ARABIAN AMERICAN DEVELOPMENT CO - 10-K Annual Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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FORM 10-K

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 0-6247

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ARABIAN AMERICAN DEVELOPMENT COMPANY
(FORMERLY 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
DALLAS, TEXAS 75231
(Address of principal executive offices) (Zip Code)

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:

(TITLE OF CLASS)
Common Stock, par value $0.10 per share

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Indicate by check mark whether the registrant (l) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

Number of shares of registrant's Common Stock, par value $0.10 per share,
outstanding as of March 30, 2001: 22,788,994.

The aggregate market value on March 30, 2001 of the registrant's voting
securities held by non-affiliates was $4,072,453.

DOCUMENTS INCORPORATED BY REFERENCE

(a) Selected portions of the registrant's definitive Proxy Statement for
the Annual Meeting to be held May 29, 2001. -- Part III

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PART I

ITEM 1. BUSINESS.

GENERAL

Arabian American Development Company (the "Company") was organized as a
Delaware corporation in 1967. The Company's principal business activities
include refining various specialty petrochemical products and developing mineral
properties in Saudi Arabia and the United States. All of its mineral properties
are presently undeveloped and require significant capital expenditures before
beginning any commercial operations. The Company's undeveloped mineral interests
are primarily located in Saudi Arabia.

On January 25, 2000, Texas Oil & Chemical Co. II, Inc., an indirect, wholly
owned subsidiary of the Company, acquired 92% of the issued and outstanding
shares of common stock of Productos Quimicos Coin, S.A. de. C.V. ("Coin"), a
specialty petrochemical products refining company located in Coatzacoalcos, on
the Yucatan Peninsula near Veracruz, Mexico. The purchase price was $2.5
million.

United States Activities. The Company's domestic activities are primarily
conducted through a wholly owned subsidiary, American Shield Refining Company
(the "Refining Company"), which 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 Refining Company ("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 specialty petrochemical products refinery near
Silsbee, Texas that is one of the largest manufacturers of pentanes consumed
domestically. 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 directly owns all of American Shield Coal Company (the "Coal
Company") and approximately 51% of the capital stock of a Nevada mining company,
Pioche-Ely Valley Mines, Inc. ("Pioche"). Neither the Coal Company nor Pioche
conduct any substantial business activities. See Item 2. Properties.

Saudi Arabian Activities. The Company holds a thirty (30) year mining lease
(which commenced on May 22, 1993) covering an approximate 44 square kilometer
area in the Al Masane area in southwestern Saudi Arabia. The Company has the
option to renew or extend the term of the lease for additional periods not to
exceed twenty (20) years. The Company was granted exploration licenses for the
other areas in southwestern Saudi Arabia which have expired.

In 1999, the Company applied for an exploration license covering an area of
approximately 2,850 square kilometers surrounding the mining lease area, where
it had previously explored with the written permission of the Saudi Ministry of
Petroleum and Mineral Resources.

Mexico Activities. TOCCO acquired 92% of the issued and outstanding shares
of common stock of Coin, a specialty petrochemical products refining company,
from Spechem, S.A. de. C.V. on January 25, 2000 at a purchase price of $2.5
million. The refinery is located in Coatzacoalcos, on the Yucatan Peninsula near
Veracruz, Mexico. An administrative office is located in Mexico City.

See Item 2. Properties for additional discussions regarding all of the
Company's properties and financing of the Al Masane project.

Note 12 to the Company's Consolidated Financial Statements contains
information regarding the Company's industry segments and geographic financial
information for the years ended December 31, 2000, 1999 and 1998. In addition,
see Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations for a discussion of the Company's liquidity, capital
resources and operating results.

FOREIGN OPERATIONS

Since a substantial portion of the Company's mineral properties and related
interests, and its newly acquired petrochemical refinery, 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

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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

The Company competes in both the petrochemical and mining industries.
Accordingly, the Company is subject to intense competition among a large number
of companies, both larger and smaller than the Company, many of which have
financial and other resources (including facilities and personnel) greater than
the Company. In the specialty products and solvents markets, the Refining
Company has one principal and one other competitor. Generally good economic
conditions have meant strong demand for its specialty products and solvents. The
acquisition of Coin will strengthen the Refining Company's position in the
market in Mexico and allow it to pursue increased sales volumes in the United
States. All of the Refining Company's raw materials are purchased on the open
market. The cost of these materials is a function of spot market oil and gas
prices, which trended down during 1998, began rising in mid-1999 and continued
to rise dramatically throughout 2000. The rise in these natural gas and
feedstock prices has adversely affected the Refining Company's gross margin.

ENVIRONMENTAL MATTERS

In 1993, while remediating a small spill area, The Texas Natural Resources
Conservation Commission required South Hampton to drill a well to check for
groundwater contamination under the spill area. Two pools of hydrocarbons were
discovered to be floating on the groundwater at a depth of approximately 25
feet. One pool is under the site of a former gas processing plant owned and
operated by Sinclair, Arco and others before its purchase by South Hampton in
1981. The other pool is under the South Hampton facility. Subsequent tests
determined that hydrocarbons are contained on the property and are not moving in
any direction. The recovery process was initiated in June 1998 and approximately
$53,000 was spent setting up the system. The recovery is proceeding as planned
and is expected to continue for several years until the pools are reduced to an
acceptable level. Expenses of recovery and periodic migration testing will be
recorded as normal operating expenses. Expenses for future years recovery are
expected to stabilize and be less per annum than the initial set up cost,
although there can be no assurance of this effect. Consulting engineers estimate
that as much as 20,000 barrels of recoverable material may be available to South
Hampton for use in its refining process, but no reduction has been made in the
accrual for remediation costs due to the uncertainties relating to the recovery
process. Also, see Item 3. Legal Proceedings.

The Clean Air Act Amendments of 1990 have had a positive effect on the
Refining Company'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 the Refining Company's product line. Management believes its
ability to manufacture high quality solvents in the C5 hydrocarbon market will
provide a basis for growth over the next few years; however, there can be no
assurance that such growth will occur. While the refinery continues to
manufacture C6 solvents, its manufacturing of these solvents is being phased
out. The Aromax(R) unit, which was jointly developed with Chevron Research
Company, has the ability to convert C6 hydrocarbons into benzene and other more
valuable aromatic compounds, which is one of the reasons the Refining Company
initially participated in the Aromax(R) development project. Also, see Item 2.
Properties.

PERSONNEL

The Company's officers who are resident in the United States are Mr. John
A. Crichton, Chairman of the Board, and Mr. Drew Wilson, Jr., Secretary and
Treasurer. Mr. Hatem El-Khalidi, the Company's President and Chief Executive
Officer, supervises the Company's 28 employees in Saudi Arabia, consisting of
the office personnel and field crews who conduct exploration and related
activities. The Refining Company employs 61 persons.
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ITEM 2. PROPERTIES.

UNITED STATES SPECIALTY PRODUCTS REFINERY

South Hampton owns and operates a specialty products refinery near Silsbee,
Texas. The refinery presently consists of eight operating units which, while
interconnected, make distinct products through differing processes: (i) a
pentane-hexane unit; (ii) a catalytic reformer; (iii) an aromatics fractionation
unit; (iv) a cyclopentane unit; (v) an Aromax(R) unit; (vi) an aromatics
hydrogenation unit; and (vii) two specialty fractionation units. All of these
units are currently in operation.

The pentane-hexane unit's design capacity is approximately 2,500 barrels
per day ("BPD") of feedstock. The unit averaged 2,040 barrels per stream day
during 2000. 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 a
platinum-rhenium catalyst which produces an aromatics concentrate sold as
feedstock for an aromatics extraction unit, as well as hydrogen which is
utilized in other processes. The design capacity of the reformer is 800 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's average production was 450 barrels per stream day in 2000.

The aromatics fractionation unit consists of two towers and has a design
capacity of 750 BPD. The unit processes an aromatic feedstock stream into three
specialized aromatic solvents used in various applications such as pesticides,
paints and coatings and adhesives. 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 253 barrels of production per stream day during
2000.

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 high
aromatic hydrocarbon content. The Aromax(R) unit's design capacity is 400 BPD
and uses a by-product from the pentane-hexane unit as feedstock. The unit's
average production throughput during 2000 was 72 barrels per stream day. Chevron
Research Company has agreed to continue development of the Aromax(R) process.
The unit continues to successfully operate as designed.

The aromatics hydrogenation unit was modified and expanded during the first
half of 2000 to meet the needs of a new, long-term toll processing customer. The
unit now consists of a hydro-desulphurization reactor with an adjoining stripper
tower and a new hydro-treater section with an adjoining stripper/fractionation
tower. The unit, which has a design capacity of 300 BPD, was constructed to
produce a specialty product using a proprietary process and is under contract
with the customer for a ten year period. The modifications cost approximately
$1.5 million and are expected to pay back in approximately two years, although
there can be no assurance of this effect. The unit became operational in June
2000 and, after the normal start-up adjustments, has performed as intended.

The specialty fractionation unit consists of a single fractionation tower
and has a design capacity of 500 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.

The specialty solvents fractionation unit consists of three fractionation
towers, two of which operate under vacuum. The design capacity of this unit is
1,000 BPD. This unit processes a specialized high purity feedstock into four
high purity white oil solvents. This unit is leased to a customer for its own
use pursuant to a contract providing for the payment of a minimum daily charge.

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South Hampton owns approximately 100 storage tanks with a total capacity of
approximately 320,000 barrels. The refinery is situated on 125 acres of land,
approximately 70 acres of which are developed. South Hampton has a contract to
purchase an additional eight acres in 2000. South Hampton also 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 various expansion programs and the toll processing
contracts, essentially all of the standing equipment at South Hampton is
operational. South Hampton has surplus equipment in storage on site with which
to assemble additional processing units, such as a hydrocracking unit with a
2,000 BPD capacity.

Gulf State owns and operates three 8 inch pipelines aggregating
approximately 50 miles in length that connect South Hampton's 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.

MEXICO SPECIALTY PRODUCTS REFINERY

The newly acquired refinery in Mexico is a specialty petrochemical plant,
similar to South Hampton's refinery in Silsbee, Texas, which produces high
purity solvents which are used in the expandable polystyrene and polystyrene
foam industries. These solvents are additionally approved and used by developers
of high-density polyethylene manufacturing processes for use in their licensed
units. Coin markets its products in Mexico, Latin America and the United States.
With this acquisition, the Company believes its refining operations are a
significant supplier of high purity solvents in those markets. Coin employs 34
persons.

SAUDI ARABIA MINING PROPERTIES

Al Masane Project

The Al Masane project, consisting of a mining lease 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 BC to 700 AD. The ancients are believed to have
extracted mainly gold, silver and copper.

Initial Exploration Work and Prior Feasibility Studies. The Saudi Arabian
government granted the Company exploration licenses for the Al Masane and Wadi
Qatan areas in 1971. Subsequently, the Company conducted substantial geological
and geophysical activities in these areas. Core drilling and studies by
independent consulting firms concluded that Al Masane's copper, zinc, gold and
silver prospects could be put in 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 conducted at Al
Masane by the mining consulting firm of Watts, Griffis and McOuat Limited of
Toronto, Canada ("WGM"). WGM recommended an extensive development program for
the Al Masane prospect.

Phase I of WGM's recommended Al Masane development program was completed in
April 1981. It involved construction of underground tunnels parallel to the ore
bodies totaling 3.9 kilometers in length from which extensive underground core
drilling was done in order to prove the quantity and quality of the ore
reserves. This work was financed primarily with an $11 million interest-free
loan from the Saudi Arabian Ministry of Finance. As a result of this work, WGM
concluded that sufficient ore reserves had been established to justify
completion of a full bank feasibility study to determine the economic potential
of establishing a commercial mining and ore treatment operation at Al Masane.
WGM and SNC/GECO of Montreal, Canada conducted this study in 1982. They
concluded 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 would involve the construction of mining,
ore treatment and support facilities. WGM's September 1984 reevaluation of the
project resulted in no substantial changes of their initial conclusions and
recommendations.

The Company continued its exploration work at Al Masane after 1984.
Consequently, WGM upwardly revised its reserve estimates in 1989 and again
concluded that a proposed mining operation was economically viable as well as
having high potential for the discovery of additional ore zones.

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Current Feasibility Studies. The Saudi government granted the Company a
mining lease for the Al Masane area on May 22, 1993. The Company subsequently
commissioned WGM to prepare a new fully bankable feasibility study to be used to
obtain financing for commercial development of the project. The study, which was
completed in 1994, contained specific recommendations to insure that project
construction was accomplished expeditiously and economically. The engineering
design and costing portions of the study were performed by Davy International of
Toronto, Canada ("Davy"). WGM and Davy updated this study in 1996. A summary of
the studies' findings are as follows:

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:

RESERVE COPPER ZINC GOLD SILVER
ZONE (TONNES) (%) (%) (G/T) (G/T)
- ---- --------- ------ ---- ----- ------

Saadag....................................... 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 that 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.

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. Further studies recommended by consultants may improve those
recoveries and thus the potential profitability of the project, however, there
can be no assurances of this effect.

The mining and milling operation recommended by WGM for Al Masane would
involve the production of 2,000 tonnes of ore per day (700,000 tonnes per year),
with a mine life of over ten years. Annual production is estimated to be 34,900
tonnes of copper concentrate (25% copper per tonne) containing precious metal
and 58,000 tonnes of zinc concentrate (54% zinc per tonne). Total output per
year of gold and silver is estimated to be 22,000 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 21 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 and zinc concentrates also
contain valuable amounts of gold

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and silver. These concentrates and the dore bullion to be produced from the
cynidization plant are estimated to be 22,000 ounces of gold and 800,000 ounces
of silver and will be sold to copper and zinc custom smelters and refineries
worldwide. After the smelter refining process, the metals could be sold by the
Company or the smelter for the Company's account in the open market.

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

The 1996 update shows the estimated capital cost to bring the project into
operation to be $89 million. At a production rate of 700,000 tonnes per year,
the operating cost of the project (excluding concentrate freight, ship loading,
smelter charges, depreciation, interest and taxes) was estimated to be $38.49
per tonne of ore milled.

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.

The base case assumes the corporate structure of the entity to be formed to
operate the project 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
$26 million to the cost of the project. The base case further assumes financing
for the project from commercial loans in the aggregate amount of $25 million
bearing interest at the rate of 8% per year and a loan in the amount of $38
million from the Saudi Industrial Development Fund ("SIDF") repayable in equal
annual installments over the initial life of the mine. Cash generated by the
operation of the project would contribute the remainder of the project
financing. The base case assumes that the $11 million loan outstanding to the
Saudi Arabian government will be paid by the Company in accordance with a
repayment schedule to be agreed upon with the Saudi Arabian government from the
Company's share of the project's cash flows. Based on these assumptions, and
assuming the average prices of metal over the life of the mine to be $1.05 per
pound for copper, $.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 (after debt repayment) 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.

Mining Lease. 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
previously discussed $11 million loan. The Company's interpretation of the
mining lease is that repayment of this loan will be made in accordance with a
repayment schedule to be agreed upon with the Saudi Arabian government from the
Company's share of the project's cash flows. 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 is obligated to pay
advance surface rental in the amount of 10,000 Saudi riyals (approximately
$2,667 at the

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current exchange rate) per square kilometer per year (approximately $117,300
annually) 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. The Saudi Arabian Mining Code provides that
income tax will not be due during the first stage of mining operations, which is
the period of five years starting from the earlier of (i) the date of the first
sale of products or (ii) the beginning of the fourth year since the issue of the
mining lease. The lease gives the Saudi Arabian government priority to purchase
any gold production from the project as well as the right to purchase up to 10%
of the 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. Furthermore, the lease contains provisions requiring that
preferences be given to Saudi Arabian suppliers and contractors, that the
Company employ Saudi Arabian citizens and provide training to Saudi Arabian
personnel.

Reference is made to the map on page 10 of this Report for information
concerning the location of the Al Masane project.

Project Financing. As detailed above, the estimated total capital cost to
bring the Al Masane project into production is $89 million. The Company does not
presently have sufficient funds to bring this project into production. Also, see
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations for a further discussion of these matters.

Pursuant to the mining lease agreement, when the Al Masane project is
profitable the Company is obligated to form a Saudi public stock company with
the Saudi Arabian Mining Company, a corporation wholly owned by the Saudi
Arabian government ("Ma'aden"), as successor to and assignee of the mining
interests formerly held by the Petroleum Mineral Organization ("Petromin").
Ma'aden is the Saudi Arabian government's official mining company. In 1994, the
Company received instructions from the Saudi Ministry of Petroleum and Mineral
Resources stating that it is possible for the Company to form a Saudi company
without Petromin (now Ma'aden), but the sale of stock to the Saudi public could
not occur until the mine's commercial operations were profitable for at least
two years. The instructions added that Petromin (now Ma'aden) still had the
right to purchase shares in the Saudi public stock company any time it desires.
Title to the mining lease and the other obligations specified in the mining
lease would be transferred to the Saudi public stock company. However, the
Company would remain responsible for the repaying the $11 million loan to the
Saudi Arabian government.

In order to commercially develop the Al Masane project, the Company entered
into a joint venture arrangement with Al Mashreq Company for Mining Investments
("Al Mashreq"), a Saudi limited liability company owned by Saudi Arabian
investors (including certain of the Company's shareholders). The partners formed
The Arabian Shield Company for Mining Industries Ltd., a Saudi limited liability
company ("Arabian Mining"), which was officially registered and licensed in
August 1998 to conduct business in Saudi Arabia and authorized to mine and
process minerals from the Al Masane lease area. Arabian Mining received
conditional approval for a $38.1 million interest-free loan from SIDF, and
deposited $26 million of equity capital into its bank account.

Due to the severe decline in the open market prices for the minerals to be
produced by the Al Masane project and the financial crisis affecting Eastern
Asia in 1998, SIDF and other potential lenders required additional guarantees
and other financing conditions which were unacceptable to the Company and Al
Mashreq. As a consequence, Al Mashreq withdrew from the joint venture and all
equity capital was returned. By letter dated May 11, 1999, the Company informed
the Ministry of Petroleum and Mineral Resources that the joint venture was
dissolved and that implementation of the project would be delayed until open
market prices for the minerals to be produced by the Al Masane project improve
to the average price levels experienced during the period from 1988 through
1997. At that time, the Company will attempt to locate a joint venture partner,
form a joint venture and, together with the joint venture partner, attempt to
obtain acceptable financing to commercially develop the project. There can be no
assurances that the Company would be able to locate a joint venture partner,
form a joint venture or obtain financing from SIDF or any other sources. In the
meantime, the Company intends to maintain the Al Masane mining lease through the
payment of the annual advance surface rental, the implementation of a drilling
program to attempt to increase

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proven and probable reserves and to attempt to improve the metallurgical
recovery rates beyond those stated in the feasibility study, which may improve
the commercial viability of the project at lower metal prices than those assumed
in the feasibility study.

Other Exploration Areas in Saudi Arabia

During the course of its exploration and development work in the Al Masane
area, the Company has carried on exploration work in other areas in Saudi
Arabia. In 1971, the Saudi Arabian government awarded the Company exclusive
mineral exploration licenses to explore and develop the Wadi Qatan area in
southwestern Saudi Arabia. The Company was subsequently awarded an additional
license in 1977 for an area north of Wadi Qatan at Jebel Harr. These licenses
have expired.

In 1999, the Company applied for an exploration license covering an area of
approximately 2,850 square kilometers surrounding Wadi Qatan, Jebel Harr and the
Al Masane mining lease area, which is referred to as the Greater Al Masane area.
The Company previously has been authorized in writing by the Saudi Arabian
government to carry out exploration work on the area. Previous exploration work
has been carried on and paid for by the Company.

Reference is made to the map on page 10 of this Report for information
concerning the location of the foregoing areas.

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. The
Company's geological, geophysical and limited core drilling disclosed the
existence of massive sulfides containing an average of 1.2% nickel. Reserves for
these areas have not yet been classified and additional exploration work is
required. When the Company obtains an exploration license for the Wadi Qatan and
Jebel Harr areas, the Company intends to continue its exploratory drilling
program in order to prove whether enough ore reserves exist to justify a viable
mining operation, however there is no assurance that a viable mining operation
could be established.

Greater Al Masane. On June 22, 1999, the Company submitted a formal
application for a five-year exclusive mineral exploration license for the
Greater Al Masane area of approximately 2,850 square kilometers, which surrounds
the Al Masane mining lease area and includes the Wadi Qatan and Jebel Harr
areas. The Company previously worked in the Greater Al Masane area after
obtaining written authorization from the Saudi Ministry of Petroleum and Mineral
Resources and has expended over $3 million on exploration work. Geophysical,
geochemical and geological work and diamond core drilling on the Greater Al
Masane area has revealed mineralization similar to that discovered at Al Masane.
A detailed exploration program and expenditures budget accompanied the
application. The Company indicated on its application that it would welcome the
participation of Ma'aden in this license. Ma'aden, which has expressed an
interest in the Greater Al Masane area, also was informed by the Company that
its participation as a joint venture partner in the license would be welcomed.

As previously stated, the Company does not possess current formal
exploration licenses for any of the above areas. The absence of such licenses
creates uncertainty regarding the Company's rights and obligations, if any, in
these areas. The Company believes it has satisfied the Saudi Arabian
government's requirements in these areas and that the government should honor
the Company's claims. If the Saudi Arabian government does not issue the Greater
Al Masane exploration license, the Company believes that it will be entitled to
a refund of the approximately $3 million it has expended on exploration work in
the area, since the Company was authorized by the Saudi Arabian government to
carry out exploration work in this area while waiting for the exploration
license to be issued.

U.S. MINERAL INTERESTS

The Company's mineral interests in the United States include its ownership
interests in the Coal Company and Pioche. The Coal Company's sole remaining
asset is its net operating loss carryforward of

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approximately $5.9 million at December 31, 2000 and its future, if any, is
uncertain. Pioche also has been inactive for many years.

Nevada Mining Properties. Pioche's properties include 48 patented and 80
unpatented claims totaling approximately 3,500 acres. All the claims are located
in the Pioche Mining District, Lincoln County, Nevada. There are prospects and
mines on these claims that previously 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). 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, if commercial mining is to be conducted on
the property.

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 that is used as a technical office and for staff housing. The Company
continues to lease office space in Dallas, Texas on a month-to-month basis. It
also owns a base camp and accompanying facilities and equipment at the Al Masane
project site.

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11

[GRAPH]

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ITEM 3. LEGAL PROCEEDINGS.

South Hampton, together with several other companies, is a defendant in
five lawsuits filed in Jefferson County and Orange County, Texas filed in the
period from December 1997 to December 2000 by former employees of the southeast
Texas plants of Goodyear Tire & Rubber Company, DuPont, Atlantic Richfield and
South Hampton. In each of these suits the plaintiff claims illnesses and
diseases resulting from alleged exposure to chemicals, including benzene,
butadiene and/or isoprene, during their employment. The plaintiffs claim the
defendant companies engaged in the business of manufacturing, selling and/or
distributing these chemicals in a manner which subjected each and all of them to
liability for unspecified actual and punitive damages. One of the lawsuits
brought in Jefferson County, Texas has been settled, with South Hampton
contributing $10,000 toward such settlement. South Hampton intends to vigorously
defend itself against the remaining lawsuits.

In August 1997, the Executive Director of the Texas National Resource
Conservation Commission ("TNRCC") filed a preliminary report and petition with
the TNRCC alleging that South Hampton violated various TNRCC rules, TNRCC
permits issued to South Hampton, a TNRCC order issued to South Hampton, the
Texas Water Code, the Texas Clean Air Act and the Texas Solid Waste Disposal
Act. The violations generally relate to the management of volatile organic
compounds in a manner that allegedly violates the TNRCC's air quality rules and
the storage, processing and disposal of hazardous waste in a manner that
allegedly violates the TNRCC's industrial and hazardous waste rules. The TNRCC's
Executive Director recommends the TNRCC enter an order assessing administrative
penalties against South Hampton in the amount of $709,408 and order South
Hampton to undertake such actions as are necessary to bring its operations at
its refinery and its bulk terminal into compliance with Texas Water Code, the
Texas Health and Safety Code, TNRCC rules, permits and orders. South Hampton is,
and intends to continue to, vigorously defending itself against this proceeding.
Appropriate modifications were made by South Hampton where it appeared there
were legitimate concerns. A preliminary hearing was held in November 1997, but
no further action has been taken.

On February 2, 2000, the TNRCC amended its pending administrative
enforcement action against South Hampton to add allegations dating through May
21, 1998 of 35 regulatory violations relating to air quality control and
industrial solid waste requirements. The TNRCC proposes that administrative
penalties be increased to approximately $765,000 and that certain corrective
action be taken. South Hampton intends to vigorously defend itself against these
additional allegations, the proposed penalties and proposed corrective actions.

In May 1991, the Company filed a complaint with the U.S. Department of
Justice ("DOJ") against Hunt Oil Company of Dallas, Texas ("Hunt"). The
Company's complaint alleged various violations of the Foreign Corrupt Practices
Act ("FCPA") by Hunt, at the Company's detriment, in obtaining its 1981
Petroleum Production Sharing Agreement ("PSA") in Yemen. The DOJ requested
additional documentation regarding the Company's allegations in 1995 that the
Company provided in early 1996. In late 1996, the DOJ advised the Company that
the documents presented did not provide sufficient evidence of any criminal
activity and that the DOJ did not intend to pursue the investigation at that
time. In December 1996, after providing the DOJ with additional legal analyses,
the Company's representatives were told that the DOJ would take a more
aggressive stance if additional legal evidence was presented to the DOJ. In an
effort to comply with the DOJ's request, in 1997 the Company requested certain
documents from the Central Intelligence Agency ("CIA") under the Freedom of
Information Act ("FOIA"). The Company believes the requested documents may
contain the evidentiary information that the DOJ needs to properly and
sufficiently evaluate the Company's compliant against Hunt. The CIA refused to
either confirm or deny the existence of the requested information. After
exhausting its administrative appeals, the Company filed suit against the CIA in
early 1998 in the U.S. District Court for the Northern District of Texas seeking
a judicial determination of the Company's FOIA request. The Company argued that
the FOIA specifically prohibits any agency from using Executive Order 12958,
relating to classification of documents, and the FOIA to conceal criminal
activity, in this instance Hunt's violation of the FCPA. Following a February
1999 hearing, the Court rejected the Company's arguments and issued a summary
judgement in favor of the CIA. The Company filed an appeal with the U.S. Court
of Appeals for the Fifth Circuit, which on January 28, 2000 rejected the
Company's
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appeal. The Company believes that this could be a landmark case. In addition,
the Company has requested and will continue to request additional documents from
both the CIA and DOJ under appropriate provisions of the FOIA and may seek
judicial review in the event its requests are denied. In the event the Company
is able to provide the DOJ with appropriate legal evidence and the DOJ prevails
in any FCPA action against Hunt regarding the PSA, the Company would then
institute an appropriate action against Hunt in accordance with the provisions
of the Victim Restitution Act. Based on the advice of its counsel, the Company
believes that it would be entitled to restitution of monies lost as a result of
the wrongdoing by Hunt, if Hunt is convicted under the FCPA. The Company further
believes, based on such advice, that the amount of restitution could include all
of the profits received by Hunt from its Yemen operations and also could include
proceeds from the sale of a portion of Hunt's interest in the PSA. However,
there can be no assurance that the DOJ will pursue or obtain a conviction of
Hunt regarding the PSA under the FCPA and no assurance that the Company would
receive or be entitled to receive any restitution as a result of any such
conviction. The cost to the Company of these pursuits is minimal.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

No matters were submitted to a vote of the Company's shareholders during
the fourth quarter of 2000.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.

NASDAQ notified the Company in May 2000 that the Company's common stock
would be delisted in August 2000 if the Company was unable to demonstrate
compliance with the minimum bid price requirements. The Company appealed this
proposed action in August 2000 and a hearing on the appeal was held in October
2000. As a result of the hearing, the Company's common stock was delisted on
October 12, 2000. The Company then submitted an appeal request to a higher
NASDAQ authority and, at a hearing in February 2001, the prior delisting
decision was affirmed.

The Company's common stock traded on the NASDAQ National Market until
October 2000 and currently trades on OTC Bulletin Board under the symbol: ARSD.
The following table sets forth the high and low closing sale prices for each
quarter of 2000 and 1999, respectively, as reported by NASDAQ and the OTC
Bulletin Board for the relevant periods.

2000 1999
------------------------------------------ ------------------------------------------
1ST 2ND 3RD 4TH 1ST 2ND 3RD 4TH
--------- --------- --------- --------- --------- --------- --------- ---------

High................. 2 1/16 1 13/32 13/16 11/16 1 1/2 1 3/16 1 3/16 1 5/16
Low.................. 29/32 5/8 9/16 1/4 15/16 3/4 7/8 3/4

At March 30, 2001, there were 759 record holders of the Company's common
stock. The Company has not paid any dividends since its inception and, at this
time, does not have any plans to pay any dividends in the foreseeable future.

On November 15, 1999, the Company issued 500 shares of its common stock to
a long term employee of South Hampton in recognition of his services. In
connection with the acquisition of Coin by TOCCO, on December 23, 1999 the
Company sold 300,000 shares of its common stock to TOCCO at $1.00 per share to
assist TOCCO with the financing of the acquisition. The Company relied upon the
private offering exemption of Section 4(2) of the Securities Act of 1933 in both
of these transactions.

In March 2000, the Company issued 469,000 shares of its common stock,
valued at $1.00 per share, to Al Mashreq for the cancellation of $469,000 of
indebtedness incurred in connection with the payment of advance surface rentals
on the Al Masane project. The Company relied upon the exemption set forth in
Regulation S under the Securities Act of 1933 in this transaction.

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ITEM 6. SELECTED FINANCIAL DATA.

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

2000 1999 1998 1997 1996
------- ------- ------- ------- -------

Revenues............................. $42,612 $27,791 $25,089 $26,174 $22,014
Net Income (Loss).................... $(3,903) $ 2,740 $ 3,442 $ 818 $ (391)
Net Income (Loss) Per
Share-Diluted...................... $ (.17) $ .12 $ .16 $ .04 $ (.02)
Total Assets (at December 31)........ $57,599 $52,848 $46,683 $45,153 $44,096
Notes Payable (at December 31)....... $11,924 $11,874 $11,874 $11,376 $11,376
Total Long-Term Obligations (at
December 31)....................... $ 841 $ 4,314 $ 1,953 $ 4,110 $ 4,293

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

GENERAL

Statements in Items 7 and 7A, as well as elsewhere in, or incorporated by
reference in, this Annual Report on Form 10-K regarding the Company's financial
position, business strategy and plans and objectives of the Company's management
for future operations and other statements that are not historical facts, are
"forward-looking statements" as that term is defined under applicable Federal
securities laws. In some cases, "forward-looking statements" can be identified
by terminology such as "may," "will," "should," "expects," "plans,"
"anticipates," "contemplates," "proposes," "believes," "estimates," "predicts,"
"potential" or "continue" or the negative of such terms and other comparable
terminology. Forward-looking statements are subject to risks, uncertainties and
other factors that could cause actual results to differ materially from those
expressed or implied by such statements. Such risks, uncertainties and factors
include, but are not limited to, general economic conditions domestically and
internationally; insufficient cash flows from operating activities; difficulties
in obtaining financing; outstanding debt and other financial and legal
obligations; competition; industry cycles; feedstock, specialty petrochemical
product and mineral prices; feedstock availability; technological developments;
regulatory changes; environmental matters; foreign government instability;
foreign legal and political concepts; and foreign currency fluctuations, as well
as other risks detailed in the Company's filings with the U.S. Securities and
Exchange Commission, including this Annual Report on Form 10-K, all of which are
difficult to predict and many of which are beyond the Company's control.

LIQUIDITY AND CAPITAL RESOURCES

The Company operates in two business segments, specialty petrochemicals
(which is composed of the entities owned by the Refining Company) and mining.
Its corporate overhead needs are minimal. A discussion of each segment's
liquidity and capital resources follows.

Specialty Petrochemicals Segment. Historically, this segment has
contributed substantially all of the Company's internally generated cash flows.
However, significant increases in the prices of feedstock and natural gas
resulted in a loss from operations in 2000 of $2.8 million which, in turn,
resulted in violations of certain loan agreement covenants and a lack of
liquidity. These prices have declined in early 2001 allowing a return to
positive cash flow in February 2001. Feedstock prices, in particular, have
declined so that operating margins are returning to sustainable levels. Sales
are currently sustainable and there has been little downturn in demand. Some
customers have recently requested increased production in the toll processing
units associated with their products. Management expects adequate margins
throughout the remainder of 2001, although there can be no assurance of this
effect, and has taken steps to protect the operations from extreme fluctuations
in natural gas prices over the next 12 months. A return to normal profitability
is expected in the second quarter, although there is no assurance that this will
occur.

This business segment entered into a $3.25 million credit agreement in
September 1999 with Southwest Bank of Texas, N.A., located in Houston, Texas
(the "Bank"). The terms and conditions of this credit agreement are discussed in
Note 8 to the Company's Consolidated Financial Statements. The Company is not

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in compliance with certain covenants contained in the loan agreement. In the
event this segment were to undertake a major capital expenditure, such as
construction of a new facility, financing for this activity would most likely
come from some combination of internal resources, a debt placement with a
financial institution or a joint venture partner. Any major capital expenditure
requires the Bank's advance review and approval.

In connection with the acquisition of the common stock of Coin, South
Hampton and Gulf State entered into a $3.5 million credit agreement in December
1999 with Heller Financial Leasing, Inc. The credit agreement is evidenced by a
47 month promissory note bearing interest at the rate of 10.55% per annum. The
terms and conditions of this credit agreement are discussed in Note 8 to the
Company's Consolidated Financial Statements. The credit agreement is secured by
a pledge of all of the capital stock of South Hampton and Gulf State, a first
lien on all of South Hampton's and Gulf State's present and future machinery and
equipment and a ground lease relating to South Hampton's real property, and is
guaranteed by the Company, the Refining Company and TOCCO. The Company is not in
compliance with certain covenants contained in the loan agreement.

Mining Segment. This segment is in the development stage. Its most
significant asset is the Al Masane mining project in Saudi Arabia, which is a
net user of the Company's available cash and capital resources. As discussed in
Item 2. Properties, implementation of the project has been delayed until the
open market prices for the minerals to be produced by the mine improve. At that
time, the Company will attempt to locate a joint venture partner, form a joint
venture and, together with the joint venture partner, attempt to obtain
acceptable financing to commercially develop the project. There is no assurance
that a joint venture partner can be located, a joint venture formed or, if it is
formed, that the joint venture would be able to obtain acceptable financing for
the project.

Management also is addressing two other significant financing issues within
this segment. These issues are the $11.0 million note payable due the Saudi
Arabian government and accrued salaries and termination benefits of
approximately $1,062,000 due employees working in Saudi Arabia (this amount does
not include any amounts due the Company's President and Chief Executive Officer
who also primarily works in Saudi Arabia and is owed approximately $841,000).
Regarding the note payable, this loan was originally due in ten annual
installments beginning in 1984. The Company has not made any repayments nor has
it received any payment demands or other communications regarding the note
payable from the Saudi government. By memorandum to the King of Saudi Arabia in
1986, the Saudi Ministers of Finance and Petroleum recommended that the $11.0
million note be incorporated into a loan from SIDF to finance 50% of the cost of
the Al Masane project, repayment of the total amount of which would be made
through a mutually agreed upon repayment schedule from the Company's share of
the operating cash flows generated by the project. The Company remains active in
Saudi Arabia and received the Al Masane mining lease at a time when it had not
made any of the agreed upon repayment installments. Based on its experience to
date, management believes that as long as the Company diligently attempts to
explore and develop the Al Masane project no repayment demand will be made. The
Company has communicated to the Saudi government that its delay in repaying the
note is a direct result of the government's lengthy delay in granting the Al
Masane lease and requested formal negotiations to restructure this obligation.
Based on its interpretation of the Al Masane mining lease and other documents,
management believes the government is likely to agree to link repayment of this
note to the Company's share of the operating cash flows generated by the
commercial development of the Al Masane project and to a long-term installment
repayment schedule. In the event the Saudi government were to demand immediate
repayment of this obligation, which management considers unlikely, the Company
would be unable to pay the entire amount due. If a satisfactory rescheduling
agreement could be reached, and there are no assurances that one could be, the
Company believes it could obtain the necessary resources to meet the rescheduled
installment payments by making certain changes at the Refining Company.

With respect to the accrued salaries and termination benefits due employees
working in Saudi Arabia, the Company plans to continue employing these
individuals until it is able to generate sufficient excess funds to begin
payment of this liability. Management will then begin the process of gradually
releasing certain employees and paying its obligation as they are released from
the Company's employment.

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At this time, the Company has no definitive plans for the development of
its domestic mining assets. It periodically receives proposals from outside
parties who are interested in possibly developing or using certain assets.
Management will continue to review these proposals as they are received, but at
this time does not anticipate making any significant domestic mining capital
expenditures or receiving any significant proceeds from the sale or use of these
assets.

If the Company seeks additional outside financing, there is no assurance
that sufficient funds can be obtained. It is also possible that the terms of any
additional financing that the Company would be able to obtain would be
unfavorable to the Company and its existing shareholders.

The report of the Company's independent auditors states that the $3.9
million loss incurred in 2000, the excess of current liabilities over current
assets and the violations of certain covenants of loan agreements raise
substantial doubt about the Company's ability to continue as a going concern.

RESULTS OF OPERATIONS

Comparison of the Years 2000 to 1999

Specialty Petrochemicals Segment. Total revenues increased approximately
53% or $14.8 million in 2000. This increase was due to revenues of Coin of $5.9
million (Coin was acquired in January 2000), an increase in sales volume of
approximately two million gallons or 6.5%, an increase in toll processing fees
of approximately $850,000 or 58% and a general increase in product prices.
However, costs increased also and were detrimental to the final results of
operations. Cost of sales (excluding depreciation) increased approximately $13.5
million or 63% from 1999, excluding the effect of the Coin acquisition. Average
feedstock prices rose almost 70% in 2000 to $.81 per gallon in comparison to an
average of $.48 per gallon in 1999. Consequently, the gross profit on refined
product sales (excluding depreciation) for 2000 decreased by 90% to $0.5 million
from $4.9 million in 1999, excluding the effect of the Coin acquisition. With
domestic operating costs rising approximately 72% due primarily to the rapid
rise in the cost of natural gas, which is used for fuel in the refineries, the
operating income of this segment fell from a $3.1 million profit in 1999 to a
loss of $2.8 million in 2000. Coin contributed $.9 million to the operating
loss. It is difficult, in a competitive market, for this segment to raise
product prices as rapidly as costs were escalating in 2000. The refineries use
natural gasoline for feedstock. Natural gasoline is the heavier liquid produced
by natural gas processing plants and by LPG fractionators. Higher natural gas
prices in 2000, in conjunction with the higher crude oil prices experienced by
the industry for much of the year, drove the cost of other petroleum liquids to
higher than historical levels. The high BTU value of the liquids associated with
natural gas production caused many gas producers to not process their gas or to
leave as much of the heavier molecules as possible in the gas streams thereby
causing a shortage of the liquids in the normal markets and higher prices.

Toll processing continued to be a growing contributor to the segment's
business. As stated earlier, processing fees increased 58% in 2000 from 1999.
This increase in the toll processing business is indicative of the direction of
the U.S. refining and petrochemical industries. Many companies are outsourcing
smaller jobs and processes that were formerly done internally. The Refining
Company has been in the toll processing business for over 30 years, enjoys a
good reputation within the industry and believes it offers customers several
competitive advantages over other suppliers of these services. Management
intends to expand its involvement in this area as opportunities arise.
Approximately $1.5 million and $1.6 million was invested in capital projects for
toll processing in 2000 and 1999, respectively.

General and administrative expenses increased $.9 million in 2000 to $3.5
million, primarily due to the acquisition of Coin. Interest expense and bank
fees rose in 2000 to $984,000 from $118,000 in 1999. This increase was due to
the addition of debt for the purchase of Coin, Coin's existing debt and the
increased use of the working capital credit line due to the rising cost of
feedstock. The increase in interest income was due to the increased amount of
excess cash, primarily restrictive cash. The 95% decrease in miscellaneous
income in 2000 of $310,601 is due primarily to reduced tank rental income.

High feedstock prices and high fuel costs have made it difficult to
generate acceptable margins on operations. For the approximate 11-month period
in 2000 when Coin was a subsidiary of the Company, the

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total refined product sales were $5.9 million, while the costs of sales
(excluding depreciation) were $5.8, resulting in a gross profit of approximately
$100,000. However, after general and administrative expenses, depreciation and
interest expenses, Coin had a net loss for the period of $1.4 million. In
response to these economic anomalies, Coin shut the refinery down for several
months in the fall and winter months of 2000. Coin continued to generate sales
and maintain market share by buying product on the open market and from its U.S.
parent and reselling the product to existing customers. While the margins
generated in this manner are not sufficient to maintain the refinery's
operations indefinitely, management expects a return to normal operation once
fuel and feedstock prices return to more favorable levels. Coin's customer base
remains intact and its equipment remains in good operating condition, which
should enable the refinery to produce and ship product without undue delay once
production recommences.

Mining Segment and General Corporate Expenses. None of the Company's other
operations generate significant operating or other revenues. The minority
interest amount represents the Pioche and Coin minority stockholders' share of
the losses from the Pioche and Coin operations. Pioche losses are primarily
attributable to the costs of maintaining the Nevada mining properties.

The Company periodically reviews and evaluates its mineral exploration and
development projects as well as its other mineral properties and related assets.
The recoverability of the Company's carrying values of its development
properties are assessed by comparing the carrying values to estimated future net
cash flows from each property. In 2000, for purposes of estimating future cash
flows, the price assumptions contained in the 1996 update to the Al Masane
project's feasibility study, which was prepared by WGM, were used. See Item 2.
Properties. These price assumptions are averages over the projected life of the
Al Masane mine and are $1.05 per pound for copper, $.60 per pound for zinc, $400
per ounce for gold, and $6.00 per ounce for silver. For its other mineral
properties and related assets, carrying values were compared to estimated net
realizable values based on market comparables. Using these price assumptions, no
asset impairments were evident.

The Company assesses the carrying values of its assets on an ongoing basis.
Factors which may affect carrying values include, but are not limited to,
mineral prices, capital cost estimates, the estimated operating costs of any
mines and related processing, ore grade and related metallurgical
characteristics, the design of any mines and the timing of any mineral
production. There are no assurances that the Company will not be required to
take a material write-down of its mineral properties.

Due primarily to the 1988 write-off of its coal lease investments, the
Company has net operating loss carryforwards of approximately $28.0 million at
December 31, 2000, of which approximately $5.9 million and $1.7 million are
limited to the Coal Company's and Refining Company's, respectively, future
taxable income. These loss carryforwards expire during the years 2001 through
2020.

Comparison of the Years 1999 to 1998

Specialty Petrochemicals Segment. During 1999, total revenues increased
approximately $2.7 million or 10.8% while the cost of sales (excluding
depreciation) increased approximately $3.2 million or 17.4% from 1998.
Consequently, 1999's gross profit margin decreased approximately $.5 million or
6.6% even as sales volume increased by 6.2% and average selling prices increased
slightly by 1.7%. As a result of these changes in sales volume and cost of
sales, the petrochemical segment experienced a decreased in net income of $.6
million due primarily to increased feedstock and operating costs. The price of
its primary feedstock, natural gasoline, remained stable throughout the first
half of 1999, but began a steady increase in the second half of 1999. Natural
gasoline is the heavier liquid produced by natural gas processing plants and by
LPG fractionators. Feedstock prices in the fourth quarter of 1999 were almost
91% higher than those in the first quarter of 1999. The petrochemical segment's
reputation for superior product quality and service reliability in the
petrochemical industry's specialty products segment allowed it to increase sales
volume and prices during 1999. Management expects its feedstock costs to
continue to increase through the first quarter of 2000.

Toll processing continued to be a growing contributor to the segment's
business as fees increased 101.5% to approximately $1.5 million in 1999. The
increase in the toll processing business is indicative of the direction of the
U.S. refining and petrochemical industries. Many larger companies are
outsourcing smaller jobs and
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processes that were formerly processed internally. The Refining Company has been
in the toll processing business for over 30 years, enjoys a good reputation
within the industry and believes it offers customers several competitive
advantages over other suppliers. Management intends to expand the segment's
involvement in this area as opportunities arise. Construction began in early
2000 on a hydrogenation unit for a major customer on a multi-year contract.
Production from the unit is scheduled to begin in June 2000.

The decrease in interest income was due to the reduced amount of excess
cash while the decrease in interest expense was due to the reduction in debt.

Miscellaneous income represents various items that individually are not
significant enough to disclose separately. This includes income from tank and
other rentals, dividend income from investments of excess cash and occasional
gains from small asset sales. The increase in 1999 is due primarily to expanded
tank rentals.

Mining Segment and General Corporate Expenses. None of the Company's other
operations generate significant operating or other revenues. Minority interest
amounts represent the Pioche minority shareholders' share of Pioche's losses
that are primarily attributable to the costs of maintaining the Nevada mining
properties.

The Company periodically reviews and evaluates its mineral exploration and
development projects as well as its other mineral properties and related assets.
The recoverability of the Company's carrying values of its development
properties are assessed by comparing the carrying values to estimated future net
cash flows from each property. In 1999, for purposes of estimating future cash
flows, the price assumptions contained in the 1996 update to the Al Masane
project's feasibility study, which was prepared by WGM, were used. See Item 2.
Properties. These price assumptions are averages over the projected life of the
Al Masane mine and are $1.05 per pound for copper, $.60 per pound for zinc, $400
per ounce for gold, and $6.00 per ounce for silver. For its other mineral
properties and related assets, carrying values were compared to estimated net
realizable values on market comparables. Using these price assumptions, no asset
impairments were evident.

The Company intends to assess the carrying values of its assets on an
ongoing basis. Factors which may affect carrying values include, but are not
limited to, mineral prices, capital cost estimates, the estimated operating
costs of any mines and related processing, ore grade and related metallurgical
characteristics, the design of any mines and the timing of any mineral
production. There are no assurances that, particularly in the event of a
prolonged period of depressed mineral prices, the Company will not be required
to take a material write-down of its mineral properties.

The Company's income tax expense includes $75,400 for the 1999 payment of
its 1998 federal income tax liability, $60,000 for an estimate of its 1999
federal income tax liability (both of which are due to the alternative minimum
income tax), and $147,700 for its state tax liability. Due primarily to the 1988
write-off of its coal lease investments, the Company had net operating loss
carryforwards of approximately $25.0 million at December 31, 1999, approximately
$5.9 million and $2.8 million of which are limited to the Coal Company's and
Refining Company's, respectively, future taxable income. These loss
carryforwards expire during the years 2000 through 2019.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The market risk inherent in the Company's financial instruments represents
the potential loss resulting from adverse changes in interest rates, foreign
currency rates and commodity prices. The Company's exposure to interest rate
changes results from its variable rate debt instruments which are vulnerable to
changes in short term United States prime interest rates. At December 31, 2000,
the Company had $8.9 million in variable rate debt outstanding. A hypothetical
10% change in interest rates underlying these borrowings would result in
approximately a $90,000 annual change in the Company's earnings and cash flows.

The Company is also exposed to market risk in the exchange rate of the
Saudi Arabian riyal and the Mexican peso as measured against the United States
dollar. The Company does not view these exposures as significant and has not
acquired or issued any foreign currency derivative financial instruments. The
Company's strategy in managing its exposure to commodity prices is to purchase
options on commodity based
17
19

derivative futures contracts when available. At December 31, 1999, the Company's
investment in such instruments was insignificant. At December 31, 2000, there
was no such investment.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The financial statements of the Company and the financial statement
schedules, including the independent auditor's report thereon, are included
elsewhere in this document.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS 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", "Executive Officers" and "Section 16(a) Beneficial Ownership
Reporting Compliance" of the Company's Proxy Statement for the Company's Annual
Meeting of Shareholders.

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 Shareholders.

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
Shareholders.

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 Shareholders.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

(a) 1. The following financial statements are filed with this Report:

Reports of Independent Certified Public Accountants.

Consolidated Balance Sheets dated December 31, 2000 and 1999.

Consolidated Statements of Operations for the three years ended December 31,
2000.

Consolidated Statement of Stockholders' Equity for the three years ended
December 31, 2000.

Consolidated Statements of Cash Flows for the three years ended December 31,
2000.

Notes to Consolidated Financial Statements.

18
20

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

Schedule II -- Valuation and Qualifying Accounts for the three years ended
December 31, 2000.

3. The following documents are filed or incorporated by reference as
exhibits to this Report. Exhibits marked with an asterisk (*) are
management contracts or a compensatory plan, contract or arrangement.

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 July 19, 2000.
3(b) -- Bylaws of the Company, as amended through March 4, 1998
(incorporated by reference to Exhibit 3(b) to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1999 (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 Annual Report
on Form 10-K for the year ended December 31, 1999 (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 Annual Report on Form 10-K for the year
ended December 31, 1999 (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 (incorporated by reference to Exhibit
10(c) to the Company's Annual Report on Form 10-K for the
year ended December 31, 1999 (File No. 0-6247)).
10(d) -- Stock Option Plan of the Company, as amended
(incorporated by reference to Exhibit 10(d) to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1999 (File No. 0-6247)).*
10(e) -- 1987 Non-Employee Director Stock Plan (incorporated by
reference to Exhibit 10(e) to the Company's Annual Report
on Form 10-K for the year ended December 31, 1999 (File
No. 0-6247)).*
10(f) -- Phantom Stock Plan of Texas Oil & Chemical Co. II, Inc.
(incorporated by reference to Exhibit 10(f) to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1999 (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 Company and South Hampton Refining Company
(incorporated by reference to Exhibit 10(g) to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1999 (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(h) to the Company's Annual Report on Form 10-K
for the year ended December 31, 1999 (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(i) to the Company's Annual Report
on Form 10-K for the year ended December 31, 1999 (File
No. 0-6247)).*

19
21

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

10(j) -- Letter Agreement dated May 3, 1991 between Sheikh Kamal
Adham and the Company (incorporated by reference to
Exhibit 10(j) to the Company's Annual Report on Form 10-K
for the year ended December 31, 1999 (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(k) to the Company's Annual Report on Form 10-K
for the year ended December 31, 1999 (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(l) to the Company's Annual Report on Form 10-K
for the year ended December 31, 1999 (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(m) to the Company's Annual Report on Form 10-K
for the year ended December 31, 1999 (File No. 0-6247)).
10(n) -- Letter Agreement dated October 23, 1995 between Sheikh
Fahad Al-Athel and the Company (incorporated by reference
to Exhibit 10(n) to the Company's Annual Report on Form
10-K for the year ended December 31, 1999 (File No.
0-6247)).
10(o) -- Letter Agreement dated November 30, 1996 between Sheikh
Fahad Al-Athel and the Company. (incorporated by reference to
Exhibit 10(o) to the Company's Annual Report on Form 10-K
for the year ended December 31, 1999 (File No. 0-6247)).
10(p) -- Stock Purchase Agreement dated as of January 25, 2000
between Spechem, S.A. de. C.V. and Texas Oil and Chemical
Co. II, Inc.
10(q) -- Loan and Security Agreement dated as of December 30, 1999
by and among Heller Financial Leasing, Inc., South
Hampton Refining Company and the Gulf State Pipe Line
Company, Inc., together with related Promissory Note,
Guaranty made by the Company, Guaranty made by American
Shield Refining Company, Guaranty made by Texas Oil and
Chemical Co. II, Inc., Pledge Agreement made by Texas Oil
and Chemical Co. II, Inc., Pledge Agreement made by South
Hampton Refining Company, Ground Lease, Sub-Ground Lease
and Hazardous Materials Indemnity Agreement (incorporated
by reference to Exhibit 10(q) to the Company's Annual
Report on Form 10-K for the year ended December 31, 1999
(File No. 0-6247)).
10(r) -- Loan Agreement dated as of September 30, 1999 between
South Hampton Refining Company and Southwest Bank of
Texas, N.A., together with related Promissory Note,
Security Agreement, Arbitration Agreement and Guaranty
Agreement made by Texas Oil and Chemical Co. II, Inc.
(incorporated by reference to Exhibit 10(r) to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1999 (File No. 0-6247)).
21 -- Subsidiaries (incorporated by reference to Exhibit 21 to
the Company's Annual Report on Form 10-K for the year
ended December 31, 1999 (File No. 0-6247)).

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

20
22

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS that each of Arabian American Development
Company, a Delaware corporation, and the undersigned directors and officers of
Arabian American 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 AMERICAN DEVELOPMENT COMPANY

By: /s/ HATEM EL-KHALIDI
-------------------------------------
Hatem El-Khalidi
President and Chief Executive Officer

Dated: April 12, 2001

21
23

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 April 12, 2001.

SIGNATURE TITLE
--------- -----

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

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

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

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

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

22
24

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors and Stockholders
Arabian American Development Company

We have audited the accompanying consolidated balance sheets of Arabian
American Development Company and Subsidiaries as of December 31, 2000 and 1999,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 2000.
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 in accordance with auditing standards generally
accepted in the United States of America. Those standards 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. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above, present fairly,
in all material respects, the consolidated financial position of Arabian
American Development Company and Subsidiaries as of December 31, 2000 and 1999,
and the consolidated results of their operations and their consolidated cash
flows for each of the three years in the period ended December 31, 2000, in
conformity with accounting principles generally accepted in the United States of
America.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the financial statements,
the Company incurred a loss of $3,902,898 in 2000 compared to net income of
$2,740,353 in 1999 and $3,441,646 in 1998, and had an excess of current
liabilities over current assets at December 31, 2000. Circumstances affecting
the loss in 2000 and related recent positive developments are discussed in Note
2 to the financial statements. As discussed in Notes 2 and 8 to the financial
statements, the Company was not in compliance with certain covenants in its loan
agreements. If resolution with the lenders is not achieved, and the Company does
not generate positive cash flow adequate for its operations and loan
obligations, the Company will have to raise debt or equity capital. There is no
assurance that capital would be available. These matters raise substantial doubt
about the Company's ability to continue as a going concern. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.

GRANT THORNTON LLP

Dallas, Texas
April 11, 2001

23
25

ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31,
--------------------------
2000 1999
------------ -----------

ASSETS

CURRENT ASSETS
Cash and cash equivalents................................. $ 158,977 $ 434,313
Short-term investments.................................... -- 20,597
Trade receivables......................................... 5,239,769 4,308,085
Inventories............................................... 960,494 745,396
------------ -----------
Total current assets.............................. 6,359,240 5,508,391
REFINERY PLANT, PIPELINE AND EQUIPMENT -- AT COST........... 17,248,891 9,357,956
LESS ACCUMULATED DEPRECIATION............................. (5,570,930) (4,330,856)
------------ -----------
REFINERY PLANT, PIPELINE AND EQUIPMENT, NET................. 11,677,961 5,027,100
AL MASANE PROJECT........................................... 35,304,240 34,621,335
OTHER INTERESTS IN SAUDI ARABIA............................. 2,431,248 2,431,248
MINERAL PROPERTIES IN THE UNITED STATES..................... 1,282,142 1,299,008
RESTRICTED CASH............................................. -- 3,500,000
OTHER ASSETS................................................ 543,864 461,127
------------ -----------
TOTAL ASSETS...................................... $ 57,598,695 $52,848,209
============ ===========

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
Accounts payable -- trade................................. $ 5,306,121 $ 1,129,926
Accrued liabilities....................................... 1,259,272 1,005,110
Accrued liabilities in Saudi Arabia....................... 1,062,375 1,326,823
Notes payable............................................. 11,923,780 11,873,780
Current portion of long-term debt......................... 8,060,981 677,439
------------ -----------
Total current liabilities......................... 27,612,529 16,013,078
LONG-TERM DEBT.............................................. -- 3,572,561
ACCRUED LIABILITIES IN SAUDI ARABIA......................... 841,489 741,218
DEFERRED REVENUE............................................ 131,401 165,835
COMMITMENTS AND CONTINGENCIES............................... -- --
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES.............. 999,011 907,354
STOCKHOLDERS' EQUITY
Common stock -- authorized, 40,000,000 shares of $.10 par
value; issued and outstanding, 22,488,994 shares in
2000 and 22,019,994 shares in 1999..................... 2,248,899 2,201,999
Additional paid-in capital................................ 36,523,606 36,101,506
Accumulated deficit....................................... (10,758,240) (6,855,342)
------------ -----------
Total stockholders' equity........................ 28,014,265 31,448,163
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $ 57,598,695 $52,848,209
============ ===========

The accompanying notes are an integral part of these statements.

24
26

ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,

2000 1999 1998
----------- ----------- -----------

Revenues
Refined product sales............................... $40,267,342 $26,302,862 $24,350,938
Processing fees..................................... 2,344,469 1,487,804 738,237
----------- ----------- -----------
42,611,811 27,790,666 25,089,175
Operating costs and expenses
Cost of refined product sales and processing........ 40,715,332 21,352,555 18,192,488
General and administrative.......................... 3,665,642 2,933,616 2,669,088
Depreciation........................................ 1,258,953 719,793 428,743
----------- ----------- -----------
45,639,927 25,005,964 21,290,319
----------- ----------- -----------
Operating income (loss)..................... (3,028,116) 2,784,702 3,798,856
Other income (expense)
Interest income..................................... 104,795 65,052 112,129
Interest expense.................................... (1,026,766) (155,829) (346,117)
Minority interest................................... 126,537 2,245 7,905
Foreign exchange transaction loss................... (96,044) -- --
Miscellaneous income................................ 16,696 327,297 124,650
----------- ----------- -----------
(874,782) 238,765 (101,433)
----------- ----------- -----------
Income (loss) before income taxes........... (3,902,898) 3,023,467 3,697,423
Income tax expense.................................... -- 283,114 255,777
----------- ----------- -----------
Net income (loss)........................... $(3,902,898) $ 2,740,353 $ 3,441,646
=========== =========== ===========
Income (loss) per common share:
Basic............................................... $ (0.17) $ 0.12 $ 0.16
=========== =========== ===========
Diluted............................................. $ (0.17) $ 0.12 $ 0.14
=========== =========== ===========
Weighted average number of common and common
equivalent shares outstanding:
Basic............................................... 22,673,033 22,026,114 21,995,735
=========== =========== ===========
Diluted............................................. 22,673,033 22,604,240 25,649,695
=========== =========== ===========

The accompanying notes are an integral part of these statements.

25
27

ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

COMMON STOCK RECEIVABLE
----------------------- ADDITIONAL FROM ACCUMULATED
SHARES AMOUNT PAID-IN CAPITAL STOCKHOLDER DEFICIT TOTAL
---------- ---------- --------------- ----------- ------------ -----------

January 1, 1998........ 21,861,494 $2,186,149 $35,875,950 $(126,000) $(13,037,341) $24,898,758
Common stock sold.... 100,000 10,000 140,000 -- -- 150,000
Stock options
exercised......... 58,000 5,800 85,200 -- -- 91,000
Offset of receivables
against related
payables.......... -- -- -- 126,000 -- 126,000
Net income........... -- -- -- -- 3,441,646 3,441,646
---------- ---------- ----------- --------- ------------ -----------
December 31, 1998...... 22,019,494 2,201,949 36,101,150 -- (9,595,695) 28,707,404
Common stock sold.... 500 50 356 -- -- 406
Net income........... -- -- -- -- 2,740,353 2,740,353
---------- ---------- ----------- --------- ------------ -----------
December 31, 1999...... 22,019,994 2,201,999 36,101,506 -- (6,855,342) 31,448,163
Common stock issued
on debt
conversion........ 469,000 46,900 422,100 -- -- 469,000
Net loss............. -- -- -- -- (3,902,898) (3,902,898)
---------- ---------- ----------- --------- ------------ -----------
December 31, 2000...... 22,488,994 $2,248,899 $36,523,606 $ -- $(10,758,240) $28,014,265
========== ========== =========== ========= ============ ===========

The accompanying notes are an integral part of these statements.

26
28

ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,

2000 1999 1998
----------- ----------- -----------

Operating activities
Net income (loss)................................... $(3,902,898) $ 2,740,353 $ 3,441,646
Adjustments for non-cash transactions
Depreciation..................................... 1,258,953 719,793 428,743
(Decrease) increase in deferred revenue.......... (34,434) 67,158 (15,504)
Effects of changes in operating assets and
liabilities Decrease (increase) in trade
receivables...................................... 1,029,691 (1,528,121) 267,347
Decrease (increase) in inventories............... 30,900 (566,682) 369,606
Decrease (increase) in other assets.............. (74,761) (7,273) 9,376
Increase in accounts payable and accrued
liabilities.................................... 1,917,746 438,544 232,222
Increase (decrease) in accrued liabilities in
Saudi Arabia................................... 304,823 (79,329) 210,820
Other............................................... (102,525) (42,809) (150,627)
----------- ----------- -----------
Net cash provided by operating activities... 427,495 1,741,634 4,793,629
----------- ----------- -----------
Investing activities
Additions to short-term investments................. -- -- (14,387)
Proceeds from sale of short-term investments........ 20,597 10,039 391,293
Purchase of business (net of cash acquired)......... (2,279,665) -- --
Additions to Al Masane Project...................... (682,905) (499,834) (599,074)
Additions to refinery plant, pipeline and
equipment........................................ (2,743,405) (2,206,822) (1,224,946)
(Additions to) reduction in mineral properties in
the United States................................ 16,866 (18,352) 130,534
----------- ----------- -----------
Net cash used in investing activities....... (5,668,512) (2,714,969) (1,316,580)
----------- ----------- -----------
Financing activities
Common stock sold................................... -- 406 241,000
Additions to notes payable and long-term
obligations...................................... 3,338,644 4,250,000 1,985,000
Reduction of notes payable and long-term
obligations...................................... (1,872,963) (1,250,000) (4,329,893)
----------- ----------- -----------
Net cash provided by (used in) financing
activities................................ 1,465,681 3,000,406 (2,103,893)
----------- ----------- -----------
Net increase (decrease) in cash....................... (3,775,336) 2,027,071 1,373,156
Cash and cash equivalents at beginning of year........ 3,934,313 1,907,242 534,086
----------- ----------- -----------
Cash and cash equivalents at end of year.............. $ 158,977 $ 3,934,313 $ 1,907,242
=========== =========== ===========

The accompanying notes are an integral part of these statements.

27
29

ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. BUSINESS AND OPERATIONS OF THE COMPANY

Arabian American Development Company (the "Company") was organized as a
Delaware corporation in 1967. The Company's principal business activities
include refining various specialty petrochemical products (also referred to as
the "Refining Segment") and developing mineral properties in Saudi Arabia and
the United States (also referred to as the "Mining Segment"). All of its mineral
properties are presently undeveloped and require significant capital
expenditures before beginning any commercial operations (see Notes 2, 6 and 7).

The Company's Refining Segment activities are primarily conducted through a
wholly-owned subsidiary, American Shield Refining Company (the "Refining
Company"), which 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 Refining
Company ("South Hampton"), and 92% of the capital stock of Productos Quimicos
Coin S.A. de. C.V. ("Coin"), which was acquired on January 25, 2000 for $2.5
million. South Hampton owns all of the capital stock of Gulf State Pipe Line
Company, Inc. ("Gulf State"). South Hampton owns and operates a specialty
petrochemical products refinery near Silsbee, Texas that is one of the largest
domestic manufacturers of pentanes. Gulf State owns and operates three pipelines
that 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. Coin owns and operates a specialty petrochemical
products refinery in Coatzacoalcos, on the Yucatan Peninsula near Veracruz,
Mexico. The Company also directly owns all of American Shield Coal Company (the
"Coal Company") and approximately 51% of the capital stock of a Nevada mining
company, Pioche-Ely Valley Mines, Inc. ("Pioche"). Neither the Coal Company nor
Pioche conduct any substantial business activities. The Coal Company, Pioche and
the Company's mineral properties in Saudi Arabia constitute its Mining Segment.

The Company consolidates all subsidiaries for which it has majority
ownership or voting control that is other than temporary. All material
intercompany accounts and transactions are eliminated.

NOTE 2. LIQUIDITY MATTERS, REALIZATION OF ASSETS AND BUSINESS RISKS

The accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America, which
contemplate the realization of assets and the satisfaction of liabilities in the
normal course of business. As shown in the financial statements, the Company
incurred a loss of $3,902,898 in 2000 in contrast to net income of $2,740,353 in
1999 and $3,441,646 in 1998, and had an excess of current liabilities over
current assets of $21,253,289 at December 31, 2000. The loss in 2000 was
principally due to the precipitous rise in feedstock and natural gas prices
during late 1999 and 2000. These prices have recently declined, allowing the
Refining Company to realize an operating profit before interest expense in
February and March 2001 (unaudited). As discussed in Note 8, the Company was not
in compliance with certain covenants in its loan agreements. If resolution with
the lenders is not achieved, and the Company does not generate positive cash
flow adequate for its operations and loan obligations, the Company will have to
raise debt or equity capital. There is no assurance that capital would be
available.

Historically, the Company's cash flows from operating activities have been
insufficient to meet its operating needs, planned capital expenditures and debt
service requirements. The Company has continually sought additional debt and
equity financing in order to fund its mineral development and other investing
activities and experienced difficulties obtaining additional financing. The
Company presently needs additional financing in order to fund its planned
mineral development activities and other activities.

The Company's mining segment is in the development stage. Its most
significant asset is the Al Masane mining project in Saudi Arabia, which is a
net user of the Company's available cash and capital resources. As discussed in
Note 6, the Company intends to take steps to finance commercial development of
the Al Masane mining project. However, there is no assurance the Company will be
able to arrange financing.

28
30
ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Management is also addressing two other significant financing issues within
this segment. These issues are the $11.0 million note payable due the Saudi
Arabian government and accrued salaries and termination benefits of
approximately $1,062,000 due employees working in Saudi Arabia (this amount does
not include any amounts due the Company's President and Chief Executive Officer
who also primarily works in Saudi Arabia and is owed accrued salaries of
approximately $841,000). The note payable was originally due in ten annual
installments beginning in 1984. While the Company has not made any repayments,
it has not received any payment demands or other communications from the Saudi
government regarding the note payable. This is despite the fact the Company
remains active in Saudi Arabia and received the Al Masane mining lease at a time
when it had not made any of the agreed upon repayment installments. Based on its
experience to date, management believes as long as the Company diligently
attempts to explore and develop the Al Masane project that no repayment demand
will be made. The Company has communicated to the Saudi government that its
delay in repaying the note is a direct result of the government's lengthy delay
in granting the Al Masane lease and requested formal negotiations to restructure
this obligation. Based on its interpretation of the Al Masane mining lease and
other documents, management believes the government is likely to agree to link
repayment of this note to the operating cash flows generated by the commercial
development of the Al Masane project, which would result in a long-term
installment repayment schedule. In the event the Saudi government were to demand
immediate repayment of this obligation, which management considers unlikely, the
Company would be unable to pay the entire amount due. If a satisfactory
rescheduling agreement could be reached, and there are no assurances that one
could be, the Company believes it could obtain the necessary resources to meet
the rescheduled installment payments by making certain changes at the Refining
Company.

The second issue is the accrued salaries and termination benefits due
employees working in Saudi Arabia. The Company plans to continue employing these
individuals until it is able to generate sufficient excess funds to begin
payment of this liability. Management will then begin the process of gradually
releasing certain employees and paying its obligation as they are released from
the Company's employment.

A significant component of the Company's assets consists of undeveloped
mineral deposits. There is no assurance that the Company will ultimately
successfully develop either the Al Masane project or any of the other properties
discussed in Notes 6 and 7, and if, developed, whether the mineral acquisition,
development and development costs incurred will be recovered. The recovery of
these costs is dependent upon a number of factors and future events, many of
which are beyond the Company's control. Furthermore, the Company's ability to
develop and realize its investment in these properties is dependent upon (i)
obtaining significant additional financing and (ii) attaining successful
operations from one or more of these projects.

The Company assesses the carrying values of its assets on an ongoing basis.
Factors which may affect carrying values include, but are not limited to,
mineral prices, capital cost estimates, the estimated operating costs of any
mines and related processing, ore grade and related metallurgical
characteristics, the design of any mines and the timing of any mineral
production. Prices currently used to assess recoverability, based on production
to begin no sooner than 2004, are $1.05 per pound for copper and $.60 per pound
for zinc. Zinc and copper comprise in excess of 80% of the expected value of
production. There are no assurances that, particularly in the event of a
prolonged period of depressed mineral prices, the Company will not be required
to take a material write-down of its mineral properties.

NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Cash, Cash Equivalents and Short-Term Investments -- The Company's
principal bank and short-term investing activities are with local and national
financial institutions. Short-term investments with an original maturity of
three months or less are classified as cash equivalents. At December 31, 1999,
the Company held certificates of deposit and mutual funds with original
maturities of less than one year that the Company converted into cash in 2000.
At December 31, 2000, there were no cash equivalents or short-term investments.

29
31
ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Inventories -- Refined products and feedstock are recorded 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, 2000, none of the projects described in Notes 6 and 7 had reached
the commercial exploration stage. No indirect overhead or general and
administrative costs have been allocated to any of the projects.

Refinery Plant, Pipeline and Equipment -- Refinery plant, pipeline and
equipment are stated at cost. Depreciation is provided over the estimated
service lives using the straight-line method. Gains and losses from disposition
are included in operations in the period incurred.

Other Assets -- Other assets include catalysts used in refinery operations,
prepaid expenses, a note receivable and certain refinery assets, which are being
leased to a third party.

Environmental Liabilities -- Remediation costs are accrued based on
estimates of known environmental remediation exposure. Such accruals are
recorded even if uncertainties exist over the ultimate cost of the remediation.
Ongoing environmental compliance costs, including maintenance and monitoring
costs, are expensed as incurred.

Deferred Revenue -- Deferred revenue represents funds advanced by two
suppliers and customers to defray development and processing costs and are being
amortized over five year and 15 year periods.

Statements of Cash Flows -- In the statements of cash flows, cash includes
cash held in the United States and Saudi Arabia. Significant noncash changes in
financial position in 2000 include the issuance of 469,000 shares of common
stock at $1.00 per share for the conversion of $469,000 of indebtedness.

Net Income (Loss) Per Share -- The Company computes basic earnings (loss)
per common share based on the weighted-average number of common shares
outstanding. Diluted earnings (loss) per common share is computed based on the
weighted-average number of common shares outstanding plus the number of
additional common shares that would have been outstanding if dilutive potential
common shares, consisting of stock options and shares issuable upon conversion
of debt, had been issued (Note 13).

Foreign Currency and Operations -- The functional currency for each of the
Company's subsidiaries is the US dollar. Transaction gains or losses as a result
of remeasuring from the subsidiaries local currency to US dollar are reflected
in the statement of operations as a foreign exchange transaction gain or loss.
The Company does not employ any practices to minimize foreign currency risks. It
is anticipated that its products in Mexico and Saudi Arabia will be sold in
United States dollars.

The Company's foreign operations have been, and will continue to be,
affected by periodic changes or developments in the country's political and
economic conditions as well as changes in their laws and regulations. Any such
changes could have a material adverse effect on the Company's financial
condition, operating results or cash flows.

Saudi Arabian investors, including certain members of the Company's board
of directors, own approximately 62% of the Company's outstanding common stock at
December 31, 2000.

Management Estimates -- The preparation of financial statements in
conformity with accounting principles generally accepted in the United States
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.
30
32
ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Stock-Based Compensation -- The Company accounts for employee stock options
under the intrinsic value method prescribed by Accounting Principles Board
Opinion No. 25 and has adopted the disclosure requirements of Statement of
Financial Accounting Standards No. 123 (Statement No. 123). Accordingly, the
compensation expense of employee stock options is the excess, if any, of the
quoted market price of the Company's common stock at the grant date over the
amount the employee must pay to acquire the stock. Note 10 includes pro forma
disclosures of net earnings and earnings per share as if the Company had adopted
the fair value based method of accounting set forth in Statement No. 123.

Hedging Program -- The Company's refining segment has used a hedging
program to decrease the price volatility of its natural gas fuel requirements.
For the years ended December 31, 1999 and 1998 the net recognized gain (loss)
from hedging transactions was $28,244 and ($74,500), respectively. In 2000, the
refining segment temporarily discontinued its hedging program.

Prospective Accounting Pronouncements -- In June 1998, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging Activities.
In June 1999, FASB issued Statement No. 137, Accounting for Derivative
Instruments and Hedging Activities -- Deferral of the Effective Date of FASB
Statement No. 133. In June 2000, FASB issued Statement 138, Accounting for
Certain Derivative Instruments and Certain Hedging Activities and amendment of
FASB Statement of No. 133. Statement 133, as amended, establishes accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet as either an asset or liability measured at its fair value.
The statement requires that changes in the derivative instrument's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. Special accounting for qualifying hedges allows a derivative instrument's
gains and losses to offset related results on the hedged item in the income
statement, to the extent effective, and requires that a company must formally
document, designate and assess the effectiveness of transaction that receive
hedge accounting. Statement 133, as amended, is effective for fiscal years
beginning after June 15, 2000 and will be adopted by the Company on January 1,
2001. Statement 133 is not expected to have a material impact on the
consolidated financial statements.

NOTE 4. CONCENTRATIONS OF CREDIT RISK

The refining segment sells its products and services to companies in the
chemical and plastics industries. It performs periodic credit evaluations of its
customers and does not require collateral from its customers. The largest
customer accounted for 10% of the total product sales in 2000, 11% in 1999 and
10% in 1998. Minimal credit losses have been incurred. The carrying amount of
accounts receivable approximates fair value at December 31, 2000.

NOTE 5. INVENTORIES

Inventories include the following at December 31:

2000 1999
-------- --------

Refined products............................................ $960,494 $745,396
======== ========

At December 31, 2000 and 1999, current cost exceeded LIFO value by
approximately $178,000 and $142,000, respectively.

NOTE 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. This includes the

31
33
ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

"Al Masane Project" (the "Project") and "Other Interests in Saudi Arabia" which
primarily pertains to the costs of rentals, field offices and camps, core
drilling and labor incurred at the Wadi Qatan and Jebel Harr properties.

In 1971, the Saudi Arabian government awarded the Company exclusive mineral
exploration licenses to explore and develop the Wadi Qatan area in southwestern
Saudi Arabia. The Company was subsequently awarded an additional license in 1977
for an area north of Wadi Qatan at Jebel Harr. These licenses have expired. On
June 22, 1999, the Company submitted a formal application for a five-year
exclusive exploration license for the Greater Al Masane Area of approximately
2,850 square kilometers that surrounds the Al Masane mining lease area and
includes the Wadi Qatan and Jebel Harr areas. Although a license has not been
formally granted for the Greater Al Masane area, the Company has been authorized
in writing by the Saudi Arabian government to carry out exploration work on the
area. The Company previously worked the Greater Al Masane Area after obtaining
written authorization from the Saudi Ministry of Petroleum and Mineral
Resources, and has expended over $3 million in exploration work. Geophysical and
geochemical work and diamond core drilling on the Greater Al Masane area has
revealed mineralization similar to that discovered at Al Masane. The Company
intends to formalize its claims in these areas.

The Al Masane project, consisting of a mining lease 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 BC to 700 AD. The ancients are believed to have
extracted mainly gold, silver and copper. The Project includes various
quantities of proved zinc, copper, gold and silver reserves.

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 previously
discussed $11 million loan. The Company's interpretation of the mining lease is
that repayment of this loan will be made in accordance with a repayment schedule
to be agreed upon with the Saudi Arabian government from the Company's share of
the project's cash flows. 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 is obligated to pay advance surface rental
in the amount of 10,000 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. 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. The Saudi Arabian Mining Code provides that income tax
will not be due during the first stage of mining operations, which is the period
of five years starting from the earlier of (i) the date of the first sale of
products or (ii) the beginning of the fourth year since the issue of the mining
lease. The lease gives the Saudi Arabian government priority to purchase any
gold production from the project as well as the right to purchase up to 10% of
the 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. Furthermore, the lease contains provisions requiring that
preferences be given to Saudi Arabian suppliers and contractors, that the
Company employ Saudi Arabian citizens and provide training to Saudi Arabian
personnel.

Pursuant to the mining lease agreement, when the Al Masane project is
profitable the Company is obligated to form a Saudi public stock company with
the Saudi Arabian Mining Company, a corporation wholly owned by the Saudi
Arabian government (Ma'aden), as successor to and assignee of the mining
interests formerly held by the Petroleum Mineral Organization ("Petromin").
Ma'aden is the Saudi Arabian government's official mining company. In 1994, the
Company received instructions from the Saudi Ministry of Petroleum and Mineral
Resources stating that it is possible for the Company to form a Saudi company
without Petromin (now Ma'aden), but the sale of stock to the Saudi public could
not occur until the mine's commercial operations were profitable for at least
two years. The instructions added that Petromin (now

32
34
ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Ma'aden) still had the right to purchase shares in the Saudi public stock
company any time it desires. Title to the mining lease and the other obligations
specified in the mining lease will be transferred to the Saudi public stock
company. However, the Company would remain responsible for the repaying the $11
million loan to the Saudi Arabian government.

When open market prices for the minerals to be produced by the Al Masane
project improve to the average price levels experienced during the period from
1988 through 1997, the Company will attempt to locate a joint venture partner,
form a joint venture and, together with the joint venture partner, attempt to
obtain acceptable financing to commercially develop the project. There can be no
assurances that the Company would be able to locate a joint venture partner,
form a joint venture or obtain financing from SIDF or any other sources. In the
meantime, the Company intends to maintain the Al Masane mining lease through the
payment of the annual advance surface rental, the implementation of a drilling
program to attempt to increase proven and probable reserves and improve the
metallurgical recovery rates beyond those stated in the feasibility study, which
may improve the commercial viability of the project at lower metal prices than
those assumed in the feasibility study.

Deferred development costs of the Al Masane Project at December 31, 2000,
1999 and 1998, and the changes in these amounts for each of the three years then
ended are detailed below:

BALANCE AT BALANCE AT BALANCE AT
DECEMBER 31, ACTIVITY DECEMBER 31, ACTIVITY DECEMBER 31, ACTIVITY
2000 FOR 2000 1999 FOR 1999 1998 FOR 1998
------------ -------- ------------ -------- ------------ --------

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, consulting services
and
project administration
costs...................... 20,922,024 $681,040 20,240,984 $496,832 19,744,152 $598,856
Materials and maintenance.... 6,173,746 1,865 6,171,881 3,002 6,168,879 218
Feasibility study............ 2,907,771 -- 2,907,771 -- 2,907,771 --
----------- -------- ----------- -------- ----------- --------
Total................. 29,743,621 682,905 29,320,636 499,834 28,820,802 599,074
----------- -------- ----------- -------- ----------- --------
$35,304,240 $682,905 $34,621,335 $499,834 $34,121,501 $599,074
=========== ======== =========== ======== =========== ========

The deferred development costs of the "Other Interests in Saudi Arabia," in
the total amount of approximately $2.4 million, consist of approximately $1.5
million associated with the Greater Al Masane area and the balance of
approximately $900,000 is associated primarily with the Wadi Qatan and Jebel
Harr areas. In the event exploration licenses for these areas are not granted,
then all or a significant amount of deferred development costs relating thereto
may have to be written off. However, the Company believes it would be entitled
to a refund of the amounts expended for development costs.

NOTE 7. MINERAL PROPERTIES IN THE UNITED STATES

The principal assets of Pioche are an undivided interest in 48 patented and
80 unpatented mining claims and a 300 ton-per-day mill located on the
aforementioned properties in the Pioche Mining District in southeastern Nevada.
Due to the lack of capital , the properties held by Pioche have not been
commercially operated for approximately 35 years. The Company has an option
(which expires in 2002) to buy 720,000 shares (approximately 10% of the
outstanding shares) of Pioche common stock at $0.20 per share.

33
35
ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 8. 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:

2000 1999
----------- -----------

Notes payable:
Secured note to Saudi Arabian government See (A)......... $11,000,000 $11,000,000
Unsecured demand notes payable to Saudi investors........ 363,280 363,280
Unsecured notes to foreign investors See (B)............. 498,000 498,000
Other.................................................... 62,500 12,500
----------- -----------
Total............................................ $11,923,780 $11,873,780
=========== ===========
Long-term debt:
Revolving bank note See (C).............................. $ 3,183,944 $ --
Revolving bank note See (D).............................. 3,250,000 750,000
Secured note with commercial lender See (E).............. 1,627,037 3,500,000
----------- -----------
Total............................................ 8,060,981 4,250,000
Less current portion..................................... (8,060,981) (677,439)
----------- -----------
Total............................................ $ -- $ 3,572,561
=========== ===========

- ---------------

(A) The Company has an interest-free loan of $11,000,000 from the Saudi Arabia
Ministry of Finance and National Economy, the proceeds of which were used
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. Pursuant to the mining lease agreement covering
the Al Masane Project, the Company intends to repay the loan in accordance
with a repayment schedule to be agreed upon with the Saudi Arabian
government from its share of cash flows. An agreement has not yet been
reached regarding either the rescheduling or source of these payments. The
loan is collateralized by all of the Company's "movable and immovable"
assets in Saudi Arabia.

(B) Represents loans payable to a shareholder of the Company for $445,000, and
the Company's president for $53,000. The loans are due on demand with
interest payable at the LIBOR rate plus 2%. Each loan provides for an
option to convert the loan amount to shares of the Company's common stock
at $1.00 per share anytime within five years from the date of the loan.

(C) Represents two loans payable to banks of $1,139,851 and $2,044,093,
respectively. The first loan is payable in monthly payments through 2004.
The second loan is payable in quarterly payments through 2007. The loans
bear interest at the LIBOR rate plus seven points (LIBOR was 6.55% at
December 31, 2000). Both loans are collateralized by all of the assets of
Coin including the plant located in Coatzacoalcos Veracruz. Coin is in
default of the loan covenants as a result of not having made its monthly
and quarterly payments and has therefore classified the loans as current in
the financial statements. Unpaid interest of $290,764 has been accrued and
is included in accrued liabilities.

(D) The Refining Segment entered into a $3.25 million revolving credit
agreement with a Houston, Texas bank in September 1999 that is
collateralized by a first security interest in certain of its assets.
Interest (at the bank's prime rate plus .5%) is payable monthly. The
agreement contains various restrictive covenants including the maintenance
of various financial ratios, net worth and parent company distribution
limitations. The Company is not in compliance with several of the financial
ratio covenants. The credit agreement expires on May 31, 2001.

(E) The Refining Segment entered into a $3.5 million loan agreement with a
commercial lending company in December 1999 that is collateralized by a
first security interest in all of its assets, except those dedicated

34
36
ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

to the bank mentioned in Note (D) above. Interest is at 10.55% per annum
with principal and interest payable in 47 consecutive monthly installments
of $89,696 from February 1, 2000 through January 2004. The agreement for
this loan contains various restrictive covenants including the maintenance
of a working capital credit facility in an amount not less than $2 million
and parent company distribution limitations. In January 2001, the Refining
Segment advised the lender that certain events of default had occurred and
requested the lender to suspend borrower's principal payments for the
months of December 2000, January, February and March of 2001. During this
period interest only payments would be made. The lender agreed provided
that, beginning on April 1, 2001, the borrower will resume making principal
and interest payments. At that time, the principal payments will be
adjusted to fully amortize the outstanding principal balance during or
prior to the initial term of the loan. Also, the lender agreed to forbear
from exercising any rights and remedies under the loan agreement with
respect to certain events of default until April 1, 2001.

Interest of $977,216, $118,145 and $418,403 was paid in 2000, 1999, and
1998, respectively.

NOTE 9. COMMITMENTS AND CONTINGENCIES

The Company's Refining Segment leases various vehicles and equipment from a
related party on a month to month basis at a monthly cost of approximate
$34,500. The Company's total rental costs were approximately $405,000 in 2000,
$373,000 in 1999 and $361,000 in 1998.

The Refining Segment has guaranteed a note payable of $160,000 of a limited
partnership in which South Hampton has a 19% interest.

South Hampton is a defendant in five lawsuits filed in Jefferson County and
Orange County, Texas in the period from December 1997 to December 2000 by former
employees of the southeast Texas plants of Goodyear Tire & Rubber Company,
Dupont, Atlantic Richfield and South Hampton. The suits claim illness and
disease resulting from alleged exposure to chemicals, including benzene,
butadiene and/or isoprene, during their employment. The plaintiffs claim that
the companies engaged in the business of manufacturing, selling and/or
distributing these chemicals in a manner which subjected them to liability for
unspecified actual and punitive damages. One of the lawsuits brought in
Jefferson County, Texas has been settled, with South Hampton contributing
$10,000 toward such settlement. South Hampton intends to vigorously defend
itself against these lawsuits.

South Hampton spends a considerable amount of time and expense on
environmental and regulatory functions and compliance. It is South Hampton's
policy to accrue costs associated with regulatory compliance when those costs
are reasonably determinable. Amounts accrued at December 31, 2000 and 1999 were
$216,840 and $250,000, respectively. Amounts charged to expense were
approximately $338,000 in 2000, $186,000 in 1999 and $430,000 in 1998.

In 1993, while remediating a small spill area, the Texas Natural Resources
Conservation Commission ("TNRCC") requested South Hampton to drill a well to
check for groundwater contamination under the spill area. Based on the results,
two pools of hydrocarbons were discovered in the groundwater. The recovery
process was initiated in June 1998, and is expected to continue for several
years until the pools are reduced to an acceptable level. In August 1997, the
TNRCC notified South Hampton that it had violated various rules and procedures.
It proposed administrative penalties totaling $709,408 and recommended the South
Hampton undertake certain actions necessary to bring its refinery operations
into compliance. The violations generally relate to various air and water
quality issues. Appropriate modifications have been made by South Hampton where
it appeared there were legitimate concerns. South Hampton feels the penalty is
greatly overstated and intends to vigorously defend itself against it. On
February 2, 2000, the TNRCC amended its pending administrative action against
South Hampton to add allegations dating through May 21, 1998 of 35 regulatory
violations relating to air quality control and industrial solid waste
requirements. The TNRCC proposes that
35
37
ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

administrative penalties be increased to approximately $765,000 and that certain
corrective actions be taken. South Hampton intends to vigorously defend itself
against these additional allegations, the proposed penalties and proposed
corrective actions.

NOTE 10. STOCK OPTIONS

Stock Options -- The Company's Employee Stock Option Plan (the "Employee
Plan") provides for the grant of incentive options at the market price of the
stock on the date of grant and non-incentive options at a price not less than
85% of the market price of the stock on the date of grant. The Company has
reserved up to 500,000 shares of common stock for grant pursuant to the Employee
Plan. At December 31, 2000, 335,000 shares were reserved for grant. The options
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 Employee Plan is
registered with the Securities and Exchange Commission and expires May 16, 2003.

The Company periodically grants stock options to various parties, including
certain officers and directors, who have made loans to or performed critical
services for the Company. Most of these options allow the parties to purchase
common share for $1.00 per share.

If the Company recognized compensation expense based upon the fair value at
the grant date for options granted to employees, the Company's net income and
income per share for 1998 (there was no effect of fair value accounting in 2000
and 1999) would be the pro forma amounts indicated as follows:

1998
----------

Net income
As reported............................................... $3,441,646
Pro forma................................................. $3,429,996
Net income per common share -- basic and diluted
As reported............................................... $ .16
Pro forma................................................. $ .16

The fair value of these options was estimated at the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions: expected volatility of 85 percent; risk-free interest rate of 6
percent; no dividend yield; and expected lives of 3 to 10 years.

Additional information with respect to all options outstanding at December
31, 2000, and changes for the three years then ended was as follows:

1998
----------------------------
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------- ----------------

Outstanding at beginning of year........................... 1,648,000 $1.10
Forfeited.................................................. (10,000) 2.25
Exercised.................................................. (58,000) 1.57
---------
Outstanding at end of year................................. 1,580,000 $1.08
========= =====
Options exercisable at December 31, 1998................... 1,580,000 $1.08
========= =====

36
38
ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

1999
----------------------------
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------- ----------------

Outstanding at beginning of year........................... 1,580,000 $1.08
Forfeited.................................................. (10,000) 2.50
---------
Outstanding at end of year................................. 1,570,000 $1.07
========= =====
Options exercisable at December 31, 1999................... 1,570,000 $1.07
========= =====

2000
----------------------------
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------- ----------------

Outstanding at beginning of year........................... 1,570,000 $1.07
Forfeited.................................................. (698,000) 1.00
---------
Outstanding at end of year................................. 872,000 $1.07
========= =====
Options exercisable at December 31, 2000................... 872,000 $1.07
========= =====

Information about stock options outstanding at December 31, 2000 is
summarized as follows:

OPTIONS OUTSTANDING AND EXERCISABLE
-------------------------------------
WEIGHTED AVERAGE
---------------------------
REMAINING EXERCISE
RANGE OF EXERCISE PRICES NUMBER CONTRACTUAL LIFE PRICE
- ------------------------ ------- ---------------- --------

$- to 1.00........................................... 745,000 6.6 years $1.00
$1.00 to $2.00....................................... 107,000 2.4 years 1.54
$2.00 to $3.75....................................... 20,000 2.6 years 3.32
-------
872,000 $1.07
======= =====

NOTE 11. INCOME TAXES

Income tax expense (benefit) for the years ended December 31, 2000, 1999,
and 1998 differs from the amount computed by applying the applicable U.S.
corporate income tax rate of 34% to net income before income taxes. The reasons
for this difference are as follows:

2000 1999 1998
----------- ---------- -----------

Income taxes at U.S. statutory rate............ $(1,326,985) $1,027,979 $ 1,257,124
State taxes.................................... -- 147,700 231,019
Goodwill amortization.......................... -- -- 6,461
Net operating losses utilized.................. -- (929,278) (1,255,792)
Net operating losses carried forward........... 1,321,421 -- --
Other items.................................... 5,564 36,713 16,965
----------- ---------- -----------
Total tax expense.................... $ -- $ 283,114 $ 255,777
=========== ========== ===========

37
39
ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

DECEMBER 31,
----------------------------------------
2000 1999 1998
------------ ----------- -----------

Deferred tax liabilities:
Refinery plant, pipeline and equipment..... $ (383,437) $ (355,978) $ (331,263)
Deferred tax assets:
Accounts receivable........................ 58,948 50,985 49,761
Mineral interests.......................... 196,446 196,446 196,446
Accrued liabilities........................ 118,850 118,749 93,137
Net operating loss and contribution
carryforwards........................... 9,647,285 8,525,532 9,594,376
Tax credit carryforwards................... 341,398 325,789 197,397
Deferred gain on sale of property.......... 90,542 99,570 107,853
------------ ----------- -----------
Gross deferred tax assets.................. 10,453,469 9,317,071 10,238,970
Valuation allowance.......................... (10,070,032) (8,961,093) (9,907,707)
------------ ----------- -----------
Net deferred tax assets.................... 383,437 355,978 331,263
------------ ----------- -----------
Net deferred taxes......................... $ -- $ -- $ --
============ =========== ===========

The Company has provided a valuation allowance against the deferred tax
assets because of uncertainties regarding their realization.

At December 31, 2000, the Company had approximately $28,000,000 of net
operating loss carryforwards and approximately $57,000 of general business
credit carryforwards. These carryforwards expire during the years 2001 through
2020. In addition, the Company has minimum tax credit carryforwards of
approximately $212,000 that may be carried over indefinitely. Approximately
$1,500,000 of the net operating loss carryforwards and $57,000 of the general
business credit carryforwards are limited to the net earnings of TOCCO.
Approximately $5,900,000 of the net operating loss carryforwards are limited to
the net earnings of the Coal Company.

The Company has no Saudi Arabian or Mexican tax liability.

NOTE 12. SEGMENT INFORMATION

As discussed in Note 1, the Company has two business segments. The Company
measures segment profit or loss as operating income (loss), which represents
earnings (loss) before interest, miscellaneous income and minority interest.
Information on segments is as follows:

DECEMBER 31, 2000
---------------------------------------
REFINING MINING TOTAL
----------- ----------- -----------

Revenue from external customers............... $42,611,811 $ -- $42,611,811
Depreciation.................................. 1,256,472 2,481 1,258,953
Operating income (loss)....................... (2,837,864) (190,252) (3,028,116)
Total assets........................ $18,733,016 $38,865,679 $57,598,695

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ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

DECEMBER 31, 1999
---------------------------------------
REFINING MINING TOTAL
----------- ----------- -----------

Revenue from external customers............... $27,790,666 $ -- $27,790,666
Depreciation.................................. 717,705 2,088 719,793
Operating income (loss)....................... 3,135,730 (351,028) 2,784,702
Total assets........................ $11,640,497 $41,207,712 $52,848,209

DECEMBER 31, 1998
---------------------------------------
REFINING MINING TOTAL
----------- ----------- -----------

Revenue from external customers............... $25,089,175 $ -- $25,089,175
Depreciation.................................. 428,452 291 428,743
Operating income (loss)....................... 4,160,786 (361,930) 3,798,856
Total assets........................ $ 8,566,887 $38,116,436 $46,683,323

Information regarding foreign operations for the years ended December 31,
2000, 1999 and 1998 follows (in thousands). Revenues are attributed to countries
based upon the origination of the transaction.

YEAR ENDED DECEMBER 31,
---------------------------
2000 1999 1998
------- ------- -------

Revenues
United States......................................... $36,660 $27,791 $25,089
Mexico................................................ 5,951 -- --
Saudi Arabia.......................................... -- -- --
------- ------- -------
$42,611 $27,791 $25,089
======= ======= =======
Long-lived assets
United States......................................... $ 7,381 $ 6,326 $ 4,780
Mexico................................................ 5,579 -- --
Saudi Arabia.......................................... 37,735 37,052 36,533
------- ------- -------
$50,695 $43,378 $41,333
======= ======= =======

NOTE 13. NET INCOME (LOSS) PER COMMON SHARE

Net Income (loss) per share has been calculated as follows:

2000 1999 1998
----------- ----------- -----------

Basic
Net income (loss)........................... $(3,902,898) $ 2,740,353 $ 3,441,646
Weighted average shares outstanding......... 22,673,033 22,026,114 21,995,735
Per share........................... $ (.17) $ .12 $ .16
Diluted
Net income (loss)........................... $(3,902,898) $ 2,740,353 $ 3,441,646
Add interest on convertible debt............ -- 36,434 218,228
----------- ----------- -----------
Net income (loss) -- diluted................ -- $ 2,776,787 $ 3,659,874
Weighted shares outstanding................. 22,673,033 22,026,114 21,995,735
Dilutive effect of convertible debt......... -- 511,280 2,818,138
Dilutive effect of stock options............ -- 66,846 835,822
----------- ----------- -----------
Weighted shares outstanding -- diluted...... -- 22,604,240 25,649,695
Per share........................... $ (.17) $ .12 $ .14

In 2000 and 1999, options for 872,000 shares and 1,180,000 shares,
respectively, were excluded from diluted shares outstanding because their effect
was antidilutive.

39
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ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 14. ACQUISITION

On January 25, 2000, TOCCO purchased 92% of the issued and outstanding
shares of the common stock of Productos Quimicos Coin, S.A. de. C.V. ("Coin")
from Spechem, S.A. de. D.V. for $2.5 million in cash. Coin is a specialty
petrochemical products refining company located in Coatzacoalcos, Mexico near
Veracruz. Financing was provided by a loan from Heller Financial Leasing, Inc.

The following table (in thousands, except per share amounts) presents
unaudited pro forma consolidated results of operations for the years ended
December 31, 2000 and 1999, assuming that the acquisition had taken place at the
beginning of the periods presented. The pro forma results are not necessarily
indicative of the results of operations that would have occurred had the
acquisition been made at the beginning of the periods presented, or of future
results of operations of the combined operations.

2000 1999
------- -------

Revenue..................................................... $44,064 $38,442
Net income (loss)........................................... (4,147) 2,504
Net income (loss) per share
Basic..................................................... $ (.18) $ .11
======= =======
Diluted................................................... $ (.18) $ .11
======= =======

NOTE 15. RELATED PARTY TRANSACTIONS

Pursuant to a sharing arrangement, the Company shares personnel, office
space and other overhead expenses in its Dallas, Texas location with a company
wholly-owned by the Company's Chairman of the Board. The Company paid
approximately $24,000, $23,000 and $22,000 in 2000, 1999 and 1998, respectively,
pursuant to such arrangement.

South Hampton incurred product transportation costs of approximately
$391,000, 359,000 and $349,000 in 2000, 1999 and 1998, respectively, with a
trucking and transportation company owned by two of TOCCO's officers.

NOTE 16. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

A summary of the Company's quarterly results of operations for the years
ended December 31, 2000 and 1999 are as follows (in thousands, except per share
data):

YEAR ENDED DECEMBER 31, 2000
-----------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- -------

Revenues............................. $10,569 $10,890 $11,764 $ 9,389 $42,612
Net income (loss).................... (477) (320) (1,199) (1,907) (3,903)
Basic and Diluted EPS................ $ (0.02) $ (0.01) $ (0.05) $ (0.08) $ (0.17)

YEAR ENDED DECEMBER 31, 1999
-----------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- -------

Revenues............................. $ 5,541 $ 6,313 $ 8,098 $ 7,839 $27,791
Net income (loss).................... 1,184 999 734 (177) 2,740
Basic and Diluted EPS................ $ 0.05 $ 0.04 $ 0.03 $ (0.01) $ 0.12

40
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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULES

Board of Directors and Stockholders
Arabian American Development Company

In connection with our audit of the consolidated financial statements of
Arabian American Development Company and Subsidiaries referred to in our report
dated April 11, 2001, 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,
2000, 1999, and 1998 and for the years then ended. In our opinion, this schedule
presents fairly, in all material respects, the information required to be set
forth therein.

GRANT THORNTON LLP

Dallas, Texas
April 11, 2001

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ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES

VALUATION AND QUALIFYING ACCOUNTS
THREE YEARS ENDED DECEMBER 31, 2000

CHARGED
BEGINNING (CREDITED) TO ENDING
DESCRIPTION BALANCE EARNINGS DEDUCTIONS BALANCE
- ----------- ----------- ------------- ----------- -----------

ALLOWANCE FOR DEFERRED
TAX ASSET
December 31, 1998..................... $11,059,712 $ --(b) $(1,017,340) $ 9,907,707
(a) (134,665)
December 31, 1999..................... 9,907,707 --(b) (946,610) 8,961,093
December 31, 2000..................... 8,961,093 1,321,421(a) (212,482) 10,070,032

- ---------------

(a) Expiration of carryforwards

(b) Utilization of carryforwards

42