ARABIAN AMERICAN DEVELOPMENT CO - 10-Q Quarterly Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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FORM 10-Q

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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934

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FOR QUARTER ENDING SEPTEMBER 30, 2002

COMMISSION FILE NUMBER 0-6247

ARABIAN AMERICAN DEVELOPMENT COMPANY
(Exact name of registrant as specified in its charter)

DELAWARE 75-1256622
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)

10830 NORTH CENTRAL EXPRESSWAY, SUITE 175 75231
DALLAS, TEXAS (Zip code)
(Address of principal executive offices)

Registrant's telephone number, including area code: (214) 692-7872

Former name, former address and former fiscal year, if
changed since last report.
NONE

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.

YES X NO
--- ---

Number of shares of the Registrant's Common Stock (par value $0.10 per share),
outstanding at September 30, 2002: 22,731,994.

ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES

PART I. FINANCIAL INFORMATION

ITEM I. FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS
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See notes to consolidated financial statements.

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ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
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See notes to consolidated financial statements.

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ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
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See notes to consolidated financial statements.

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ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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See notes to consolidated financial statements.

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ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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1. BASIS OF PRESENTATION

The consolidated financial statements reflect all adjustments (consisting
only of normal and recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of Arabian American Development
Company and Subsidiaries financial position and operating results for the
interim period. Interim period results are not necessarily indicative of the
results for the calendar year. Please refer to Management's Discussion and
Analysis of Financial Condition and Results of Operations for additional
information in the Company's December 31, 2001 Annual Report on Form 10-K.

These financial statements include the accounts of Arabian American
Development Company (the "Company") and its wholly-owned subsidiary, American
Shield Refining Company (the "Refining Company"), which owns all of the
capital stock of Texas Oil and Chemical Company II, Inc. ("TOCCO"). TOCCO
owns all of the capital stock of South Hampton Refining Company ("South
Hampton") and South Hampton owns all of the capital stock of Gulf State Pipe
Line Company, Inc. ("Gulf State"). TOCCO also owns 92% of the capital stock
of Productos Quimicos Coin, S.A. de. C.V. ("Coin"), a specialty petrochemical
products refining company located near Veracruz, Mexico, which was purchased
on January 25, 2000 for $2.5 million. The Company also owns approximately 51%
of the capital stock of a Nevada mining company, Pioche-Ely Valley Mines,
Inc. ("Pioche"), which does not conduct any substantial business activity.
The Refining Company and its subsidiaries constitute the Company's Specialty
Petrochemicals or Refining Segment. Pioche and the Company's mineral
properties in Saudi Arabia constitute its Mining Segment.

2. INVENTORIES

Inventories include the following:

Inventories are recorded at the lower of cost, determined on the last-in,
first-out method (LIFO), or market. At September 30, 2002, current cost
exceeded LIFO value by approximately $153,000. At December 31, 2001, LIFO
inventory approximated current cost.

3. NET INCOME (LOSS) PER COMMON SHARE

The following table (in thousands, except per share amounts) sets forth the
computation of basic and diluted net income (loss) per share for the three
and nine months ended September 30, 2002 and 2001, respectively.

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In the three and nine months ended September 30, 2002 and 2001, options for
810,000 shares and 872,000 shares, respectively, were excluded from diluted
shares outstanding because their effect was antidilutive.

4. SEGMENT INFORMATION

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

Information regarding foreign operations for the three and nine months ended
September 30, 2002 and 2001 follows (in thousands). Revenues are attributed
to countries based upon the origination of the transaction.

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5. LEGAL PROCEEDINGS

At September 30, 2002 South Hampton, together with several other companies,
was a defendant in five lawsuits filed in the period from December 1999
through October 2002 by former employees or outside workers of South
Hampton. The suits primarily claim illness and disease resulting from
alleged exposure to chemicals, including benzene, butadiene and/or isoprene,
during their employment or work at the refinery. 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. A previous lawsuit was settled
in October 2001, with South Hampton contributing $10,000 toward the
settlement. Two other previous lawsuits were settled in 2002. One in January
2002 resulted in South Hampton agreeing to pay a total of $60,000 in
quarterly payments by the end of the year and, in the other, South Hampton
settled for $100,000 to be paid over one year in four quarterly payments.
There have been three new lawsuits filed in 2002 which contain claims
similar to the other suits. South Hampton intends to vigorously defend
itself against these lawsuits.

In August 1997, the Texas Natural Resource Conservation Commission ("TNRCC")
notified South Hampton that it had violated various rules and procedures. It
proposed administrative penalties totaling $709,408 and recommended that
South Hampton undertake certain actions necessary to bring 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 administrative penalties be
increased to approximately $765,000 and that certain corrective actions be
taken. On December 13, 2001, the TNRCC notified South Hampton that it found
several violations of TNRCC rules during a record review in October 2001 and
proposed that the administrative penalties be increased another $59,000.
South Hampton settled this particular claim in April 2002 for approximately
$5,900. South Hampton believes the original penalty and the additional
allegations are greatly overstated and intends to vigorously defend itself
against these additional allegations, the proposed penalties and proposed
corrective actions.

6. LONG-TERM DEBT

South Hampton entered into a $2.25 million revolving credit agreement with a
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. An amended agreement was entered into on June 30, 2000,
which increased the total amount to $3.25 million. A second amended
agreement was entered into on May 31, 2001 which extended the due date from
May 31, 2001 to July 31, 2001. The debt was not paid on July 31, 2001. A
third amended agreement was entered into on July 31, 2001, which extended
the due date to October 31, 2001. The debt was not paid on October 31, 2001.
A fourth amended agreement was entered into on October 31, 2001, which
extended the due date to December 31, 2001. The debt was not paid on
December 31, 2001. A fifth amended agreement was entered into on December
31, 2001, which extended the due date to April 30, 2002. The debt was not
paid on April 30, 2002. A sixth amended agreement was entered into on April
30, 2002, which extended the due date to August 31, 2002. The debt was not
paid on August 31, 2002. A seventh amended agreement was entered into on
August 31, 2002, which extended the due date to December 31, 2002. At
September 30, 2002, South Hampton was not in compliance with the covenant
relating to distributions to the parent company, and therefore, the debt is
classified as current in the financial statements.

In connection with the acquisition of the common stock of Coin, South
Hampton and Gulf State entered into the $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 to the
bank mentioned in the preceding paragraph. Interest is at 10.55% per annum.
A new agreement dated April 1, 2001 provides for principal and interest
payments in the amount of $58,340 on a monthly basis beginning July 1, 2001
and continuing until January 2004. At September 30, 2002, South Hampton was
not in compliance with certain covenants contained in the loan agreement;
therefore this debt is classified as current in the financial statements.

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Coin has two loans payable to banks in Mexico, which are collateralized by
all of the assets of Coin. The first loan is payable in monthly payments
through 2004, while the second loan is payable in quarterly payments through
2007. The first loan bears interest at 5% and the second loan bears interest
at the LIBOR rate plus seven points (LIBOR was 1.82% at September 30, 2002).

At September 30, 2002, Coin was 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
and penalty interest of $1,667,064 has been accrued and is included in
accrued liabilities.

By not being in compliance with the loan agreement covenants, the creditors
have the right to declare the debt to be immediately due and payable. If
this were to occur, the Company would currently be unable to pay the entire
amounts due.

7. NATURAL GASOLINE SWAP AGREEMENTS

Statement of Financial Accounting Standard (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities", establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and hedging activities. SFAS No. 133
requires all derivative financial instruments to be recorded on the balance
sheet at fair value. Changes in fair value are recognized either in earnings
or equity, depending on the nature of the underlying exposure being hedged
and the effectiveness of the hedge. As required, the Company adopted SFAS
No. 133 on January 1, 2001. All of the Company's derivatives are designated
as cash flow hedges. Therefore, the effective portions of changes in the
fair value of the derivative are recorded in other comprehensive income
(loss) and are recognized in the statement of operations when the hedged
item affects income. Ineffective portions of changes in the fair value of
cash flow hedges are immediately recognized in earnings. Effectiveness of
hedges is determined by their success in offsetting the variability of cash
flows associated with the hedged item. Hedge ineffectiveness had no effect
on the results of operation for the three and nine month periods ended
September 30, 2002.

In July 2001, October 2001 and February 2002, the Company entered into swap
agreements to limit the effect of significant fluctuations in natural
gasoline prices. The first two agreements expired in January and July 2002.
The third agreement expires in December 2002. The Company's primary source
of feedstock is natural gasoline. The effect of these agreements is to limit
the Company's exposure by fixing the natural gasoline price of approximately
25,000 barrels (1,050,000 gallons) of feedstock per month over the term of
the agreements. This amount of material approximates 50% of the Company's
average monthly feedstock requirements. The agreements had no cost to the
Company. During the nine months ended September 30, 2002, the Company
recognized a gain of $392,700 attributable to the difference between the
actual natural gasoline prices and the fixed prices under the swap
agreements. At September 30, 2002, the agreements had a total positive fair
value of approximately $433,000.

8. RESTATEMENT

During the third quarter of 2002, the Company became aware that refined
product sales of $210,109 in the first quarter of 2002 for the Mexico
refinery had not been recorded at March 31, 2002 or June 30, 2002, which,
therefore, resulted in an understatement of revenues and net income in the
Company's financial statements at March 31, 2002 and June 30, 2002. The
Statement of Operations for the nine months ended September 30, 2002
reflects the corrected amounts.

The three and six months ended March 31 and June 30, 2002 have been restated
as followed:

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ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

GENERAL

Statements in Part 1, Item 2 as well as elsewhere in, or incorporated by
reference in, this Quarterly Report on Form 10-Q regarding the Company's
financial position, business strategy and plans and objectives of the Company's
management for future operations and other statements that are not historical
facts, are "forward-looking statements" as that term is defined under applicable
Federal securities laws. In some case, "forward-looking statements" can be
identified by terminology such as "may," "will," "should," "expects," "plans,"
"anticipates," "contemplates," "proposes," believes," "estimates," "predicts,"
"potential" or "continue" or the negative of such terms and other comparable
terminology. Forward-looking statements are subject to risks, uncertainties and
other factors that could cause actual results to differ materially from those
expressed or implied by such statements. Such risks, uncertainties and factors
include, but are not limited to, general economic conditions domestically and
internationally; insufficient cash flows from operating activities; difficulties
in obtaining financing; outstanding debt and other financial and legal
obligations; competition; industry cycles; feedstock, specialty petrochemical
product and mineral prices; feedstock availability; technological developments;
regulatory changes; environmental matters; foreign government instability;
foreign legal and political concepts; and foreign currency fluctuations, as well
as other risks detailed in the Company's filings with the U.S. Securities and
Exchange Commission, including this Quarterly Report on Form 10-Q, all of which
are difficult to predict and many of which are beyond the Company's control.

LIQUIDITY AND CAPITAL RESOURCES

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

SPECIALTY PETROCHEMICALS SEGMENT. Historically, this segment has contributed
substantially all of the Company's internally generated cash flows from
operating activities and its primary sources of revenue are the specialty
products refineries owned and operated by South Hampton near Silsbee, Texas and
by Coin in Mexico. Significant increases in the prices of feedstock and natural
gas resulted in a loss from operations in 2000 of $2.8 million and in 2001 of
$199,629, which, in turn, resulted in violations of certain loan agreement
covenants and a lack of liquidity. Beginning in February 2001, the decline of
feedstock and natural gas prices returned the Refining Company to a positive
cash flow, which it attained for the remainder of 2001 and the first nine months
of 2002. Management took steps, beginning in July 2001, to protect the
operations from extreme fluctuations in the price of its feedstock purchases by
hedging approximately 50% of its needs through December 2002. In addition, the
purchase price of natural gas, which is used as fuel gas, has been fixed by
agreement for the period from July 2001 through February 2003.

As mentioned in Note 6, South Hampton and Coin were not in compliance with
certain covenants contained in their loan agreements at September 30, 2002, and
therefore, the creditors have the right to declare the debt to be immediately
due and payable. If this were to occur, the Company would currently be unable to
pay the entire amount due.

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. 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. Financing plans
for the above are currently being studied. In the meantime, the Company intends
to maintain the Al Masane mining lease through the payment of the annual advance
surface rental, the implementation of a drilling program to attempt to increase
proven and probable reserves and to attempt to improve the metallurgical
recovery rates beyond those stated in the feasibility study, which may improve
the commercial viability of the project. At September 30, 2002, unpaid annual
rental payments total approximately $425,000.

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

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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 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 application for the new exploration license is
still pending and is expected to be acted upon after the new Saudi Arabian
Mining Code is issued, which is expected before the end of 2002. If the Saudi
Arabian government does not issue the exploration license, the Company believes
that it will be entitled to a refund of the monies expended, 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.

The Company's mineral interest in the United States is represented by its
ownership interest in Pioche, which has been inactive for many years. Its
properties include 48 patented and 5 unpatented claims totaling approximately
1,500 acres in Lincoln County, Nevada. There are prospects and mines on these
claims that previously produced silver, gold, lead, zinc and copper. There is
also 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.

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 $1,260,000 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 $1,097,000).
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 has 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 was
to demand immediate repayment of this obligation, which management considers
unlikely, the Company would be unable to pay the entire amount due.

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 obligations as they are released from
the Company's employment. The salary and social security benefits for these
employees currently total approximately $108,000 per year.

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 could 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.

RESULTS OF OPERATIONS

SPECIALTY PETROCHEMICALS SEGMENT. In the quarter ended September 30, 2002,
total refined product sales increased approximately $1,933,000 or 29%, while the
cost of sales (excluding depreciation) increased approximately $1,376,000 or 21%
from the same period in 2001. Coin's sales increased approximately $487,000 or
160%, while its cost of sales increased approximately $261,000 or 77%.
Consequently, the total gross profit margin on sales in the third quarter of
2002 increased

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approximately $557,000 or 242% compared to the same period in 2001. This
includes Coin's gross profit margin for this quarter of approximately $190,000,
an increase of approximately $226,000 from the same quarter in 2001. Contrary to
most other companies in the petrochemical and refining industries, the refining
operation in Silsbee had positive net income and cash flow for the third quarter
of 2002. Sales remained steady, although some slowing of volume took place,
which was not a dramatic decline and mostly occurred toward the end of the
quarter. Sales early in the quarter were strong enough that the quarter as a
whole showed a 2% increase in volume. Net income for this segment (including
Coin) in the third quarter rose by 13% to approximately $585,000 from the
approximately $520,000 as recorded in the second quarter of 2002.

In the nine months ended September 30, 2002, total refined product sales
increased approximately $2,649,000 or 12%, while the cost of sales (excluding
depreciation) increased approximately $514,000 or 2% from the same period in
2001. Coin's sales increased approximately $1,152,000 or 125%, while its cost of
sales increased approximately $575,000 or 53%. Consequently, the total gross
profit margin on product sales in the first nine months of 2002 increased
approximately $2,135,000 compared to the same period in 2001. This includes
Coin's gross profit margin for the nine months of approximately $422,000, an
increase of approximately $577,000 or 372% from the same period in 2001.

The Company attributes much of the increase in earnings to the healthy toll
processing business it has developed over the last five years. The units, which
were constructed in 1997, 1998, and 1999 to provide specific toll processing
capabilities to contracted customers, have begun to develop into steady
operations running at or near capacity most of the time. Typically when toll
processing customers request services from outside parties such as South
Hampton, there are several reasons. One is that they don't wish to invest the
capital to build the facility in their own location either for capital cost or
for operating cost reasons. The second common situation is that the process
produces products which will be entering a new (for the customer) market and
they need the flexibility to run low production rates for a period of time while
the market is developed and then be able to raise production as demand
increases. The Company builds into its proposals sufficient flexibility to allow
these needs to be met in the most economical fashion. And in accordance with the
agreements, as the volume increases, so does the income to the Company. The
refining and petrochemical industry in general is a volume oriented business
with more volume resulting in lower unit costs. The toll processing customers
have been successful in increasing the markets for their products and
consequently the Company is beginning to enjoy the results of their efforts.
Feedstock prices and fuel gas prices are currently such that, should the Company
not have invested heavily in the toll processing business in the last five
years, the operating results, while positive, would be more in line with the
conditions of a year ago.

Natural gas is the Company's single largest manufacturing cost and dramatic
price changes in this fuel cost, as occurred in late 2000 and early 2001, can
have a dramatic effect on the economics of the operation. Since September 2001,
the Company has entered into purchase contracts for approximately 90% of its
normal monthly requirements for natural gas. Since the cost of fuel gas so
directly and immediately affects the cost of the refined product, it is felt
that a predictable price is more important than taking the risk of a moving
market. Natural gas prices have become so volatile that simply having a stable
supply and price is an acceptable goal. These prices fell from $4.73 in the
third quarter of 2001 to $3.34 for the same period of 2002.

Toll processing fee income, which is earned when the Company manufactures
products on a fee basis for others, remained stabile for the third quarter and
the first nine months of 2002 at approximately $1,144,000 and $3,119,000,
respectively as compared to approximately $707,000 and $2,671,000, respectively
in the same prior year periods. The foreign exchange transaction gain in the
third quarter and first nine months of 2002 of approximately $215,000 and
$571,000, respectively was primarily a result of a change in the exchange rate
of the Mexican peso in relation to the U.S. dollar. Administrative expenses for
this segment were higher by $257,000 in the third quarter of 2002 and $403,000
in the first nine months of 2002 than in the same prior year periods. This
increase includes a lawsuit settlement amount of $100,000 accrued in September.

To prevent the fluctuations in the market from affecting the profitability
of the refining operation to such a degree as was seen in the 2000 or early 2001
time frame, the Company in 2001 put a hedging program in place for its feedstock
purchases. The policy of the Company has been to keep approximately 50% of its
normal feedstock requirements covered by a future hedge for a six to nine month
period. Management considers that this time frame allows the Company adequate
time to respond if the market price of feedstock rises significantly and stays
at the higher levels for several months. The program is not designed to play the
market to attempt to pay the lowest possible price for feedstock but to insure
against any sudden and extreme price fluctuations. It is a safeguard against
sudden high spikes in the cost of feedstock rather than a profit center in
itself and is designed to be an insurance program versus a profit center or
speculative program.

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The Mexico refinery has continued to make progress in correcting its
difficulties in the aftermath of the difficult economic times in that country.
It has continued to make progress in both sales volumes and in cash flow results
since restarting production in late 2001. Expenses are under control and new
opportunities are being pursued with both the domestic market and in the South
American markets. As its operating and financial problems are solved, the
facility will provide strategic benefit in three different areas. It will enable
the Company to be the premier producer of solvents within Mexico, it will enable
the refining operation to be competitive in the growing South American markets,
and it can be a secondary supplier to the needs of the U.S. based operations if
growth and demand outstrip the domestic capacity.

The outlook for the refining operations for the fourth quarter of 2002
remains good. Sales volumes remain steady and are predicted to remain so through
the end of the year. Many in the industry are predicting increased growth and
activity in early 2003. Stability in petroleum markets and in the natural gas
market, is important to the economy in general and to the petrochemical industry
in particular. With stable feedstock prices and reasonable natural gas costs,
the Company believes that operations for the remainder of 2002 and early 2003
will be profitable and consistent.

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 assesses the carrying values of its assets on an ongoing basis.
Factors which may affect the carrying values of the mining properties 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 the recoverability of the Al
Masane project costs, based on production to begin no sooner that 2004, are
$1.04 per pound for copper, $.60 per pound for zinc. Copper and zinc comprise in
excess of 80% of the expected value of production. Using these price
assumptions, there were no asset impairments at September 30, 2002. 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 in the future.

ITEM 4. CONTROLS AND PROCEDURES.

Within the 90 days prior to the filing date of this report, the Company
carried out an evaluation, under the supervision and with the participation of
the Company's management, including the Company's Chairman of the Board,
President and Chief Executive Officer and Executive Vice President/Chief
Financial Officer, of the effectiveness of the Company's disclosure controls and
procedures. Based upon that evaluation, the Chairman of the Board, President and
Chief Executive Officer and Executive Vice President/Chief Financial Officer
concluded that the Company's disclosure controls and procedures are effective in
timely alerting them to material information relating to the Company (including
its consolidated subsidiaries) required to be included in the Company's periodic
SEC filings. There have been no significant changes in the Company's internal
controls or in other factors which could significantly affect internal controls
subsequent to the date the Company carried out its evaluation.

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ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

NONE

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.

NONE

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

NONE

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

NONE

ITEM 5. OTHER INFORMATION

SHAREHOLDER PROPOSALS

Any proposal by a shareholder of the Company intended to be presented at the
2003 annual meeting of shareholders, which is tentatively scheduled sometime in
May 2003, must be received by the Company at its principal executive office no
later than January 31, 2003 for inclusion in the Company's Proxy Statement and
form of proxy. Any such proposal must also comply with the other requirements of
the proxy solicitation rules of the Securities and Exchange Commission. The
Company intends to exercise discretionary voting authority granted under any
proxy, which is executed and returned to the Company on any matter that may
properly come before the 2003 annual meeting of shareholders, unless written
notice of the matter is delivered to the Company at its principal executive
office no later than January 31, 2003.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) EXHIBITS

10 (a) - Seventh Amendment to Loan Agreement dated as of August 31, 2002
between South Hampton Refining Company and Southwest Bank of Texas, N.A.,
together with related Promissory Note.

99.1 - Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.

99.2 - Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.

(b) REPORTS ON FORM 8-K

No Reports on Form 8-K were filed during the quarter ended September 30,
2002.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

DATE: November 6, 2002
ARABIAN AMERICAN DEVELOPMENT COMPANY
(Registrant)

/s/ J. A. CRICHTON
-------------------------------------
J. A. Crichton, Chairman of the
Board of Directors

/s/ DREW WILSON, JR.
-------------------------------------
Drew Wilson, Jr. Secretary/Treasurer

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CERTIFICATION

I, Hatem El-Khalidi, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Arabian American
Development Company;

2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:

(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;

(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and

(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):

(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and

(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.

Date: November 6, 2002

/s/ HATEM EL-KHALIDI
- ------------------------
Hatem El-Khalidi
Chief Executive Officer

-15-

CERTIFICATION

I, Drew Wilson, Jr., certify that:

1. I have reviewed this quarterly report on Form 10-Q of Arabian American
Development Company;

2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:

(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;

(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and

(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):

(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and

(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.

Date: November 6, 2002

/s/ Drew Wilson, Jr.
- ------------------------
Drew Wilson, Jr.
Chief Financial Officer

-16-

EXHIBIT INDEX