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, 2003

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 NO X
--- ---

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
YES NO X
--- ---

Number of shares of the Registrant's Common Stock (par value $0.10 per share),
outstanding at September 30, 2003: 22,731,994.

ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

CONSOLIDATED BALANCE SHEETS

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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*Restated. See Note 2.

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, 2003
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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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*Restated. See Note 2.

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, 2002 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. The Company also
directly 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. RESTATEMENT

During 2002, the Company became aware that the natural gasoline swap
agreements (swap agreements) discussed in Note 8, did not qualify for cash
flow hedge accounting treatment. The following table highlights the effects
of the restatement adjustments on the previously reported consolidated
statement of operations for the nine months ended September 30, 2002,
accumulated other comprehensive income and accumulated deficit. All notes
have been restated as appropriate.

3. INVENTORIES

Inventories include the following:

Inventories are recorded at the lower of cost, determined on the last-in,
first-out method (LIFO), or market, for inventory in the United States and on
the average cost method, or market, for inventories held in Mexico. At
September 30, 2003, current cost exceeded LIFO value by approximately
$139,000. At December 31, 2002, current cost exceeded the LIFO value by
approximately $203,000.

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4. 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, 2003 and 2002, respectively.

*Restated. See Note 2.

In the three and nine months ended September 30, 2003 and 2002, options for
445,000 shares and 810,000 shares, respectively, were excluded from diluted
shares outstanding because their effect was antidilutive.

5. SEGMENT INFORMATION

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

*Restated. See Note 2.

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Information regarding foreign operations for the three and nine months ended
September 30, 2003 and 2002 follows (in thousands). Revenues are attributed
to countries based upon the origination of the transaction.

*Restated. See Note 2.

6. LEGAL PROCEEDINGS

At September 30, 2003, South Hampton, together with several other companies,
was a defendant in four pending lawsuits filed by former employees of South
Hampton and other refineries. The suits primarily claim illness and disease
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 them to liability
for unspecified actual and punitive damages. A motion for a summary judgment
was granted in October 2003 for one lawsuit. South Hampton intends to
vigorously defend itself against these lawsuits and believes it has adequate
insurance coverage to protect it financially from any damage awards that
might be incurred.

South Hampton also is a defendant in a lawsuit filed in September 2001, which
alleges that the plaintiff became ill from exposure to asbestos while
employed by South Hampton from 1961 through 1975. The plaintiff is seeking
unspecified amounts and a previously scheduled trial date for January 2004
has not been rescheduled. South Hampton is vigorously defending itself
against the claim. If this matter is resolved in an adverse manner, it could
have a material adverse effect on South Hampton's operating results and cash
flows in a future reporting period.

In August 1997, the Texas Commission on Environmental Quality ("TCEQ")
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.

On February 2, 2000, the TCEQ 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 TCEQ proposed that administrative penalties be
increased to approximately $765,000 and that certain corrective actions be
taken. On December 13, 2001, the TCEQ notified South Hampton that it found
several violations of its rules during a record review in October 2001 and
proposed a settlement for $59,375. South Hampton settled this particular
claim in April 2002 for approximately $5,900.

On April 11, 2003, the TCEQ reduced the penalties to approximately $690,000.
On May 25, 2003, a settlement hearing with the TCEQ was held and additional
information was submitted to the TCEQ on June 2, 2003. South Hampton believes
the original penalty and the additional allegations are incorrect and intends
to continue to vigorously defend itself against these allegations, the
proposed penalties and proposed corrective actions. Management has accrued an
estimate for a proposed settlement. There are no assurances that the amounts
settled will not be different than the amounts accrued. Negotiations between
South Hampton and the TCEQ are expected to continue in order to reach a final
settlement.

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By letter dated March 11, 2003, the Company was advised that the Division of
Enforcement of the Securities and Exchange Commission ("SEC") was conducting
an informal, non-public inquiry concerning disclosure matters relating to the
Al Masane project and the Ministry's threatened termination of the Al Masane
mining lease. The Company fully cooperated with the SEC in the conduct of the
investigation, which became a formal investigation.

On October 16, 2003, without admitting or denying any findings of fact or
conclusions of law, the Company agreed to a cease-and-desist order with the
SEC settling alleged violations of the federal securities laws asserted by
the SEC relating to developments not previously disclosed concerning the
Company's mining lease for the Al Masane area of Saudi Arabia. In connection
with the settlement, the Company agreed to (i) cease and desist from
violating certain provisions of the Securities Exchange Act of 1934 and (ii)
comply with certain undertakings designed to improve its reporting and record
keeping practices and enhance its internal accounting controls.

On the same date, without admitting or denying any findings of fact or
conclusions of law, the Company's President and Chief Executive Officer,
Hatem El-Khalidi, agreed to a cease-and-desist order with the SEC settling
alleged violations of the federal securities laws relating to the same matter
and agreeing to pay a $25,000 penalty. In connection with the settlement, Mr.
El-Khalidi agreed to cease and desist from violating certain provisions of
the Securities Exchange Act of 1934.

7. 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. An amended agreement was entered into on June 30,
2000, which increased the total amount to $3.25 million. Amendments two
through ten extended the due dates from May 31, 2001 to June 15, 2003. The
agreement contained various restrictive covenants including the maintenance
of various financial ratios, net worth and parent company distribution
limitations.

On July 29, 2003, South Hampton entered into a Purchase and Sale Agreement
(the "Agreement) with a bank, whereby the bank will purchase the accounts
receivable of South Hampton at a 15% discount. The discounted amount is
returned to South Hampton, less fees, when the invoice is collected. Under
this factoring agreement, the bank has agreed to purchase up to $4.5 million
of invoices. The initial proceeds of the Agreement were used to retire the
$3.25 million revolving credit agreement with the bank. Management expects
the fees and interest charged by the bank in this arrangement will equate to
an effective interest rate of approximately 9.0%. The Agreement imposes
limitations on distributions to the Company. At September 30, 2003, South
Hampton was in compliance with these limitations.

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 on all of South Hampton's and Gulf State's 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, 2003, South
Hampton and Gulf State were not in compliance with a covenant relating to
distributions to the Company, and therefore, the debt is classified as
current in the financial statements.

Coin has two loans payable to Mexican banks, 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% per annum and the second loan bears
interest at the LIBOR rate plus seven points (LIBOR was 1.12% at September
30, 2003). At September 30, 2003, Coin was in default of the loan covenants
as a result of not having made its monthly and quarterly payments and
therefore the loans are classified as current in the financial statements.
Unpaid interest and penalty interest of $2,968,719 has been accrued at
September 30, 2003.

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.

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8. NATURAL GASOLINE SWAP AGREEMENTS

Statement of Financial Accounting Standard (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended by SFAS No. 138,
establishes accounting and reporting standards for derivative instruments and
hedging activities. SFAS No. 133 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
transactions that receive hedge accounting. Statement No. 133, as amended,
was adopted by the Company on January 1, 2001. The Company periodically
enters into commodity swap derivative agreements to decrease the price
volatility of its natural gasoline feedstock requirements. These derivative
agreements were not designated as hedges by the Company.

South Hampton's primary source of feedstock is natural gasoline. In 2001 and
2002 South Hampton entered into three swap agreements to limit the effect of
significant fluctuations in natural gasoline prices. The last of these
agreements expired in January 2003. In March and April 2003 two new
agreements were entered into with the last agreement expiring on July 31,
2003. The effect of these agreements is to limit the company's exposure by
fixing the natural gasoline price of a portion of its feedstock purchases
over the term of the agreements. The agreements cover approximately 20% to
40% of the average monthly feedstock requirements. For the nine months ended
September 30, 2003 and 2002, the net realized gain (loss) from the agreements
was $(71,492) and $392,700, respectively. There was no unrealized gain or
loss on the derivative contracts for the nine months ended September 30,
2003. The unrealized gain for the nine months ended September 30, 2002 was
approximately $939,000.

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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 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 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. Management took steps, beginning in July 2001, to protect the
operations from extreme fluctuations in the price of its feedstock purchases by
entering into swap agreements covering approximately 20% to 40% 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 7, South Hampton and Coin were not in compliance with
certain covenants contained in their loan agreements at September 30, 2003, 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 amounts 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.

By letter dated May 11, 1999, the Company informed the Ministry of Petroleum
and Mineral Resources that implementation of the Al Masane project would be
delayed until open market prices for the minerals improved. One year later in
May 2000, a reply was received from the Ministry to the Company's letter of May
11, 1999 notifying the Company that it must immediately implement the Al Masane
project. In September 2000 the Company was further notified that the project
should be immediately implemented or the mining lease would be terminated. A
second notice from the Ministry several weeks later stated that the Committee of
the Supreme Council of Petroleum and Minerals in Saudi Arabia had recommended
giving the Company six months to take positive steps to implement the project.
Another notice from the Ministry in August 2001 stated that the Council of
Ministers of Saudi Arabia had issued a resolution in which it refused the
Company's request to postpone implementation of the project, that the Company
must start implementation of the project within six months of the date of the
resolution and that, if the project was not then started, the Ministry was
authorized to begin procedures to terminate the mining lease. Subsequent
correspondence from the Ministry in the fall of 2001 reiterated the threat to
terminate the mining lease if the project was not immediately implemented. A
letter from the Ministry in March

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2002 stated that the six-month period to implement the project had expired
without the Company taking positive steps towards that end.

The Company has vigorously contested the legality of the threats of the
Ministry to terminate the Company's mining lease. The Company has written
numerous letters to the Ministry and the Company and its Saudi Arabian legal
advisors also have had meetings with officials of the Ministry. In September
2002, the Company sent a letter to Saudi Arabian Crown Prince Abdullah Ben Abdul
Aziz, in his capacity as Deputy Chairman of the Saudi Supreme Council of
Petroleum and Minerals (the King of Saudi Arabia is the chairman), in which the
Company contested the legality of the threats of the Ministry to terminate the
mining lease and requested his advice. As stated in these letters, the Company
believes that the Ministry's letters to the Company asking for the
implementation of the project, without any regard to metal market conditions, is
contrary to the Saudi Mining Code and the mining lease agreement. In addition,
the Company has had correspondence and a meeting with the United States
Ambassador to Saudi Arabia where the Company presented its opinion regarding the
legality of the Ministry's actions. This opinion also was conveyed in a recent
letter to the United States Secretary of Commerce, who replied that the United
States Embassy is working to set up meetings with Saudi Arabian government
officials in an effort to resolve the matter. The Secretary of Commerce assured
the Company that the Department of Commerce has a strong commitment in helping
United States companies whenever possible. In a further letter from the
Department of Commerce dated March 6, 2003, the Assistant Secretary for Market
Access and Compliance stated the following: "After investigating the matter, the
U.S. Embassy in Riyadh has been informed by the Ministry of Petroleum that it
did not cancel your mining lease. According to the Ministry, it is waiting
development of the site by Arabian American Development Company." To date, the
Company has not received a written notice of termination of the lease. An order
of termination of the mining lease by the Minister can be appealed to the Board
of Lease Appeals in accordance with Article (55) of the Saudi Mining Code, which
is an independent Board, chosen regardless of nationality, from eminent and
highly reputable jurists and judges experienced in international law and
problems relating to leases.

When the market prices for the minerals rise to acceptable levels, plans to
implement the project will be resumed. 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 are no assurances 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, 2003, unpaid annual
rental payments total approximately $543,000.

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 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, geochemical and
geological 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 proposed new Saudi Arabian Mining Code is issued. 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 interests in the United States are 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 $943,000 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 $1,143,000).
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

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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, 2003,
total refined product sales increased approximately $978,000 or 11%, while the
cost of sales (excluding depreciation) increased approximately $1,606,000 or 19%
from the same period in 2002. Coin's sales decreased approximately $105,000 or
10%, while its cost of sales increased approximately $384,000 or 64%.
Consequently, the total gross profit margin on product sales in the third
quarter of 2003 decreased approximately $628,000 or 147% compared to the same
period in 2002. Coin had a negative gross profit margin in this quarter of
approximately $89,000, compared to a positive gross profit margin of
approximately $400,000 in the same quarter in 2002.

In the nine months ended September 30, 2003, total refined product sales
increased approximately $1,837,000 or 7%, while the cost of sales (excluding
depreciation) increased approximately $5,618,000 or 26% from the same period in
2002. Coin's sales decreased approximately $939,000 or 45%, while its cost of
sales decreased approximately $395,000 or 24%. Consequently, the total gross
profit margin on product sales in the first nine months of 2003 decreased
approximately $3,781,000 compared to the same period in 2002. Coin had a
negative gross profit margin in the nine months of approximately $122,000,
compared to a positive gross profit margin of approximately $422,000 in the same
period in 2002.

The third quarter of 2003 continued the pattern of low margins and high fuel
costs that plagued the Company and the industry in general during most of 2003.
After the conflict in Iraq was defined and speculation regarding the situation
ended, feedstock prices continued into the third quarter near the levels seen in
the previous quarter. These price levels on feedstock would normally indicate
that the Company could make a reasonable margin on its products and achieve
acceptable operating income, although not necessarily at record levels. However,
during the third quarter petroleum prices began to increase which resulted in
higher prices culminating in the record highs seen in early 2004. By the end of
the third quarter of 2003, feedstock prices had increased almost 8% to $.84 per
gallon and natural gas prices, already high by historical standards, had
increased another 7% to $6.27 per MMBTU. Most of the strength in pricing, early
in the year, was related to speculation about how fast U.S. gas storage would
recover from the winter usage and whether enough gas could be put back into
storage to provide for the 2003-2004 winter period. The Company had planned its
hedging program around protecting its fuel cost during the winter months and
then riding the spot market during the warm months when gas prices historically
are moderate to soft. The plan worked well in the winter as the

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Company enjoyed fuel prices some 60% to 70% below market prices, but when the
warm weather came and gas prices stayed at the $5.50 to $6.50 MMBTU levels
through the third quarter, the Company's operating expenses were too high and
could not be totally passed through to its customers. The Company has
consistently and diligently raised prices where possible to maintain its sales
margins but the instability of the petroleum market, and pressure from market
competition, combined to generate extreme pressure on product sales margins.

The Company uses natural gasoline for the base feedstock of most of its
products. Natural gasoline is classified as an LPG and is the heavier liquid
produced when the field gas from wells is separated from the propane, butane,
and natural gasoline contained therein. Natural gasoline does not follow the
price of crude oil directly but studies over recent years have shown an 88%
correlation with the price of crude oil. During the buildup prior to the
conflict in Iraq, the price of natural gasoline went from an average of $.65 per
gallon during 2002 to an average price of over $.93 per gallon during the first
quarter of 2003, back down to an average price per gallon of $.75 and $.84
during the second and third quarters, respectively. While the Company attempts
to raise sales prices to offset as much of the feedstock cost as possible, the
ability to raise prices is constrained by a lack of price movement from the
major oil company which competes in the same market. The Company has a loyal
customer base and has been able to adjust sales prices to some extent, but
economic conditions have forced customers to be more price conscious than might
ordinarily be the case, when service and product quality are the driving
factors.

The toll processing business has been steady and continued to contribute to
the Company's performance throughout the third quarter of 2003. The toll
processing customers continued to operate strongly and processing fee revenue
increased by 14% from the second quarter to approximately $1,023,000. This
revenue for the third quarter of 2003 decreased by approximately $121,000 from
the same period in 2002. Total processing fee revenue for the first nine months
of 2003 of approximately $3,000,000 was a slight decrease over the fees for the
same period in 2002. While there were some fluctuations in the tolling volumes
handled, toll processing has developed into a very steady business over the last
five years.

The Mexico refinery continues to struggle with economic conditions in
Mexico. High oil prices have affected their economy, as it has for much of the
world. While Mexico is a major oil producer, and hence the recipient of
increased oil revenue, much of the benefit gets tied up in Pemex, the state
owned oil company, and does not have the effect on the general population that
it possibly could. The Coin operation was shut down late in the fourth quarter
of 2002 due to market conditions and began in late March 2003 to re-establish
its feedstock supply from Pemex. The plant resumed operations late in the second
quarter and early in the third quarter of 2003. An alliance with a major
wholesale distributor of solvents has provided marketing expertise and working
capital for the Coin operation. Management continues to work toward making the
operation provide a suitable return on its investment.

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, 2003. 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.

Other than as disclosed, there have been no material changes in the
Company's exposure to market risk from the disclosure included in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 2002.

ITEM 4. CONTROLS AND PROCEDURES.

The Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's President and
Chief Executive Officer and Treasurer, of the effectiveness of the Company's
disclosure

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controls and procedures, as of the end of the period covered by this report.
Based upon that evaluation, the President and Chief Executive Officer and
Treasurer concluded that, as of the end of the period covered by this report,
the Company's disclosure controls and procedures were effective such that
information relating to the Company (including its consolidated subsidiaries)
required to be disclosed in the Company's Securities and Exchange Commission
reports (i) is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission rules and forms and
(ii) is accumulated and communicated to the Company's management, including the
President and Chief Executive Officer and Treasurer, as appropriate to allow
timely decisions regarding required disclosure.

During the period covered by this report, there have been no changes in
the Company's internal control over financial reporting that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.

ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

Reference is made to Note 6 to the consolidated financial statements
contained in this report for a discussion of material pending legal proceedings.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.

NONE

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

Reference is made to Note 7 of the consolidated financial statements and
Part I. Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations contained in this report for a discussion of the $11.0
million note payable due the Saudi Arabian government and the loans payable by
Coin to Mexican banks.

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

NONE

ITEM 5. OTHER INFORMATION.

NONE

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) EXHIBITS

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.

(b) REPORTS ON FORM 8-K

No Reports on Form 8-K were filed during the quarter ended September 30, 2003.

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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: February 12, 2004
ARABIAN AMERICAN DEVELOPMENT COMPANY
------------------------------------
(Registrant)

/s/ DREW WILSON, JR.
------------------------------------
Drew Wilson, Jr. Secretary/Treasurer
(Authorized Officer and Principal
Financial and Accounting Officer)

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