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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-K
 (MARK ONE)
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For The Fiscal Year Ended December 31, 2005
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For The Transition Period fromto
 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 incorporation or
    
    (I.R.S. Employerorganization)
    
    Identification No.)10830 North Central Expressway Suite 175Dallas, Texas
    
    75231(Address of principal executive offices)
    
    (Zip Code)
 (214) 692-7872
  None
  (Title Of Class)
 Common Stock, par value $0.10 per share
 
 o þ
 o þ
 
 þ o
 þ
  o o þ
 o þ
   DOCUMENTS INCORPORATED BY REFERENCE




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##### 



TABLE OF CONTENTS`
 Item Number and Description
 PART IITEM 1. BUSINESSGeneral
    
    
    1International Operations
    
    
    2Competition
    
    
    4Environmental Matters
    
    
    4Personnel
    
    
    5Available Information
    
    
    6ITEM 2. PROPERTIESUnited States Specialty Products Facility
    
    
    6Mexico Specialty Products Facility
    
    
    7Saudi Arabia Mining Properties
    
    
    8United States Mineral Interests
    
    
    15Offices
    
    
    15ITEM 3. LEGAL PROCEEDINGS
    
    
    17ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    19PART IIITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
    
    
    20ITEM 6. SELECTED FINANCIAL DATA
    
    
    20ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONSGeneral
    
    
    21Liquidity and Capital Resources
    
    
    21Results of Operations
    
    
    24Critical Accounting Policies
    
    
    28ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    29ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
    
    
    30ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
    
    
    30ITEM 9A. CONTROLS AND PROCEDURES
    
    
    30ITEM 9B. OTHER INFORMATION
    
    
    30PART IIIITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
    
    
    31ITEM 11. EXECUTIVE COMPENSATION
    
    
    32ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
    
    
    33ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
    
    
    35ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
    
    
    36PART IVITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
    
    
    37Loan AgreementCertification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO Pursuant to Section 906Certification of CFO Pursuant to Section 906




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PART I
 
 ITEM 1. Business .
 
 General
  United States Activities . See Item 2. Properties
 Saudi Arabian Activities
  Mexico Activities
 Item 2. Properties
 Note 13 to the Consolidated Financial Statements Item 7. Managements Discussion and Analysis of Financial
 1




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Condition and Results of Operations
 
 International Operations
  Economic and Political Instability; Terrorist Acts; War and Other Political Unrest
   Termination of Mining Lease; Expropriation or Nationalization of Assets Item 2. Properties
 Compliance with Foreign Laws
 2




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Mining Management Risks
  Other Difficulties and Risks Associated with International Operations
 3




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Competition
 Note 18 to the Consolidated Financial Statements.
  
 Environmental Matters
  4




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Item 3. Legal Proceedings
 Item
2. Properties
 
 Personnel
  5




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Available Information
  
 ITEM 2. Properties .
 
 United States Specialty Products Facility
     6




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Mexico Specialty Products Facility, Coatzacoalcos, Mexico
   7




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Note 18 to the Consolidated Financial Statements
 
 Saudi Arabia Mining Properties
 Al Masane Project
 Location, Access and Transportation
 Conditions to Retain Title.
 8




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History of Previous Operations 1
 Description of Current Property Condition
 
 1
    
    Gossan means the rust colored
oxidized, capping or staining of a mineral deposit, generally formed by the
oxidation or alteration of iron sulphides. 9




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2
   
 2
    
    Dore means unrefined gold and
silver bullion bars consisting of approximately 90% precious metals which will
be further refined to almost pure metal. 10




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Average Price
    
    Spot Price as of
    
    Increase/for 2003-2005
    
    December 31, 2005
    
    (Decrease)Gold
    
    $
    406.00/oz.
    
    $
    530.00/oz.
    
    $
    124.00/oz.Silver
    

    $
    6.29/oz.
    
    $
    9.04/oz.
    
    $
    2.75/oz.Copper
    
    $
    1.26/lb.
    
    $
    2.05/lb.
    
    $
    0.79/lb.Zinc
    
    $
    0.49/lb.
    
    $
    0.86/lb.
    
    $
    0.37/lb.
 Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
   11




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12




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Rock Formations and Mineralization
 MineralizedMaterials
    
    
    Copper
    
    
    Zinc
    
    
    Gold
    
    
    SilverZone
    
    (Tonnes)
    
    
    (%)
    
    
    (%)
    
    
    (g/t)
    
    
    (g/t)Saadah
    
    
    3,872,400
    
    
    
    1.67
    
    
    
    4.73
    
    
    
    1.00
    
    
    
    28.36Al Houra
    
    
    2,465,230
    
    
    
    1.22
    
    
    
    4.95
    
    
    
    1.46
    
    
    
    50.06Moyeath
    
    
    874,370
    
    
    
    0.88
    
    
    
    8.92
    
    
    
    1.29
    
    
    
    64.85Total
    
    
    7,212,000
    
    
    
    1.42
    
    
    
    5.31
    
    
    
    1.19
    
    
    
    40.20
  13




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Other Exploration Areas in Saudi Arabia
   Wadi Qatan and Jebel Harr
 Greater Al Masane
 14




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United States Mineral Interests
  Nevada Mining Properties
 
 Offices
  15




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16




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ITEM 3. Legal Proceedings.
       17




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18




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Note 18 to the Consolidated Financial
Statements.
 
 ITEM 4. Submission Of Matters To A Vote Of Security Holders .
  19




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PART II
 
 ITEM 5. Market For Registrants Common Equity And Related Shareholder Matters .
  Pink SheetsHigh
    
    LowFiscal Year Ended December 31, 2005First Quarter ended March 31, 2005
    
    $
    0.35
    
    
    $
    0.23Second Quarter ended June 30, 2005
    
    $
    0.45
    
    
    $
    0.37Third Quarter ended September 30, 2005
    
    $
    0.70
    
    
    $
    0.55Fourth Quarter ended December 31, 2005
    
    $
    1.11
    
    
    $
    0.94Fiscal Year Ended December 31, 2004First Quarter ended March 31, 2004
    
    $
    0.05
    
    
    $
    0.04Second Quarter ended June 30, 2004
    
    $
    0.06
    
    
    $
    0.05Third Quarter ended September 30, 2004
    
    $
    0.10
    
    
    $
    0.06Fourth Quarter ended December 31, 2004
    
    $
    0.13
    
    
    $
    0.10
 See
Note 8 to the Consolidated Financial Statements
 See Note 11 to the Consolidated Financial Statements
 
 ITEM 6. Selected Financial Data.
  2005
    
    2004
    
    2003
    
    2002
    
    2001Revenues
    
    $
    82,416
    
    
    $
    59,793
    
    
    $
    39,625
    
    
    $
    36,753
    
    
    $
    32,713Net Income (Loss)
    
    $
    16,636
    
    
    $
    (2551
    )
    
    $
    (3,505
    )
    
    $
    692
    
    
    $
    (2,601
    )Net Income (Loss) Per
Share-Diluted
    
    $
    0.73
    
    
    $
    (.11
    )
    
    $
    (.15
    )
    
    $
    .03
    
    
    $
    (.11
    )Total Assets (at December 31)
    
    $
    66,948
    
    
    $
    51,048
    
    
    $
    52,672
    
    
    $
    55,621
    
    
    $
    55,748Notes Payable (at December 31)
    
    $
    11,026
    
    
    $
    11,744
    
    
    $
    11,744
    
    
    $
    11,744
    
    
    $
    11,744Current Portion of Long-Term
Debt (at December 31)
    
    $
    1,426
    
    
    $
    3,071
    
    
    $
    3,170
    
    
    $
    7,127
    
    
    $
    7,599Total Long-Term Obligations
(at December 31)
    
    $
    9,839
    
    
    $
    4,916
    
    
    $
    
    
    
    $
    
    
    
    $
    
 20




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ITEM 7 . Managements Discussion And Analysis Of Financial Condition And Results Of Operations .
 
 General
  
 Liquidity and Capital Resources
  SPECIALTY PETROCHEMICALS SEGMENT
 21




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Note 4 to the Consolidated Financial Statements.
   22




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Note
8 to the Consolidated Financial Statements.
 MINING SEGMENT. Item 2. Properties
    23




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Payments due by periodLess than
    
    
    
    
    
    3-5
    
    More thanContractual Obligations
    
    Total
    
    1 year
    
    1-3 years
    
    years
    
    5 yearsLong-Term Debt Obligations
    
    
    11,160,906
    
    
    
    1,400,000
    
    
    
    9,760,906
    
    
    
    
    
    
    
    Capital Lease Obligations
    
    
    103,688
    
    
    
    25,932
    
    
    
    58,746
    
    
    
    19,010
    
    
    
    Operating Lease Obligations
    
    
    3,695,400
    
    
    
    645,300
    
    
    
    1,290,600
    
    
    
    234,600
    
    
    
    1,524,900Purchase Obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other Long-Term
Liabilities Reflected on
the Companys Balance
Sheet under GAAP
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    14,959,994
    
    
    
    2,071,232
    
    
    
    11,110,252
    
    
    
    253,610
    
    
    
    1,524,900
 
 Results of Operations
 Comparison of the Years 2005, 2004, 2003
 Specialty Petrochemicals Segment
    24




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2005
    
    
    2004
    
    
    2003TOCCOProduct Sales
    
    $
    76,268
    
    
    $
    52,428
    
    
    $
    34,988Toll Processing
    
    $
    4,105
    
    
    $
    3,775
    
    
    $
    3,864Gross Revenue
    
    $
    80,373
    
    
    $
    56,203
    
    
    $
    38,852Volume of sales (thousand
gallons)
    
    
    34,826
    
    
    
    32,685
    
    
    
    29,154COINGross Revenue
    
    $
    2,043
    
    
    $
    3,590
    
    
    $
    773TOCCOCost of Materials
    
    $
    45,638
    
    
    $
    34,672
    
    
    $
    23,877Total Operating Expense
    
    $
    18,638
    
    
    $
    15,193
    
    
    $
    13,107Natural Gas Expense
    
    $
    4,743
    
    
    $
    4,472
    
    
    $
    4,295General & Administrative
Expense
    
    $
    4,389
    
    
    $
    3,326
    
    
    $
    3,086COINCost of Materials
    
    $
    503
    
    
    $
    1,250
    
    
    $
    199Total Operating Expense
    
    $
    654
    
    
    $
    1,532
    
    
    $
    740Natural Gas Expense
    
    $
    294
    
    
    $
    482
    
    
    $
    17General & Administrative
Expense
    
    $
    388
    
    
    $
    412
    
    
    $
    379Capital Expenditures
    
    $
    3,491
    
    
    $
    2,091
    
    
    $
    126
 25




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Note 17 to the Consolidated Financial
Statements
   Mining Segment and General Corporate Expenses.
  26




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New Accounting Standards
 ,
     27




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Critical Accounting Policies
 Long-lived Assets
 See Item 2. Properties
   Environmental Liabilities
 Item 1. Business Item 3. Legal Proceedings
  28




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ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk.
      29




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ITEM 8. Financial Statements and Supplementary Data.
  
 ITEM 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.
  
 ITEM 9A. Controls and Procedures.
   
 ITEM 9B. Other Information.
  30




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PART III
 
 ITEM 10. Directors and Executive Officers of the Registrant .
  Name; Business Experience; Other Directorships
    
    Age
    
    Date of ElectionJohn A. Crichton
    
    
    89
    
    
    May 1967Chairman of the Board of the Company since 1967; Chief Executive Officer of the Company from 1967 to February 1994Hatem El-Khalidi
    
    
    81
    
    
    April 1968President of the Company since 1975; prior to 1975 Vice President of the Company; Chief Executive Officer of the Company since February 1994Mohammed O. Al-Omair
    
    
    62
    
    
    May 1993Executive Vice President, Saudi Fal Group of Companies, Riyadh, Saudi Arabia since 1985 (investments); President, Advanced Systems Ltd., Riyadh, Saudi Arabia since 1985 (mainframe computers)Ghazi Sultan
    
    
    68
    
    
    September 1993Chairman, Sultan Group of Companies, Jeddah, Saudi Arabia since 1987 (investments and marble mining); Director General, Safwah Company, Jeddah, Saudi Arabia since 1987 (investments); Deputy Minister of Petroleum and Mineral Resources of the Kingdom of Saudi
Arabia 1966-1987
   31




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Name
    
    Positions
    
    AgeJohn A. Crichton
    
    Chairman of the Board and Director
    
    
    89Hatem El-Khalidi
    
    President, Chief Executive Officer and Director
    
    
    81Nicholas N. Carter
    
    Secretary and Treasurer/President  TOCCO
    
    
    59
   Section 16(a) Beneficial Ownership Reporting Compliance
  
 ITEM 11. Executive Compensation .
  SUMMARY COMPENSATION TABLE
 Restricted
    
    Securities
    
    Long-TermOther Annual
    
    Stock
    
    Underlying
    
    Incentive
    
    All OtherName and
    
    
    
    
    
    Salary
    
    Bonus
    
    Compensation
    
    Award(s)
    
    Options/
    
    Plan
    
    CompensationPrincipal Position(1)
    
    Year
    
    ($) (2)
    
    ($)
    
    ($)
    
    ($)
    
    SARs (#)
    
    Payouts($)
    
    ($) (3)Hatem El-Khalidi,
    
    
    2005
    
    
    $
    72,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    8,000President and Chief
    
    
    2004
    
    
    $
    72,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    8,000Executive Officer
    
    
    2003
    
    
    $
    72,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    8,000Nicholas N. Carter
    
    
    2005
    
    
    $
    155,748
    
    
    $
    45,705
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    President, TOCCO
    
    
    2004
    
    
    $
    139,629
    
    
    $
    10,680
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2003
    
    
    $
    113,874
    
    
    $
    26,250
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 32




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(1)
    
    Except for Mr. Carter, no executive officer of the Company had total annual salary and
bonus in excess of $100,000 during the fiscal year ended December 31, 2005.(2)
    
    Includes $11,957, $28,591 and $37,639 in compensation for the fiscal years ended December 31,
2005, December 31, 2004 and December 31, 2003, respectively, that was deferred at the election
of Mr. El-Khalidi. All present deferred compensation owing to Mr. El-Khalidi aggregating
$963,328 is considered, and future deferred compensation owing to Mr. El-Khalidi, if any, will
be considered payable to Mr. El-Khalidi on demand.(3)
    
    Includes $8,000 in termination benefits for each of the fiscal years ended December 31, 2005,
December 31, 2004 and December 31, 2003, respectively, that was accrued for Mr. El-Khalidi in
accordance with Saudi Arabian employment laws. The total amount of accrued termination
benefits due to Mr. El-Khalidi as of December 31, 2005 was $292,000. Item 13,Certain
Relationships and Related Transactions.
  AGGREGATED OPTION/SAR EXERCISES IN
LAST FISCAL YEAR AND FISCAL YEAR-END OPTIONS/SAR VALUES
  Number of Securities
    
    Value of UnexercisedUnderlying Unexercised
    
    In-The-MoneyShares
    
    
    
    
    
    Options/SARs at
    
    Options/SARs atAcquired on
    
    Value
    
    FY-End(#)
    
    FY-End ($)(1)Name
    
    Exercise (#)
    
    Realized($)
    
    Exercisable/Unexercisable
    
    Exercisable/UnexercisableHatem El-Khalidi
    
    
    0
    
    
    
    0
    
    
    
    400,000/0
    
    
    $
    0/0
 
 (1)
    
    Basedon the closing price of $1.46 of the Companys Common Stock on the Pink Sheets
on December 31, 2005. 
 ITEM 12. Security Ownership of Certain Beneficial Owners and Management.
  33




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SharesName and Address
    
    Beneficially

    
    PercentOf Beneficial Owner
    
    Owned (1)

    
    of ClassFahad Mohammed Saleh Al-Athel
c/o Saudi Fal
P. O. Box 4900
Riyadh, Saudi Arabia 11412
    
    3,612,268

    
    15.9%Mohammad Salem ben Mahfouz
c/o National Commercial Bank
Jeddah, Saudi Arabia
    
    1,500,000

    
    6.6%Harb S. Al Zuhair
P.O. Box 3750
Riyadh, Saudi Arabia
    
    1,300,000

    
    5.7%Prince Talal Bin Abdul Aziz
P. O. Box 930
Riyadh, Saudi Arabia
    
    1,272,680

    
    5.6%Hatem El-Khalidi
10830 North Central Expressway, Suite 175
Dallas, Texas 75231
    
    474,000
(2)
    
    2.0%John A. Crichton
10830 North Central Expressway, Suite 175
Dallas, Texas 75231
    
    650

    
    *Mohammed O. Al-Omair
c/o Saudi Fal
P. O. Box 4900
Riyadh, Saudi Arabia 11412
    
    25,000

    
    *Ghazi Sultan
P.O. Box 5360
Jeddah, Saudi Arabia 21422
    
    25,000

    
    *Nicholas N. Carter
P.O. Box 1636
Silsbee, Texas 77656
    
    34,500

    
    *All directors and executive officers as a group (6 persons)
    
    559,150
(3)
    
    2.5%
 
 (1)
    
    Unless otherwise indicated, to the knowledge of the Company, all shares are owned directly
and the owner has sole voting and investment power.(2)
    
    Includes 400,000 shares which Mr. El-Khalidi has the right to acquire through the exercise of
presently exercisable stock options. Excludes 385,000 shares owned by Ingrid El-Khalidi, Mr.
El-Khalidis wife, and 443,000 shares owned by relatives of Hatem El-Khalidi.(3)
    
    Includes 400,000 shares which certain directors and executive officers have the right to
acquire through the exercise of stock options or other rights exercisable presently or within
60 days. Excludes 385,000 shares owned by Ingrid El-Khalidi, the wife of Hatem El-Khalidi, the
President, Chief Executive Officer and a director of the Company, and 443,000 shares owned by
relatives of Hatem El-Khalidi. 34




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ITEM 13. Certain Relationships And Related Transactions .
    35




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ITEM 14. Principal Accountant Fees and Services.
  2005
    
    2004Audit Fees
    
    $
    126,118
    
    
    $
    131,626Audit-Related Fees
    
    $
    0
    
    
    $
    0Tax Fees
    
    $
    7,525
    
    
    $
    0All Other Fees
    
    $
    
    
    
    $
    0
  36




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PART IV
 
 ITEM 15. Exhibits, Financial Statement Schedules, And Reports On Form 8-K.
            ExhibitNumber
    
    
    
    Description3(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 (incorporated by reference to Exhibit 3(a)
to the Companys Annual Report on Form 10-K for the year ended
December 31, 2000 (File No. 0-6247)).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)).
 37




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ExhibitNumber
    
    
    
    Description10(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)
    
    -
    
    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(f)
    
    -
    
    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(g)
    
    -
    
    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(h)
    
    -
    
    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(i)
    
    -
    
    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(j)
    
    -
    
    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, 2001 (File No. 0-6247)).
 38




---



##### Table of Contents



ExhibitNumber

    
    
    
    Description10
(k)
    
    -
    
    Purchase and Sale Agreement/Security Agreement dated July 29,
2003 between Southwest Bank of Texas, N.A. and South Hampton
Refining Company, together with related Restricted Payments Letter
Agreement and Guaranty of Texas Oil & Chemical Co. II, Inc.
(incorporated by reference to Exhibit 10(s) to the Companys
Annual Report on Form 10-K for the year ended December 31, 2002
(File No. 0-6247)).10
(l)
    
    -
    
    Equipment Lease Agreement dated November 14, 2003, between
Silsbee Trading and Transportation Corp. and South Hampton
Refining Company (incorporated by reference to Exhibit 10(o) to
the Companys Annual Report on Form 10-K for the year ended
December 31, 2003 (File No. 0-6247)).10
(m)
    
    -
    
    Pledge Agreement dated as of May 15, 2001, by Arabian American
Development Company, American Shield Refining Company, Fahad
Al-Athel, Hatem El-Khalidi, Ingrid El-Khalidi and Preston Peak
(incorporated by reference to Exhibit 10(p) to the Companys
Annual Report on Form 10-K for the year ended December 31, 2003
(File No. 0-6247)).10
(n)
    
    -
    
    Security Agreement and Deed of Trust dated June 1, 2004 between
South Hampton Refining Company and Martin Operating Partnership,
L.P. (incorporated by reference to Exhibit 10(p) to the Companys
Quarterly Report on Form 10-Q for the quarter ended June 30, 2004
(File No. 0-6247)).10
(o)
    
    -
    
    Addendum to Equipment Lease Agreement dated August 1, 2004,
between Silsbee Trading and Transportation Corp. and south Hampton
Refining Company (incorporated by reference to Exhibit 10(q) to
the Companys Quarterly Report on Form 10-Q for the quarter ended
September 30, 2004 (File No. 0-6247)).10
(p)
    
    -
    
    Letter Agreement dated May 7, 2005 between Sheikh Fahad Al-Athel
and the Company (incorporated by reference to Exhibit 10(p) to the
Companys Quarterly Report on Form 10-Q for the quarter ended
March 31, 2005 (File No. 0-6247)).10
(q)
    
    -
    
    Loan Agreement dated June 30, 2005 between Texas Oil & Chemical
Co. II/South Hampton Refining Co. and The Catalyst Fund,
LTD/Southwest/Catalyst Capital, LTD. (incorporated by reference to
Exhibit 10(q) to the Companys Quarterly Report on Form 10-Q for
the quarter ended June 30, 2005 (file No. 0-6247)).
 39




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##### Table of Contents



ExhibitNumber

    
    
    
    Description10
(r)
    
    -
    
    Judicial Agreement dated May 19, 2005 between Fabricante Y
Comercializadora Beta, S.A. de C.V. and Productos Coin, S.A. de
C.V. (incorporated by reference to Exhibit 10(r) to the Companys
Quarterly Report on Form 10-Q for the quarter ended June 30, 2005
(file No. 0-6247)).10
(s)
    
    -
    
    Agreement dated June 6, 2005 between Fabricante Y
Comercializadora Beta, S.A. de C.V. and Productos Quimicos Coin,
S.A. de C.V. (incorporated by reference to Exhibit 10(s) to the
Companys Quarterly Report on Form 10-Q for the quarter ended June
30, 2005 (file No. 0-6247)).10
(t)
    
    -
    
    Mercantile Shares Purchase and Sale Agreement dated June 9, 2005
between Texas Oil & Chemical Co. II. Inc. and Ernesto Javier
Gonzalez Castro and Mauricio Ramon Arevalo Mercado (incorporated
by reference to Exhibit 10(t) to the Companys Quarterly Report on
Form 10-Q for the quarter ended September 30, 2005 (file No.
0-6247)).10
(u)
    
    -
    
    Natural Gasoline Feedstock Handling Agreement dated September
21, 2005 between South Hampton Resources, Inc. and Martin Gas
Sales (incorporated by reference to Exhibit 10(u) to the Companys
Quarterly Report on Form 10-Q for the quarter ended September 30,
2005 (file No. 0-6247)).10
(v)
    
    -
    
    Pipeline Use, Right of Way Option and Right of First Refusal
Agreement dated September 21, 2005 between Gulf State Pipe Line
Co., Inc. and Martin Gas Sales (incorporated by reference to
Exhibit 10(v) to the Companys Quarterly Report on Form 10-Q for
the quarter ended September 30, 2005 (file No. 0-6247)).10
(w)
    
    -
    
    Loan Agreement dated October 31, 2005 between South Hampton
Resources, Inc. and Amegy Bank National Association.14

    
    -
    
    Code of Ethics for Senior Financial Officers (incorporated by
reference to Exhibit 14 to the Companys Annual Report on Form
10-K for the year ended December 31, 2003 (File No. 0-6247)).16

    
    -
    
    Letter re change in certifying accountant (incorporated by
reference to Exhibit 16 to the Companys Current Report on Form
8-K/A dated January 31, 2003 (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, 2001 (File No. 0-6247)).24

    
    -
    
    Power of Attorney (set forth on the signature page hereto).
 40




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##### Table of Contents



ExhibitNumber
    
    
    
    Description31.1
    
    -
    
    Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.31.2
    
    -
    
    Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.32.1
    
    -
    
    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 2002.32.2
    
    -
    
    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)
    
    No reports on Form 8-K were filed during the last quarter of the period covered
by this Report.
 41




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##### Table of Contents



POWER OF ATTORNEY
  
 SIGNATURES
  ARABIAN AMERICAN DEVELOPMENT COMPANYDated: March 31, 2006
    
    By:
    
    /s/ Hatem El-KhalidiHatem El-KhalidiPresident and Chief Executive Officer
 42




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##### Table of Contents



Signature
    
    Title/s/ Hatem El-Khalidi

Hatem El-Khalidi
    
    President, Chief Executive Officer and
Director 
(principal executive officer)/s/ Nicholas N. Carter

Nicholas N. Carter
    
    Secretary and Treasurer

(principal financial and accounting officer)/s/ John A. Crichton

John A. Crichton
    
    Chairman of the Board and Director/s/ Mohammed O. Al-Omair

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

Ghazi Sultan
    
    Director
 43




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##### Table of Contents



PageINDEX TO FINANCIAL STATEMENTSReport of Independent Registered Public Accounting Firm
    
    
    F-1Consolidated Balance Sheets at December 31, 2005 and 2004
    
    
    F-2Consolidated Statements of Operations For the Years Ended December 31, 2005, 2004 and 2003
    
    
    F-4Consolidated Statement of Stockholders Equity
For the Years Ended December 31, 2005, 2004 and 2003
    
    
    F-5Consolidated Statements of Cash Flows
For the Years Ended December 31, 2005, 2004 and 2003
    
    
    F-6Notes to Consolidated Financial Statements
    
    
    F-7INDEX TO FINANCIAL STATEMENT SCHEDULESReport of Independent Registered Public Accounting Firm on Schedules
    
    
    F-29Schedule II  Valuation and Qualifying Accounts
For the Three Years Ended December 31, 2005
    
    
    F-30INDEX TO SUPPLEMENTAL INDEPENDENT AUDITORS REPORTSIndependent Auditors Report on Productos Quimicos Coin, S.A. DE D.V.
For the Financial Statements at June 12, 2005
    
    
    F-31Independent Auditors Report on Productos Quimicos Coin, S.A. DE D.V.
For the Financial Statements at December 31, 2004
    
    
    F-33Independent Auditors Report on Productos Quimicos Coin, S.A. DE D.V.
For the Financial Statements at December 31, 2003
    
    
    F-35
 44




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
    /s/ MOORE STEPHENS TRAVIS WOLFF, L.L.P.
 
 F-1




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##### Table of Contents



ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
 December 31,2005
    
    
    2004ASSETSCURRENT ASSETSCash
    
    $
    1,738,558
    
    
    $
    623,202Trade receivables, net
    
    
    12,972,657
    
    
    
    3,198,081Inventories
    
    
    1,164,674
    
    
    
    1,243,693Total current assets
    
    
    15,875,889
    
    
    
    5,064,976PLANT, PIPELINE AND EQUIPMENT  AT COST
    
    
    17,905,048
    
    
    
    14,536,618LESS ACCUMULATED DEPRECIATION
    
    
    (9,678,443
    )
    
    
    (9,044,884
    )PLANT, PIPELINE AND EQUIPMENT, NET
    
    
    8,226,605
    
    
    
    5,491,734AL MASANE PROJECT
    
    
    36,804,098
    
    
    
    36,420,565OTHER INTERESTS IN SAUDI ARABIA
    
    
    2,431,248
    
    
    
    2,431,248MINERAL PROPERTIES IN THE UNITED STATES
    
    
    1,058,492
    
    
    
    1,058,102OTHER ASSETS
    
    
    2,551,617
    
    
    
    581,258TOTAL ASSETS
    
    $
    66,947,949
    
    
    $
    51,047,883
 F-2




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##### Table of Contents



ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
 CONSOLIDATED BALANCE SHEETS  Continued
 December 31,2005
    
    
    2004LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIESAccounts payable
    
    $
    1,787,353
    
    
    $
    2,649,899Accrued interest
    
    
    58,749
    
    
    
    4,133,964Accrued liabilities
    
    
    1,282,993
    
    
    
    1,145,399Accrued liabilities in Saudi Arabia
    
    
    2,407,282
    
    
    
    2,749,128Notes payable
    
    
    11,025,833
    
    
    
    11,025,833Notes payable to stockholders
    
    
    
    
    
    
    718,000Current portion of long-term debt
    
    
    1,425,932
    
    
    
    3,071,161Total current liabilities
    
    
    17,988,142
    
    
    
    25,493,384LONG-TERM DEBT, net of current portion
    
    
    9,838,662
    
    
    
    4,915,534DEFERRED REVENUE
    
    
    1,732,556
    
    
    
    175,141DEFERRED INCOME TAXES
    
    
    297,000
    
    
    
    MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES
    
    
    808,443
    
    
    
    816,879COMMITMENTS AND CONTINGENCIESSTOCKHOLDERS EQUITYCommon stock  authorized, 40,000,000 shares of $.10
par value; issued and outstanding, 22,431,994 shares
in 2005 and 2004
    
    
    2,243,199
    
    
    
    2,243,199Additional paid-in capital
    
    
    36,512,206
    
    
    
    36,512,206Accumulated deficit
    
    
    (2,472,259
    )
    
    
    (19,108,460
    )Total stockholders equity
    
    
    36,283,146
    
    
    
    19,646,945TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    66,947,949
    
    
    $
    51,047,883
 
  F-3




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##### Table of Contents



ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 For the years ended December 31,
 2005
    
    
    2004
    
    
    2003RevenuesPetrochemical product sales
    
    $
    76,268,360
    
    
    $
    52,429,267
    
    
    $
    34,987,145Processing fees
    
    
    4,105,227
    
    
    
    3,774,528
    
    
    
    3,864,29480,373,587
    
    
    
    56,203,795
    
    
    
    38,851,439Operating costs and expensesCost of petrochemical product sales and processing
    
    
    63,626,497
    
    
    
    49,683,489
    
    
    
    35,435,409General and administrative
    
    
    4,468,253
    
    
    
    3,845,116
    
    
    
    4,008,626Depreciation
    
    
    756,596
    
    
    
    775,114
    
    
    
    1,018,85868,851,346
    
    
    
    54,303,719
    
    
    
    40,462,893Operating income (loss)
    
    
    11,522,241
    
    
    
    1,900,076
    
    
    
    (1,611,454
    )Other income (expense)Interest income
    
    
    80,489
    
    
    
    28,089
    
    
    
    31,954Interest expense
    
    
    (792,976
    )
    
    
    (795,023
    )
    
    
    (353,433
    )Minority interest
    
    
    8,437
    
    
    
    9,095
    
    
    
    9,343Miscellaneous income
    
    
    136,273
    
    
    
    61,743
    
    
    
    124,729(567,777
    )
    
    
    (696,096
    )
    
    
    (187,407
    )Income (loss) from continuing
operations before income taxes
    
    
    10,954,464
    
    
    
    1,203,980
    
    
    
    (1,798,861
    )Income tax expense
    
    
    1,133,787
    
    
    
    
    
    
    
    Net income (loss) from continuing operations
    
    
    9,820,677
    
    
    
    1,203,980
    
    
    
    (1,798,861
    )Discontinued operationsIncome (loss) from operations of Coin
    
    
    989,856
    
    
    
    (853,772
    )
    
    
    (1,706,502
    )Gain (loss) on disposal of Coin
    
    
    5,825,668
    
    
    
    (2,900,964
    )
    
    
    Income (loss) from discontinued operations
    
    
    6,815,524
    
    
    
    (3,754,736
    )
    
    
    (1,706,502
    )Net income (loss)
    
    $
    16,636,201
    
    
    $
    (2,550,756
    )
    
    $
    (3,505,363
    )Basic and diluted net income (loss) per common shareContinuing operations
    
    $
    0.43
    
    
    $
    0.05
    
    
    $
    (0.08
    )Discontinued operations
    
    
    0.30
    
    
    
    (0.16
    )
    
    
    (0.07
    )Net income (loss)
    
    $
    0.73
    
    
    $
    (0.11
    )
    
    $
    (0.15
    )Basic and diluted weighted average number of common
shares outstanding
    
    
    22,731,994
    
    
    
    22,731,994
    
    
    
    22,731,994
  F-4




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##### Table of Contents



ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
 For the years ended December 31, 2005, 2004, and 2003
 AdditionalCommon stock
    
    
    paid-in
    
    
    AccumulatedShares
    
    
    Amount
    
    
    capital
    
    
    deficit
    
    
    TotalDECEMBER 31, 2002
    
    
    22,431,994
    
    
    $
    2,243,199
    
    
    $
    36,512,206
    
    
    $
    (13,052,341
    )
    
    $
    25,703,064Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,505,363
    )
    
    
    (3,505,363
    )DECEMBER 31, 2003
    
    
    22,431,994
    
    
    $
    2,243,199
    
    
    $
    36,512,206
    
    
    $
    (16,557,704
    )
    
    $
    22,197,701Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,550,756
    )
    
    
    (2,550,756
    )DECEMBER 31, 2004
    
    
    22,431,994
    
    
    $
    2,243,199
    
    
    $
    36,512,206
    
    
    $
    (19,108,460
    )
    
    $
    19,646,945Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,636,201
    
    
    
    16,636,201DECEMBER 31, 2005
    
    
    22,431,994
    
    
    $
    2,243,199
    
    
    $
    36,512,206
    
    
    $
    (2,472,259
    )
    
    $
    36,283,146
  F-5




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##### Table of Contents



ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 For the years ended December 31,
 2005
    
    
    2004
    
    
    2003Operating activitiesNet income (loss)
    
    $
    16,636,201
    
    
    $
    (2,550,756
    )
    
    $
    (3,505,363
    )Adjustments to reconcile net income (loss)
to net cash provided by operating activities:Depreciation
    
    
    756,596
    
    
    
    1,123,474
    
    
    
    1,367,218Increase (decrease) in deferred revenue
    
    
    (104,989
    )
    
    
    8,598
    
    
    
    (11,263
    )Unrealized (gain) loss on financial contracts
    
    
    (169,951
    )
    
    
    184,800
    
    
    
    Loss on foreclosure of Coin plant assets
    
    
    
    
    
    
    2,900,964
    
    
    
    Gain on disposal of Coin
    
    
    (5,825,668
    )
    
    
    
    
    
    
    Deferred income taxes
    
    
    297,000
    
    
    
    
    
    
    
    Changes in operating assets and liabilities:Increase in trade receivables
    
    
    (9,774,576
    )
    
    
    (387,223
    )
    
    
    (1,511,489
    )(Increase) decrease in inventories
    
    
    79,019
    
    
    
    (587,212
    )
    
    
    243,580Increase in other assets
    
    
    (182,285
    )
    
    
    (108,686
    )
    
    
    (36,328
    )Increase (decrease) in accounts payable and accrued
liabilities
    
    
    (132,704
    )
    
    
    1,436,722
    
    
    
    3,443,594Increase (decrease) in accrued interest
    
    
    (841,610
    )
    
    
    853,832
    
    
    
    909,179Increase (decrease) in accrued liabilities in
Saudi Arabia
    
    
    (341,846
    )
    
    
    77,288
    
    
    
    181,835Other
    
    
    (8,436
    )
    
    
    (18,077
    )
    
    
    (11,476
    )Net cash provided by operating activities
    
    
    386,751
    
    
    
    2,933,724
    
    
    
    1,069,487Investing activitiesAdditions to Al Masane Project
    
    
    (383,533
    )
    
    
    (255,445
    )
    
    
    (346,963
    )Additions to plant, pipeline and equipment
    
    
    (3,491,467
    )
    
    
    (1,949,760
    )
    
    
    (156,363
    )(Additions to) reduction in mineral properties in
the United States
    
    
    (390
    )
    
    
    153,572
    
    
    
    (664
    )Net cash used in investing activities
    
    
    (3,875,390
    )
    
    
    (2,051,633
    )
    
    
    (503,990
    )Financing activitiesRepayments of notes payable to stockholders
    
    
    (718,000
    )
    
    
    
    
    
    
    Advances on long-term debt
    
    
    7,000,000
    
    
    
    
    
    
    
    Repayment of long-term debt
    
    
    (1,678,005
    )
    
    
    (436,605
    )
    
    
    (706,952
    )Net cash used in financing activities
    
    
    4,603,995
    
    
    
    (436,605
    )
    
    
    (706,952
    )Net increase (decrease) in cash
    
    
    1,115,356
    
    
    
    445,486
    
    
    
    (141,455
    )Cash at beginning of year
    
    
    623,202
    
    
    
    177,716
    
    
    
    319,171Cash at end of year
    
    $
    1,738,558
    
    
    $
    623,202
    
    
    $
    177,716
 
  F-6




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##### Table of Contents



NOTE 1 
    
    BUSINESS AND OPERATIONS OF THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
 Business and Operations of the Company
    Summary of Significant Accounting Policies
 Cash, Cash Equivalents and Short-Term Investments
 Inventories
 Mineral Exploration and Development Costs
 Plant, Pipeline and Equipment
 Other Assets
 F-7




---



##### Table of Contents



NOTE 1 
    
    BUSINESS AND OPERATIONS OF THE COMPANY AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES 
Continued
 Long-Lived Assets Impairment
  Revenue recognition 
 Shipping and handling costs 
 Environmental Liabilities
 Deferred Revenue
 Statements of Cash Flows
 Net Income (Loss) Per Share
 Foreign Currency and Operations
 F-8




---



##### Table of Contents



NOTE 1 
    
    BUSINESS AND OPERATIONS OF THE COMPANY AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES 
Continued
    Management Estimates
 Stock-Based Compensation
    F-9




---



##### Table of Contents



NOTE 1 
    
    BUSINESS AND OPERATIONS OF THE COMPANY AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES 
Continued
 Derivatives
  Fair Value of Financial Instruments
 New Accounting Pronouncements
     F-10




---



##### Table of Contents



NOTE 1 
    
    BUSINESS AND OPERATIONS OF THE COMPANY AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES 
Continued
    NOTE 2 
    
    LIQUIDITY MATTERS, REALIZATION OF ASSETS AND BUSINESS RISKS
  Saudi Arabia
    
    
    United States
    
    
    TotalCurrent assets
    
    $
    467,398
    
    
    $
    15,408,491
    
    
    $
    15,875,889Current liabilities
    
    
    13,465,706
    
    
    
    4,522,975
    
    
    
    17,988,681Excess (shortage) of current
assets over current liabilities
    
    $
    (12,998,308
    )
    
    $
    10,885,516
    
    
    $
    (2,112,792
    )
   F-11




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##### Table of Contents



NOTE 2 
    
    LIQUIDITY MATTERS, REALIZATION OF ASSETS AND BUSINESS
RISKS  Continued
   NOTE 3 
    
    CONCENTRATIONS OF REVENUES AND CREDIT RISK
   NOTE 4 
    
    SALE OF ACCOUNTS RECEIVABLE
    F-12




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##### Table of Contents



NOTE 5 
    
    INVENTORIES
  2005
    
    
    2004Finished products
    
    $
    1,164,674
    
    
    $
    1,243,693
  NOTE 6 
    
    MINERAL EXPLORATION AND DEVELOPMENT COSTS IN SAUDI ARABIA
  Al Masane Project
    F-13




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##### Table of Contents



NOTE 6
 MINERAL EXPLORATION AND DEVELOPMENT COSTS IN SAUDI ARABIA
 Continued
 if 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 will be transferred to the Saudi
public stock company. However, the Company would remain responsible for repaying the $11 million
loan to the Saudi Arabian government.On 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 improve. One year later in May 2000, a reply was received from the Ministry notifying
the Company that it must immediately implement the 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 2002 stated that
the six-month period to implement the project had expired without the Company taking positive
steps towards that end. 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 its letters to the Ministry and the Crown Prince, the Company believed
that the Ministrys letters to the Company asking for the implementation of the project, without
any regard to metal market conditions, was contrary to the Saudi Mining code and the mining lease
agreement. In addition, the Company 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 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 had a strong commitment in helping United
States companies whenever possible.On February 23, 2004, the Companys President received a letter from the Deputy Minister of
Petroleum and Mineral Resources of the Kingdom of Saudi Arabia stating that the Council of
Ministers had issued a resolution, dated November 17, 2003, which directed the Minister, or
whomever he may designate, to discuss with the President of the Company the implementation of a
work program, similar to that which is attached to the Companys mining lease, to start during a
period
not to exceed two years and also the payment of the past due surface rentals. If agreeable, a
document was to be signed to that effect. The resolution stated further that, if no agreement was
reached, the Ministry of Finance would give the Council of Ministers its recommendation regarding
the $11 million loan granted to the Company.
 F-14




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##### Table of Contents



NOTE 6
 MINERAL EXPLORATION AND DEVELOPMENT COSTS IN SAUDI ARABIA
 Continued
 After discussions with the Deputy Minister, the Company President responded in a letter to the
Minister dated, March 23, 2004, that the Company would agree to abide by the resolution and would
start implementing the work program to build the mine, treatment plant and infrastructure within
two years from the date of the signed agreement. The work program was prepared by the Companys
technical consultants and attached to the letter. The Company also agreed to pay past due surface
rentals, which totaled approximately $586,000, in two equal installments, the first on December
31, 2004 and the second on December 31, 2005, and to continue to pay surface rentals as specified
in the Mining Lease Agreement. On May 15, 2004, an agreement was signed with the Ministry
covering these provisions. If the Company does not implement the program during the two-year
period, the matter will be referred to the Ministry to seek direction in accordance with the
Mining Code and other concerned codes. The Company paid $266,000 of the back lease payments on
January 3, 2005, and paid the remaining $320,000 on December 27, 2005.The Minister of Petroleum and Mineral Resources announced in October 2004, that a new revised
Saudi Arabian Mining Code was approved by the Council of Ministries, which would expedite the
issuance of licenses and has new incentives to encourage investment by the private sector, both
Saudi and foreign, in the development of mineral resources in Saudi Arabia.There can be no assurances that the Company will be able to locate a joint venture partner, form
a joint venture or obtain financing from the Saudi Industrial Development Fund (SIDF) or any
other sources. 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, which may improve
the commercial viability of the project.Deferred exploration and development costs of the Al Masane Project at December 31, 2005, 2004
and 2003, and the changes in these amounts for each of the three years then ended are detailed
below:
 Balance at
    
    
    
    
    
    
    Balance at
    
    
    
    
    
    
    Balance atDecember 31,
    
    
    Activity
    
    
    December 31,
    
    
    Activity
    
    
    December 31,
    
    
    Activity2005
    
    
    for 2005
    
    
    2004
    
    
    for 2004
    
    
    2003
    
    
    for 2003Property 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
    
    $
    22,370,730
    
    
    $
    333,867
    
    
    $
    22,036,863
    
    
    $
    255,445
    
    
    $
    21,781,418
    
    
    $
    346,963Materials and
maintenance
    
    
    6,175,232
    
    
    
    
    
    
    
    6,175,232
    
    
    
    
    
    
    
    6,175,232
    
    
    
    Feasibility study
    
    
    2,957,437
    
    
    
    49,666
    
    
    
    2,907,771
    
    
    
    
    
    
    
    2,907,771
    
    
    
    Total
    
    
    31,503,399
    
    
    
    383,533
    
    
    
    31,119,866
    
    
    
    255,445
    
    
    
    30,864,421
    
    
    
    346,963$
    36,804,098
    
    
    $
    383,533
    
    
    $
    36,420,565
    
    
    $
    255,445
    
    
    $
    36,165,120
    
    
    $
    346,963
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##### Table of Contents



NOTE 6
 MINERAL EXPLORATION AND DEVELOPMENT COSTS IN SAUDI ARABIA
 Continued
 Other Interest in Saudi ArabiaIn 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. The application for the new exploration
license is still pending. Geophysical, geochemical and geologic 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 deferred exploration and 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.The Company assesses the carrying values of its mining assets on an ongoing basis for impairment.
Factors which may result in impairment 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 2008, are $2.05 per pound for copper and $.86 per pound for zinc. Copper and zinc
comprise in excess of 80% of the expected value of production. The Company has recorded no
impairment losses through December 31, 2005.
 NOTE 7  MINERAL PROPERTIES IN THE UNITED STATES
 The principal assets of Pioche are an undivided interest in 48 patented and 5 unpatented mining
claims totaling approximately 1,500 acres, and a 300 ton-per-day mill located on the
aforementioned properties in the Pioche Mining District in southeast Nevada. In August 2001, 75
unpatented claims were abandoned since they were deemed to have no future value to Pioche. Due
to the lack of capital, the properties held by Pioche have not been commercially operated for
approximately 35 years.
 F-16




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NOTE 8  NOTES PAYABLE , LONG-TERM DEBT AND LONG-TERM OBLIGATIONS
  2005
    
    
    2004Notes payable:Secured note to Saudi Arabian government (A)
    
    $
    11,000,000
    
    
    $
    11,000,000Unsecured demand notes payable to Saudi investors
    
    
    13,333
    
    
    
    13,333Other
    
    
    12,500
    
    
    
    12,500Total
    
    $
    11,025,833
    
    
    $
    11,025,833Notes payable to stockholders:Secured notes to investors (B)
    
    $
    
    
    
    $
    698,000Unsecured note to Saudi investor (C)
    
    
    
    
    
    
    20,000Total
    
    $
    
    
    
    $
    718,000Long-term debt:Revolving notes to foreign banks (D)
    
    $
    
    
    
    $
    2,044,096Secured note with vendor (E)
    
    
    4,260,906
    
    
    
    5,815,072Capital lease with affiliated party (F)
    
    
    103,688
    
    
    
    127,527Revolving note to domestic bank (G)
    
    
    5,000,000
    
    
    
    Secured note to Capital Group (H)
    
    
    1,900,000
    
    
    
    Total long-term debt
    
    
    11,264,594
    
    
    
    7,986,695Less current portion
    
    
    (1,425,932
    )
    
    
    (3,071,161
    )Total long-term debt, less Current Portion
    
    $
    9,838,662
    
    
    $
    4,915,534
 
 (A)
    
    The Company has an interest-free loan of $11,000,000 from the Saudi Arabian 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 stockholder of the Company for $445,000 and the Companys
President for $53,000. The loans were due on demand with interest payable at the LIBOR
rate plus 2%. The balance also includes loans payable to the wife of the Companys
President for $100,000 and to a stockholder of the Company for $100,000 which were due on
demand with interest at 9%. All of these loans were secured by a pledge of all shares of
stock of American Shield Refining Company and all shares of stock of Texas Oil and Chemical
Co. II, Inc. These loans were paid in 2005.(C)
    
    Represents a loan payable to a stockholder of the Company, which was due on demand with
interest at 9%. This loan was paid in 2005.(D)
    
    Represents two loans payable to Mexican banks of $0 and $2,044,096, as of December 31,
2004. The first loan was payable in monthly payments through October 2004 with interest of
5%. Due to economic conditions, neither interest nor principal had been paid since 2001. As
discussed in Note 18, a loss on foreclosure was recorded in the fourth quarter of 2004. The
second loan was F-17




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NOTE 8  NOTES PAYABLE , LONG-TERM DEBT AND LONG-TERM OBLIGATIONS  Continued
 payable in quarterly payments through March, 2007 with interest at the LIBOR rate plus
seven points (LIBOR was 2.418% at December 31, 2004). The lender of the second loan held a
second lien on the Coin plant facilities. This lender was placed in receivership by the
Mexican government in 2001 and Coin was unable to communicate with this lender since that
occurrence. Coin was in default of the loan covenants as a result of not having made its
monthly and quarterly payments, and therefore, the loan was classified as current in the
financial statements. Unpaid interest and penalty interest of $3,721,179 is included in
accrued interest at December 31, 2004. The stock of Coin was sold in June 2005.(E)
    
    On June 1, 2004, South Hampton entered into a contract with a supplier for the purchase of 65,000 barrels per month of natural gasoline on an open account for the period from June 1,
2004 through May 31, 2006 and year to year thereafter with 30 days written notice of
termination by either party. On June 1, 2005, the term was extended to May 31, 2007. A
provision of the contract states that South Hampton will begin reducing the current debt to
the supplier by $250,000 per quarter beginning July 1, 2004. Therefore, $1,000,000 of the
balance of $4,260,906 has been classified as current at December 31, 2005.(F)
    
    On August 1, 2004, South Hampton entered into a $136,876 capital lease with a
transportation company owned by a Company officer for the purchase of a diesel powered
manlift. The lease bears interest of 6.9% over a 5 year term with a monthly payment of
$3,250. Title transfers to South Hampton at the end of the term.(G)
    
    On October 31, 2005 South Hampton entered into a $6.0 million revolving loan agreement
with a domestic bank. This agreement replaced the Purchase and Sale (Factoring) Agreement
with the same bank. The note bears interest at Prime plus .25% (7.5% at December 31,
2005), payable monthly, with a 2 year term. At December 31, 2005, $5.0 million of the
agreement was outstanding and classified as long term.(H)
    
    On June 30, 2005 South Hampton entered into $2.0 million loan agreement with a capital
investment group to fund the expansion of a toll processing unit. The note bears interest
at 12% has a 5 year term and payments due quarterly of $100,000 plus accrued interest. At
December 31, 2005, $400,000 of the balance of $1,900,000 has been classified as current.
  Year Ending December 31,
    
    Long-Term Debt
    
    
    Capital Lease Obligations2006
    
    $
    1,400,000
    
    
    $
    33,4712007
    
    
    8,660,906
    
    
    
    33,4712008
    
    
    400,000
    
    
    
    33,4712009
    
    
    400,000
    
    
    
    19,523Thereafter
    
    
    300,000
    
    
    
    Total
    
    $
    11,160,906
    
    
    
    119,936Less: Amount representing interest
    
    
    
    
    
    
    (16,248
    )Present value of future minimum
lease payments
    
    
    
    
    
    $
    103,688
  F-18




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##### Table of Contents



NOTE 9  ACCRUED LIABILITIES IN SAUDI ARABIA
  2005
    
    
    2004Salaries
    
    $
    1,528,422
    
    
    $
    1,433,712Termination benefits
    
    
    733,624
    
    
    
    708,317Surface rentals
    
    
    117,333
    
    
    
    586,666Other liabilities
    
    
    27,903
    
    
    
    20,433Total
    
    $
    2,407,282
    
    
    $
    2,749,128
 NOTE 10  COMMITMENTS AND CONTINGENCIES
 South Hampton has leased, on a month to month basis, various vehicles and equipment from Silsbee
Trading and Transportation Corp. (STTC), a trucking and transportation company currently owned
by the President of TOCCO, at a monthly cost which varies according to the amount of equipment in
service. Effective January 1, 2004, South Hampton and STTC entered into a five year lease
agreement requiring a monthly rental of $32,835 which was raised to approximately $44,000 per
month as new and additional tractors and trailers were added to the fleet throughout the years.
Total rental costs were approximately $507,000 in 2005, $414,000 in 2004 and $388,000 in 2003
(see Note 16).The Company is the holder of the Al Masane Mining lease requiring annual rental payments of
approximately $117,300 through 2023, with an option to extend the lease for an additional twenty
years. At December 31, 2005, annual payments due totaled $117,300 (see Note 6).Future minimum lease payments under these lease agreements are as follows:
 Year EndingDecember 312006
    
    $
    645,3002007
    
    
    645,3002008
    
    
    645,3002009
    
    
    117,3002010
    
    
    117,300Thereafter
    
    
    1,524,900Total
    
    $
    3,695,400
 South Hampton, in 1977, guaranteed a $160,000 note payable of a limited partnership in which it
has a 19% interest. Included in Accrued Liabilities at December 31, 2005 and 2004 is $66,570
related to this guaranty.In October 2004, a $100,000 irrevocable standby letter of credit was issued by a bank in favor of
the Companys trading partner for financial swap and option agreements. The letter of credit
will expire on October 31, 2006. In 2005 the letter of credit expiration date was extended to
October 31, 2007.In April 2005, a $25,000 irrevocable standby letter of credit was issued by a bank in favor of
the Railroad Commission of Texas for Gulf State operations. The letter of credit will expire on
July 31, 2006.
 F-19




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##### Table of Contents



NOTE
10  COMMITMENTS AND CONTINGENCIES  continued
 Litigation-On December 31, 2004, South Hampton was a defendant in eleven lawsuits. The
suits, eight of which were filed in Madison County, Illinois, and included up to 70 other
defendants, primarily claimed illness and disease resulting from alleged exposure to chemicals,
including benzene, butadiene and/or isoprene, during employment at various occupations. The plaintiffs claimed 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. South Hampton did
not believe any of the plaintiffs in the Illinois lawsuits ever came in contact with its products
and vigorously defended itself against these claims. The Madison County plaintiffs dismissed all
the claims against South Hampton in 2005.South Hampton was also a defendant in three lawsuits filed in Jefferson County, Texas. The first
lawsuit was filed in September 2001, alleging the plaintiff became ill from exposure to asbestos
while employed by South Hampton from 1961 through 1975. Due to the time period in which the
claimant was allegedly exposed, the Company was unable to locate insurance coverage for this
particular suit. The Company settled the lawsuit with a structured payment completed in December
of 2005. The settlement did not have a material impact on financial condition or the results of
operations.The second Jefferson County lawsuit was filed on May 29, 2003, and alleged that the plaintiff was
exposed to asbestos containing products while performing his duties as a welder, pipefitter
assistant, laborer, floor hand and mud hand/derrick hand from 1950 through 1984. Plaintiff
claimed an asbestos related disease, although this was not confirmed by a pathologist. Plaintiff
testified in his deposition that he worked as a pipefitter assistant building a plant for South
Hampton in Vidor, Texas for approximately three months in 1979. The lawsuit was dropped in 2005
with no settlement payment made.The third Jefferson County lawsuit was filed on June 6, 2002, alleging that the plaintiff while
working on South Hamptons premises, seriously injured his shoulder. The Greenwich Insurance
Company accepted coverage, and this matter was settled with the plaintiff in early 2005.The consolidated financial statements as of December 31, 2005 include all amounts related to the
defense or settlement of these lawsuits.Environmental remediation  In 1993, at the request of the Texas Commission on
Environmental Quality (TCEQ), South Hampton drilled a well to check for groundwater
contamination under a spill area. Based on the results, two pools of hydrocarbons were
discovered. 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, 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 petrochemical 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, TCEQ 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. TCEQ proposed that administrative penalties be
increased to approximately $765,000 and that certain corrective actions be taken. On April 11,
2003, TCEQ reduced the penalties to approximately $690,000. On May 25, 2003, a settlement hearing
with TCEQ was held and additional information was submitted to TCEQ on June 2, October 2 and
November 4, 2003. South Hampton believes the original penalty and the additional allegations are
incorrect and
 F-20




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##### Table of Contents



NOTE 10  COMMITMENTS AND CONTINGENCIES  Continued
 intends to continue to vigorously defend 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 TCEQ are expected to continue in order to reach a final
settlement.South Hampton has a liability of $200,000 recorded at December 31, 2005
and 2004, related to these environmental issues.A further amendment on separate issues was made by TCEQ on December 13, 2001 for further
violations relating to air quality control and waste requirements. TCEQ proposed administrative
penalties of $59,000. South Hampton settled this particular claim with TCEQ in April 2002 for
approximately $5,900.Amounts charged to expense for various activities related to environmental monitoring,
compliance, and improvements were approximately $285,500 in 2005, $232,100 in 2004 and $232,500
in 2003.Other Matters  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 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.
 NOTE 11  STOCK OPTIONS
 Stock Options- The Companys Employee Stock Option Plan (the Employee Plan) provided 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 had reserved up to 500,000 shares of common stock for grant pursuant to
the Employee Plan. At December 31, 2005, no options to purchase shares were outstanding under
the Employee Plan. The options vested 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 was
registered with the Securities and Exchange Commission and expired May 16, 2003.The Company had periodically granted stock options to various parties, including certain officers
and directors, who made loans to or performed critical services for the Company. Most of these
options allowed the parties to purchase common stock for $1.00 per share.
 F-21




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##### Table of Contents



NOTE 11  STOCK OPTIONS  Continued
 Additional information with respect to all options outstanding at December 31, 2005, and changes
for the three years then ended was as follows:
 2003Weighted averageShares
    
    
    exercise priceOutstanding at beginning of year
    
    
    810,000
    
    
    $
    1.10Forfeited
    
    
    (365,000
    )
    
    
    1.13Outstanding at end of year
    
    
    445,000
    
    
    $
    1.08Options exercisable at December 31, 2003
    
    
    445,000
    
    
    $
    1.08
 2004Weighted averageShares
    
    
    exercise priceOutstanding at beginning of year
    
    
    445,000
    
    
    $
    1.08Forfeited
    
    
    (45,000
    )
    
    
    1.75Outstanding at end of year
    
    
    400,000
    
    
    $
    1.00Options exercisable at December 31, 2004
    
    
    400,000
    
    
    $
    1.00
 2005Weighted averageShares
    
    
    exercise priceOutstanding at beginning of year
    
    
    400,000
    
    
    $
    1.00Forfeited
    
    
    
    
    
    
    Outstanding at end of year
    
    
    400,000
    
    
    $
    1.00Options exercisable at December 31, 2005
    
    
    400,000
    
    
    $
    1.00
  Options outstanding and exercisableRemaining
    
    ExerciseExercise prices
    
    Number
    
    contractual life
    
    price$1.00
    
    
    400,000
    
    
    undetermined
    
    $
    1.00
 F-22




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NOTE 12  INCOME TAXES
  Year endedDecember 312005Current federal provision
    
    $
    394,789Current state provision
    
    
    441,998Deferred federal provision
    
    
    273,000Deferred state provision
    
    
    24,000Income tax expense
    
    $
    1,133,787
 Income tax expense (benefit) for the years ended December 31, 2005, 2004, and 2003 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:
 2005
    
    
    2004
    
    
    2003Income taxes at U.S. statutory rate
    
    $
    6,064,431
    
    
    $
    (867,257
    )
    
    $
    (1,191,823
    )State taxes, net of federal benefit
    
    
    533,763
    
    
    
    37,013
    
    
    
    270,844Net operating losses expired
    
    
    
    
    
    
    
    
    
    
    3,704,513Change in valuation allowance
    
    
    (3,170,892
    )
    
    
    (460,734
    )
    
    
    (3,344,171
    )Foreign operations with no
benefit (tax) provided
    
    
    (2,317,278
    )
    
    
    1,276,609
    
    
    
    580,210Other items
    
    
    23,763
    
    
    
    14,369
    
    
    
    (19,573
    )Total tax expense
    
    $
    1,133,787
    
    
    $
    
    
    
    $
    
 The tax effects of temporary differences that give rise to significant portions of Federal and
state deferred tax assets and deferred tax liabilities were as follows:
 December 31,2005
    
    
    2004
    
    
    2003Deferred tax liabilities:Plant, pipeline and equipment
    
    $
    (907,000
    )
    
    $
    (377,000
    )
    
    $
    (396,000
    )Deferred tax assets:Accounts receivable
    
    
    42,000
    
    
    
    36,000
    
    
    
    82,000Mineral interests
    
    
    236,000
    
    
    
    236,000
    
    
    
    236,000Accrued liabilities
    
    
    215,000
    
    
    
    184,000
    
    
    
    149,000Net operating loss and contribution
carry-forwards
    
    
    55,000
    
    
    
    2,870,000
    
    
    
    3,389,000Capital loss carryforward
    
    
    1,336,000
    
    
    
    
    
    
    
    Tax credit carry-forwards
    
    
    
    
    
    
    212,000
    
    
    
    212,000Deferred gain on sale of property
    
    
    34,000
    
    
    
    50,000
    
    
    
    63,000Unrealized losses on swap agreements
    
    
    28,000
    
    
    
    64,000
    
    
    
    Gross deferred tax assets
    
    
    1,946,000
    
    
    
    3,652,000
    
    
    
    4,131,000Valuation allowance
    
    
    (1,336,000
    )
    
    
    (3,275,000
    )
    
    
    (3,735,000
    )Net deferred tax assets (liabilities)
    
    
    (297,000
    )
    
    
    377,000
    
    
    
    396,000Net deferred taxes
    
    $
    (297,000
    )
    
    $
    
    
    
    $
    
 F-23




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##### Table of Contents



NOTE
12  INCOME TAXES  continued
     NOTE 13  SEGMENT INFORMATION
  December 31, 2005Petrochemical
    
    
    Mining
    
    
    TotalContinuing operationsRevenue from external customers
    
    $
    80,373,587
    
    
    $
    
    
    
    $
    80,373,587Depreciation
    
    
    756,571
    
    
    
    25
    
    
    
    756,596Operating income (loss)
    
    
    12,147,234
    
    
    
    (624,993
    )
    
    
    11,522,241Discontinued operations (Coin)Revenue from external customers
    
    $
    2,042,676
    
    
    $
    
    
    
    $
    2,042,676Depreciation
    
    
    
    
    
    
    
    
    
    
    Operating income
    
    
    497,730
    
    
    
    
    
    
    
    497,730Total assets
    
    $
    26,165,931
    
    
    $
    40,782,018
    
    
    $
    66,947,949
 December 31, 2004Petrochemical
    
    
    Mining
    
    
    TotalContinuing operationsRevenue from external customers
    
    $
    56,203,795
    
    
    $
    
    
    
    $
    56,203,795Depreciation
    
    
    774,703
    
    
    
    411
    
    
    
    775,114Operating income (loss)
    
    
    2,513,564
    
    
    
    (613,488
    )
    
    
    1,900,076Discontinued operations (Coin)Revenue from external customers
    
    $
    3,589,659
    
    
    $
    
    
    
    $
    3,589,659Depreciation
    
    
    348,360
    
    
    
    
    
    
    
    348,360Operating income
    
    
    45,963
    
    
    
    
    
    
    
    45,963Total assets
    
    $
    10,796,800
    
    
    $
    40,251,083
    
    
    $
    51,047,883
 F-24




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##### Table of Contents



NOTE 13  SEGMENT INFORMATION  Continued
 December 31, 2003Petrochemical
    
    
    Mining
    
    
    TotalContinuing operationsRevenue from external customers
    
    $
    38,851,439
    
    
    $
    
    
    
    $
    38,851,439Depreciation
    
    
    1,017,146
    
    
    
    1,712
    
    
    
    1,018,858Operating income (loss)
    
    
    (856,357
    )
    
    
    (755,097
    )
    
    
    (1,611,454
    )Discontinued operations (Coin)Revenue from external customers
    
    $
    773,294
    
    
    $
    
    
    
    $
    773,294Depreciation
    
    
    348,360
    
    
    
    
    
    
    
    348,360Operating income (loss)
    
    
    (893,334
    )
    
    
    
    
    
    
    (893,334
    )Total assets
    
    $
    12,787,676
    
    
    $
    39,884,821
    
    
    $
    52,672,497
  Year ended December 31,2005
    
    
    2004
    
    
    2003RevenuesUnited States
    
    $
    80,373
    
    
    $
    56,203
    
    
    $
    38,852Mexico (discontinued operations)
    
    
    2,043
    
    
    
    3,590
    
    
    
    773Saudi Arabia
    
    
    
    
    
    
    
    
    
    
    $
    82,416
    
    
    $
    59,793
    
    
    $
    39,625
 Year ended December 31,2005
    
    
    2004
    
    
    2003Long-lived assetsUnited States
    
    $
    9,285
    
    
    $
    6,550
    
    
    $
    5,392Mexico
    
    
    
    
    
    
    
    
    
    
    4,567Saudi Arabia
    
    
    39,235
    
    
    
    38,852
    
    
    
    38,596$
    48,520
    
    
    $
    45,402
    
    
    $
    48,555
 NOTE 14  NET INCOME (LOSS) PER COMMON SHARE
 Basic and diluted earnings
    
    Year ended December 31,per common share
    
    2005
    
    
    2004
    
    
    2003Income from continuing operations
    
    $
    0.43
    
    
    $
    0.05
    
    
    $
    (0.08
    )Discontinued operations
    
    
    0.30
    
    
    
    (0.16
    )
    
    
    (0.07
    )Net income (loss)
    
    $
    0.73
    
    
    $
    (0.11
    )
    
    $
    (0.15
    )Weighted average shares outstanding
    
    
    22,731,994
    
    
    
    22,731,994
    
    
    
    22,731,994
  F-25




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##### Table of Contents



NOTE 15  QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
  Year Ended December 31, 2005First
    
    Second
    
    Third
    
    FourthQuarter
    
    Quarter(2)
    
    Quarter
    
    Quarter
    
    TotalRevenues
    
    $
    18,717
    
    
    $
    21,300
    
    
    $
    20,734
    
    
    $
    21,665
    
    
    $
    82,416Net income (loss)
    
    
    3,940
    
    
    
    7,844
    
    
    
    5,927
    
    
    
    (1,075
    )
    
    
    16,636Basic and diluted EPS
    
    $
    0.17
    
    
    $
    0.35
    
    
    $
    0.26
    
    
    $
    (0.05
    )
    
    $
    0.73
 Year Ended December 31, 2004First
    
    Second
    
    Third
    
    FourthQuarter
    
    Quarter
    
    Quarter
    
    Quarter(1)
    
    TotalRevenues
    
    $
    10,916
    
    
    $
    13,459
    
    
    $
    15,961
    
    
    $
    19,457
    
    
    $
    59,793Net income (loss)
    
    
    (1,023
    )
    
    
    (57
    )
    
    
    1,903
    
    
    
    (3,374
    )
    
    
    (2,551
    )Basic and diluted EPS
    
    $
    (0.04
    )
    
    $
    (0.00
    )
    
    $
    0.08
    
    
    $
    (0.15
    )
    
    $
    (0.11
    )
 
 (1)
    
    See Note 18. Discontinued Operations for the disclosure of the loss on foreclosure of
$2,900,964 recorded in the fourth quarter.(2)
    
    See Note 18. Discontinued Operations for the disclosure of the gain on sale of
$5,825,668 recorded in the second quarter. NOTE 16  RELATED PARTY TRANSACTIONS
     F-26




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##### Table of Contents



NOTE 17  DERIVATIVE INSTRUMENTS
 
  NOTE 18  DISCONTINUED OPERATIONS
   F-27




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##### Table of Contents



NOTE 19  SUBSEQUENT EVENTS
   F-28




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON SCHEDULES
 
   /s/ MOORE STEPHENS TRAVIS WOLFF, L.L.P.Dallas, TexasMarch 24, 2006
 F-29




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##### Table of Contents



ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
 
 VALUATION AND QUALIFYING ACCOUNTS
  ChargedBeginning
    
    
    (credited)
    
    
    
    
    
    
    EndingDescription
    
    balance
    
    
    to earnings
    
    
    Deductions
    
    
    balanceALLOWANCE FOR DEFERRED
TAX ASSETDecember 31, 2003
    
    
    7,079,493
    
    
    
    
    
    
    
    (3,344,171
    )(a)
    
    
    3,735,322December 31, 2004
    
    
    3,735,322
    
    
    
    
    
    
    
    (460,734
    )(b)
    
    
    3,274,588December 31, 2005
    
    
    3,274,588
    
    
    
    1,336,451
    
    
    
    (3,274,588
    )(b)
    
    
    1,336,451
 
 (a)
    
    Expiration of carryforwards(b)
    
    Utilization of carryforwards F-30




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##### Table of Contents



INDEPENDENT AUDITORS REPORT
 To the Shareholders of
Productos Quimicos Coin, S.A. de C.V.
Mexico City, Mexico
         F-31




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##### Table of Contents



Orozco Medina & Asociados, S.C./s/ Francisoco J. Olvera FonsecaFrancisco J. Olvera FonsecaCPA
 
 F-32




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##### Table of Contents



INDEPENDENT AUDITORS REPORT
 To the Shareholders of
Productos Quimicos Coin, S.A. de C.V.
Mexico City, Mexico
       F-33




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##### Table of Contents



Despacho Freyssinier Morin, S.C./s/ C.P. JUAN PABLO SOTOC.P.C. Juan Pablo SotoPartner
 
 F-34




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##### Table of Contents



INDEPENDENT AUDITORS REPORT
 To the Shareholders of
Productos Quimicos Coin, S.A. de C.V.
Mexico City, Mexico
       F-35




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##### Table of Contents



Despacho Freyssinier Morin, S.C./s/ C.P. JUAN PABLO SOTOC.P. Juan Pablo SotoPartner
 
 F-36