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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
    FORM 10-K/A-1 (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, 2004 OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For The Transition Period from ___________ to ________ Commission File Number 0-6247    ARABIAN AMERICAN DEVELOPMENT COMPANY (Exact name of registrant as specified in its charter)
 Delaware(State or other jurisdiction of incorporation or
organization)
    
    75-1256622(I.R.S. Employer
Identification No.)10830 North Central Expressway Suite 175
Dallas, Texas(Address of principal executive offices)
    
    75231(Zip Code)
 Registrants Telephone Number, Including Area Code: (214) 692-7872 Securities Registered Pursuant to Section 12(b) of the Act:None Securities Registered Pursuant to Section 12(g) of the Act: (Title Of Class)Common Stock, par value $0.10 per share    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 þ No o    Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. þ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Act). Yes o No þ Number of shares of registrants Common Stock, par value $0.10 per share, outstanding as of
December 31, 2004: 22,731,994. The aggregate market value on June 30, 2004 of the registrants voting securities held by
non-affiliates was $1,906,191. DOCUMENTS INCORPORATED BY REFERENCE No documents are incorporated by reference into this report.




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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
    
    
    20ITEM 6.
    
    SELECTED FINANCIAL DATA
    
    
    21ITEM 7.
    

MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONSGeneral
    
    
    21Liquidity and Capital Resources
    
    
    21Results of Operations
    
    
    25Critical 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
    
    
    30PART IIIITEM 10.
    
    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
    
    
    32ITEM 11.
    
    EXECUTIVE COMPENSATION
    
    
    33ITEM 12.
    
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
    
    
    34ITEM 13.
    
    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
    
    
    36ITEM 14.
    
    PRINCIPAL ACCOUNTANT FEES AND SERVICES
    
    
    37PART IVITEM 15.
    
    EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
    
    
    38Certification 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 Arabian American Development Company (the Company) was organized as a Delaware corporation in
1967. The Companys principal business activities include refining various specialty petrochemical
products and developing mineral properties in Saudi Arabia and the United States. All of its
mineral properties are presently undeveloped and require significant capital expenditures before
beginning any commercial operations. The Companys undeveloped mineral interests are primarily
located in Saudi Arabia. United States Activities. The Companys domestic activities are primarily conducted through a
wholly owned subsidiary, American Shield Refining Company (the Petrochemical Company), which owns
all of the capital stock of Texas Oil and Chemical Co. II, Inc. (TOCCO). TOCCO owns all of the
capital stock of South Hampton Refining Company (South Hampton), and South Hampton owns all of
the capital stock of Gulf State Pipe Line Company, Inc. (Gulf State). South Hampton owns and
operates a specialty petrochemical product facility near Silsbee, Texas that is one of the largest
manufacturers of pentanes consumed in North America. Gulf State owns and operates three pipelines
which connect the South Hampton facility to a natural gas line, to South Hamptons truck and rail
loading terminal and to a marine terminal owned by an unaffiliated third party. The Company also
directly owns approximately 55% of the capital stock of a Nevada mining company, Pioche-Ely Valley
Mines, Inc. (Pioche). Pioche does not conduct any substantial business activities. See Item 2.
Properties. Saudi Arabian Activities. The Company holds a thirty (30) year mining lease (which commenced on May
22, 1993) covering an approximate 44 square kilometer area in the Al Masane area in southwestern
Saudi Arabia. The Company has the option to renew or extend the term of the lease for additional
periods not to exceed twenty (20) years. The Company was granted exploration licenses for the other
areas in southwestern Saudi Arabia which have expired. In 1999, the Company applied for an exploration license covering an area of approximately 2,850
square kilometers surrounding the mining lease area, where it has previously explored with the
written permission of the Saudi Ministry of Petroleum and Mineral Resources. Mexico Activities. TOCCO owns approximately 93% of the issued and outstanding shares of common
stock of Productos Quimicos Coin, S.A. de. C.V. (Coin), a specialty petrochemical product
company. The facility is located in Coatzacoalcos, on the Yucatan Peninsula. An administrative
office is located in Mexico City. See Item 2. Propertiesfor additional discussions regarding all of the Companys properties and
financing of the Al Masane project. Note 13 to the Consolidated Financial Statementscontain information regarding the Companys
industry segments and geographic financial information for the years ended December 31, 2004, 2003
and 2002. In addition, see Item 7. Managements Discussion and Analysis of Financial Condition and
Results of Operationsfor a discussion of the Companys liquidity, capital resources and operating
results. 1




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International Operations A substantial portion of the Companys mineral properties and related interests, and one of its
specialty petrochemical facilities, are located in Saudi Arabia and Mexico, respectively. Specific
and known risks are discussed in detail in this report; however, the Companys international
operations involve additional general risks not usually associated with domestic operations, any of
which could have a material and adverse affect on the Companys business, financial condition or
results of operations, including a heightened risk of the following: Economic and Political Instability; Terrorist Acts; War and Other Political Unrest. The U.S.
military action in Iraq, the terrorist attacks that took place in the United States on September
11, 2001, the potential for additional future terrorist acts and other recent events, have caused
uncertainty in the worlds financial markets and have significantly increased global political,
economic and social instability, including in Saudi Arabia, a country in which the Company has
substantial interests and operations. It is possible that further acts of terrorism may be directed
against the United States domestically or abroad, and such acts of terrorism could be directed
against the properties and personnel of companies such as the Company. The Companys operations in
Saudi Arabia and elsewhere could be further adversely affected by post-war conditions in Iraq if
armed hostilities, acts of terrorism or other unrest persist. Recent acts of terrorism and threats
of armed conflicts elsewhere in the Middle East could also limit or disrupt the Companys
operations. War and other political unrest also may cause unforeseen delays in the development of the Companys
mineral properties and related interests located in Saudi Arabia, and interruption in the operation
of the Companys specialty petrochemical facility located in Mexico, and may pose a direct security
risk to such interests and operations. Such economic and political uncertainties may materially and adversely affect the Companys
business, financial condition or results of operations in ways that cannot be predicted at this
time. Termination of Mining Lease; Expropriation or Nationalization of Assets. The Companys mining lease
for the Al Masane area in Saudi Arabia is subject to the risk of termination if the Company does
not comply with its contractual obligations. See Item 2. Properties. Further, the Companys foreign
assets are subject to the risk of expropriation or nationalization. If a dispute arises, the
Company may have to submit to the jurisdiction of a foreign court or panel or may have to enforce
the judgment of a foreign court or panel in that foreign jurisdiction. Compliance with Foreign Laws. Because of the Companys substantial international operations, its
business is affected by changes in foreign laws and regulations (or interpretation of existing laws
and regulations) affecting both the mining and petrochemical industries, and foreign taxation. The
Company will be directly affected by the adoption of rules and regulations (and the interpretations
of such rules and regulations) regarding the manufacturing of specialty petrochemical products and
the exploration and development of mineral properties for economic, environmental and other policy
reasons. The Company may be required to make significant capital expenditures to comply with
non-U.S. governmental laws and regulations. It is also possible that these laws and regulations
may in the future add significantly to the Companys operating costs or may significantly limit its
business activities. Additionally, the Companys ability to compete in the international market may
be adversely affected by non-U.S. governmental regulations favoring or requiring the awarding of
leases, concessions and other contracts or exploration licenses to local contractors or requiring
foreign contractors to employ citizens of, or purchase supplies from, a particular jurisdiction.
The 2




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Company is not currently aware of any specific situations of this nature, but there is always the
opportunity for this type of difficulty to arise in the international business environment. Mining Management Risks. The Companys management and Board of Directors have many years of
experience in the exploration for, and development of, mineral prospects in various parts of the
world. Mr. John Crichton, the Chairman of the Board, is a renowned oil and mineral consultant to
major companies with world wide experience. He is the holder of a MSc. Degree in Petroleum
Engineering from MIT. Mr Hatem El-Khalidi , who holds an MSc. in Geology from Michigan State
University, is also a consultant in oil & mineral exploration and is the person who discovered the
Al Masane deposits which were subsequently developed by the Company under his direct supervision.
The other board members, Saudi citizens, are both graduates with Masters degrees with an MSc. in
Geology being held by Mr. Ghazi Sultan from the University of Texas. Mr. Sultan served as the
Saudi Deputy Minister of Petroleum and Mineral Resources for Mineral Resources from 1965-1988 and
was responsible for the massive expansion of the mineral resources section of the Ministry which
had a two hundred million dollar yearly budget and was under his direct control and supervision.
Mr. Sultan supervised the work of the USGS (United States Geological Survey) Mission in Saudi
Arabia, the BRGM (French Government Mineral Survey), and the British Riofenix Mission (owned by Rio
Tinto Mining Company). All of these explored and evaluated many mineral deposits for the Ministry
in the Kingdom with some becoming mines. Mr. Mohammad Al-Omair, another Saudi director, holds an
MBA degree from the University of Washington and is the senior executive vice president of Fal
Holdings Company of Saudi Arabia which is one of the large industrial and business holding
companies in the country with offices in London and Portland, Oregon. Mr. Sultan and Mr. Al-Omair
are members of the Audit and Executive Committees of the Company. Mr. Nicholas Carter, the
Companys Secretary and Treasurer, is a graduate of Lamar University with a BBA degree and is a CPA
with extensive experience in the management of the companys refinery and petrochemical plant since
before it was acquired by the Company in 1986. Neither management nor the Board members have personally operated a mine on a day to day basis, nor
have they marketed the product of a mining operation. The Company intends to hire qualified and
experienced managers for the operation at the appropriate time. In addition, the Company has from
time to time employed various respected engineering and financial advisors to assist in the
development and evaluation of the mining projects. The consultants currently being employed to
update the feasibility of the Al Masane project are SNC-Lavalin of Toronto, Canada. Company
management may not be totally aware in detail of the specific requirements related to working
within this industry. Therefore, there is risk that the decisions and choices may not take into
account standard engineering or management approaches mining companies commonly use. If these
issues are not correctly handled, the operations, earnings and ultimate financial success of the
Mining Segment could suffer irreparable harm due to managements lack of experience in this portion
of the development of the project. The amount of risk will ultimately depend upon the Companys
ability to use consultants and in hiring experienced personnel to manage the operation. Other Difficulties and Risks Associated with International Operations. The Company also may
experience difficulty in managing and staffing operations across international borders,
particularly in remote locations. Additional risks associated with the Companys international
operations, any of which could disrupt the Companys operations, include changing political
conditions, foreign and domestic monetary policies, international economics, world metal price
fluctuations, foreign 3




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currency fluctuations, foreign taxation, foreign exchange restrictions, trade protective measures
and tariffs. 
 Competition The Company competes in both the petrochemical and mining industries. Accordingly, the Company is
subject to intense competition among a large number of companies, both larger and smaller than the
Company, many of which have financial capability, facilities, personnel and other resources greater
than the Company. In the specialty products and solvents markets, the Petrochemical Company has one
principal competitor. Generally, good economic conditions have meant strong demand for its
specialty products and solvents. The acquisition of Coin was intended to strengthen the
Petrochemical Companys position in the market in Mexico and allow it to pursue increased sales
volumes in the United States. From 2000 to early 2004 the major competitor in Mexico was selling
product in Mexico for less than Coins feedstock price. This led to the Coin facility being
shutdown for much of the three years immediately after purchase by the Petrochemical Company. In
early 2004, the competitions pricing formulas changed and the Coin facility was once again
competitive and since that time has been profitable and active in the market. Coin has since been
positioned in the market as originally planned, selling the majority of product in Mexico and
exporting the remainder to be marketed by South Hampton in the United States. However, the
previous years of financial drain hindered Coins ability to service debt and have cast doubt on
its ability to keep the facility and remain in operation for the future. During March 2005, an
additional procedure in the process to transfer title occurred, such that, management believes that
it is probable title to the plant in Coatzacolacos will ultimately be transferred to the creditor
or its assignee. As a result, management recorded the loss on the foreclosure of the facility with
a charge to consolidated operations of $2,900,964 during the fourth quarter of 2004. See Note 18
to the Consolidated Financial Statements. All of the Petrochemical Companys raw materials are purchased on the open market. The cost of
these materials is a function of spot market oil and gas prices, which tended down during 1998,
began rising in mid-1999 and continued to rise dramatically throughout the year 2000. The prices
peaked in late 2000 and returned to more traditional levels throughout 2001 and 2002. During the
latter part of 2002 and early 2003, prices rose upon speculation the Iraqi freedom action would
disrupt supplies. Prices remained at the historically higher prices throughout 2003 and peaked
again in January 2004. During 2004, feedstock prices fluctuated, rising and falling as most of the
petroleum markets do, in relation to crude oil. 
 Environmental Matters In 1993, during remediation of a small spill area, the Texas Commission on Environmental Quality
(TCEQ), formerly the Texas Natural Resources Conservation Commission (TNRCC), required South
Hampton to drill a well to check for groundwater contamination under the spill area. Two pools of
hydrocarbons were discovered to be floating on the groundwater at a depth of approximately 25 feet.
One pool is under the site of a former gas processing plant owned and operated by Sinclair, Arco
and others before its purchase by South Hampton in 1981. The analysis of the material indicates it
entered the ground prior to South Hamptons acquisition of the property. The other pool is under
the original South Hampton facility and analysis indicates the material was deposited several
decades ago. Tests conducted have determined that the hydrocarbons are contained on the property
and are not moving in any direction. The recovery process was initiated in June 1998 and
approximately $53,000 was spent setting up the system. The recovery is proceeding 4




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as planned and is expected to continue for several years until the pools are reduced to an
acceptable level. Expenses of recovery and periodic migration testing are being recorded as normal
operating expenses. Expenses for future years recovery are expected to stabilize and be less per
annum than the initial set up cost, although there can be no assurance of this effect. The light hydrocarbon recovered from the former gas plant site is compatible with the normal Penhex
feedstock and is accumulated and transferred into the PenHex feedstock tank. The material
recovered from under the original South Hampton site is accumulated and sold as a by-product.
Approximately 540 barrels of material was recovered during 2004. The recovered material had an
economic value of approximately $15,000 during 2004. Consulting engineers estimate that as much as
20,000 barrels of recoverable material may be available to South Hampton for use in its process or
for sale, but no reduction has been made in the accrual for remediation costs due to the
uncertainties relating to the recovery process. At current market values this material, if fully
recovered would be worth approximately $630,000. South Hampton drilled additional wells in 2001 and 2002 to further delineate the boundaries of the
pools and to ensure that, with the additional rainfall experienced in 2001 and 2002, movement had
not taken place. These tests confirmed that no movement of the hydrocarbon pools had taken place.
As a result of the investigation, the current action plan was deemed acceptable. In other remediation activity, South Hampton investigated a potential chemical dump site on the
facility property relating to ownership by Arco in the 1950s. The investigation indicates no
further action is required and the TCEQ was so notified. The Company also continues to remediate
the site of a pipeline leak and spill which occurred in 2001. The affected site contains less than
one-eighth acre of land and the cost is being covered by insurance. While the amount of material
spilled is minimal, due to the nature of the soil and location, the Company feels the remediation
will be a long term process relying heavily on natural attenuation. Also, see Item 3. Legal
Proceedings. The Clean Air Act Amendments of 1990 have had a positive effect on the Refining Companys business
as plastics manufacturers are searching for ways to use more environmentally acceptable solvents in
their processes. Plastics manufacturers have historically used C6 hydrocarbons (hexanes) as
coolants and catalyst carrying agents. There is a current trend among plastics manufacturers toward
the use of lighter and more recoverable C5 hydrocarbons (pentanes) which are a large part of the
Refining Companys product line. Management believes its ability to manufacture high quality
solvents in the C5 hydrocarbon market will provide a basis for growth over the next few years;
however, there can be no assurance that such growth will occur. As the use of C6 solvents is
phased out in parts of the industry, several manufacturers of such solvents have opted to no longer
market those products. As the number of producers has consolidated, the Company has been able to
pick up market share at higher sales prices from customers who still require C6 solvents in their
business. Also, see Item 2. Properties. 
 Personnel The Companys officers who reside in the United States are Mr. John A. Crichton, Chairman of the
Board, and Mr. Nicholas Carter, Secretary and Treasurer of the parent company and President of the
petrochemical segment companies, and both are US citizens. Mr. Hatem El-Khalidi, also a US citizen
and the Companys President and Chief Executive Officer splits his time between the US and Saudi
Arabia. Mr. El-Khalidi supervises the Companys 20 mining segment employees in 5




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Saudi Arabia, consisting of the office personnel and field crews who conduct exploration and
related activities. The Petrochemical Company employs 110 persons. 
 Available Information The Company will provide paper copies of this Annual Report on Form 10-K, its quarterly reports on
Form 10-Q, its current reports on Form 8-K and amendments to those reports, all as filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, free of charge
upon written or oral request to Arabian American Development Company, P. O. Box 1636, Silsbee, TX
77656, (409) 385-1400. The Company does not maintain an Internet website. 
 ITEM 2.Properties. 
 United States Specialty Products Facility South Hampton owns and operates a specialty petrochemical products facility near Silsbee, Texas.
The facility presently consists of six operating units which, while interconnected, make distinct
products through differing processes: (i) a PenHex unit; (ii) a Reformer; (iii) a Cyclo-pentane
unit; (iv) an Aromax® unit; (v) an aromatics hydrogenation unit; and (vi) a white oil fractionation
unit. All of these units are currently in operation. The capacity of the facilitys processes when taken in total is approximately 4,950 barrels per run
day. The facility generally consists of equipment commonly found in most petroleum refineries such
as fractionation towers and hydrogen treaters except the facility is adapted to produce highly
specialized products that are high purity, highly consistent, precise specification materials
utilized in the petrochemical industry as solvents, additives, blowing agents and cooling agents.
South Hampton produces eight distinct product streams and markets several combinations of blends as
needed in various customers applications. South Hampton produces neither motor fuel products nor
any other products commonly sold directly to retail consumers or outlets. The products from the PenHex Unit, Reformer, Aromax® Unit, and Cyclo-pentane Unit are marketed
directly to the customer by South Hamptons marketing personnel. These units had the following
utilization rates during 2004 on a calendar day basis: PenHex Unit- 96.5%; Reformer- 63.3%;
Cyclo-pentane Unit- 94%; Aromax® Unit- 43.7%. The total material charged to these units averaged
approximately 3,120 barrels per day, out of approximately 3,650 BPD of capacity, or an average of
85.5% utilization. All production was essentially sold during the year and no excess inventories
were developed. The Reformer and Aromax® units are operated as needed to support the PenHex and
Cyclo-pentane Units and therefore the utilization rates of these units are lower. The other two operating units at the plant site, an Aromatics Hydrogen Treating Unit and a White
Oils Fractionation Unit, are operated as two, independent and completely segregated processes.
They are dedicated to the needs of two different toll processing customers. The customers supply
and maintain title to the feedstock, South Hampton processes the feedstock into products based upon
customer specifications, and the customers market the products. Products may be sold directly from
South Hamptons storage tanks or may be taken to the customers location for storage and marketing.
The units have a combined capacity of 1,400 BPD and realized a utilization rate of 1,062 BPD or
75.8%. The units are operated in accordance with customer needs, and the contracts call for take
or pay minimums of production. 6




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To meet market demand, the South Hampton has increased the capacity of the PenHex Unit by 30%.
Equipment was being purchased in late 2004 and a construction permit was issued by the TCEQ in late
January 2005. Expansion was accomplished primarily by the addition of two (2) larger towers and
rearrangement of existing equipment. The Expanded capacity was put into service and was fully
operational by the end of the first quarter 2005. Additionally, South Hampton signed an agreement
in late January 2005 with one of the toll processing customers calling for an expansion of the
White Oils Fractionation Unit by October 2005. Capacity will be doubled to a minimum of 2000 BPD.
Procurement of additional equipment is underway and construction will commence following completion
of work on the PenHex Unit. All permits are in place. South Hampton, in support of the petrochemical operation, owns approximately 100 storage tanks with
a total capacity of approximately 320,000 barrels, and 133 acres of land, approximately 78 acres of
which are developed. South Hampton also owns a truck and railroad loading terminal consisting of
eight storage tanks, a rail spur and truck and tank car loading facilities. As a result of various expansion programs and the toll processing contracts, essentially all of the
standing equipment at South Hampton is operational. South Hampton has surplus equipment on-site
with which to assemble additional processing units, such as a hydro-cracking unit with a 2,000 BPD
capacity. Gulf State owns and operates three (3) 8-inch diameter pipelines aggregating approximately 50 miles
in length that connect South Hamptons facility to: (1) a natural gas line, (2) South Hamptons
truck and rail loading terminal and (3) a marine terminal owned by an unaffiliated third party.
South Hampton leases storage facilities at this marine terminal. 
 Mexico Specialty Products Facility, Coatzacoalcos, Mexico The Coin specialty petrochemical products facility is similar to South Hamptons facility in
Silsbee, Texas, but is less developed, having only the PenHex Unit. The capacity is 600 BPD, or
approximately 25% of the capacity of the Silsbee plant. The Coin facility also produces high
purity solvents, which are used in the expandable polystyrene and polystyrene foam industries. In
addition, these solvents are approved and used by developers of high-density polyethylene
manufacturing processes for use in licensed units. Coin markets its products in Mexico, Latin
America and the United States. With the Coin acquisition, the Company believes its petrochemical
operations are a significant supplier of high purity solvents in those markets. Coin employs 24
persons. Coins operations are dependent upon Pemex (Mexican government owned vendor) for its
feedstock supply. In late 2003, Coin secured a purchase contract with Pemex for feedstock and
purchased material throughout 2004 on a prepaid basis at a price competitive with normal spot
market pricing. The Coin facility was shut down much of 2000 and 2001 due to the high cost of feedstock and low
margins. During the fourth quarter of 2001, the facility began to operate at reduced rates and in
the first quarter of 2002 was running at capacity. The facility operated at about 50% capacity
during much of the remainder of 2002. The Coin facility shut down in early 2003 and remained
essentially idle until March 2004. Since that time the facility has operated continuously and has
sold its product primarily in Mexico, with the remainder being marketed by South Hampton in the
United States. As discussed in Note 18 to the Consolidated Financial Statements, in February 2004, a creditor
initiated mortgage foreclosure proceedings against Coin which resulted in a court ordered award of 7




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Coins plant facilities to the creditor. The legal transfer of ownership has yet to occur. The
Company is pursuing all available remedies at law, to prevent or delay such legal action but has no
assurance it will prevail. If the creditor prevails, Coin would have no more than thirty days to
vacate the premises. During March 2005, an additional procedure in the process to transfer title
occurred, such that, management believes that it is probable title to the plant in Coatzacolacos
will ultimately be transferred to the creditor or its assignee. As a result, management recorded
the loss on the foreclosure of the facility with a charge to consolidated operations of $2,900,964
during the fourth quarter of 2004. 
 Saudi Arabia Mining Properties Al Masane Project Location, Access and Transportation. The Al Masane project consists of a mining lease area of
approximately 44 square kilometers in southwestern Saudi Arabia approximately 640 km southeast of
Jeddah. Reference is made to the map on page 15 of this Report for information concerning the
location of the Al Masane project. Presently, the site can be accessed by heavy trucks via the 20
kilometer improved gravel road from Sifah. The elevation of the Al Masane project is approximately
1,620 m above sea level. Najran is the major town located in the area and is serviced by air from
Jeddah and Riyadh. Access from the town of Najran to the project site is 130 km by a paved road to
Sifah. From Sifah, access to the site is by a 20 km gravel road. There are scheduled flights from
Jeddah to Abha and Najran. From the west, there is paved road between Abha and Gusap, and then a
dirt road to the site. Conditions to Retain Title.The Saudi government granted the Company a mining lease for the Al
Masane area on May 22, 1993. As the holder of the Al Masane mining lease, the Company is solely
responsible to the Saudi Arabian government for rental payments and other obligations required by
the mining lease and repayment of an $11 million loan. The Companys interpretation of the mining
lease is that repayment of this loan will be made in accordance with a repayment schedule to be
agreed upon with the Saudi Arabian government from the Companys share of the projects cash flows.
The initial term of the lease is for a period of thirty (30) years beginning May 22, 1993, with the
Company having the option to renew or extend the term of the lease for additional periods not to
exceed twenty (20) years. Under the lease, the Company is obligated to pay advance surface rental
in the amount of 10,000 Saudi riyals (approximately $2,667 at the current exchange rate) per square
kilometer per year (approximately $117,350 annually) during the period of the lease. At December
31, 2003, approximately $586,000 of rental payments was in arrears. The Company, in accordance with
the most recent agreement with the Ministry, paid $266,000 of the back payments on January 3, 2005,
and is scheduled to pay the remaining $320,000 on December 31, 2005. In addition, the Company
must pay income tax in accordance with the income tax laws of Saudi Arabia then in force and pay
all infrastructure costs. The Saudi Arabian Mining Code provides that income tax will not be due
during the first stage of mining operations, which is the period of five years starting from the
earlier of (i) the date of the first sale of products or (ii) the beginning of the fourth year
since the issue of the mining lease. The lease gives the Saudi Arabian government priority to
purchase any gold production from the project as well as the right to purchase up to 10% of the
annual production of other minerals on the same terms and conditions then available to other
similar buyers and at current prices then prevailing in the free market. Furthermore, the lease
contains provisions requiring that preferences be given to Saudi Arabian suppliers and 8




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contractors, that the Company employ Saudi Arabian citizens and provide training to Saudi Arabian
personnel. History of Previous Operations. The Al Masane project contains extensive ancient mineral workings
and smelters which were discovered by the Company in 1967. From ancient inscriptions in the area,
it is believed that mining activities went on sporadically from 1000 BC to 700 AD. The ancients are
believed to have extracted mainly gold, silver and copper. Various regional investigations of the
Al Masane area have been carried out by the United States Geological Survey (USGS) mission. The
first systematic mapping was by Brown and Jackson who published the Geologic Map of the Asir
Quadrangle in 1959, and Greenwood (1980) carried out reconnaissance mapping in 1974 of the Wadi
Malahah quadrangle, which includes Al Masane. Conway (1984) undertook geologic mapping of the area
in 1976. Beginning in 1972, the Company undertook various geological, geophysical, and geochemical
surveys which lead to the discovery of the ore lenses. In 1975, Robertson Research International
(RRI) reviewed the exploration program completed by the Company, prepared a preliminary economic
evaluation on the deposit and recommended ongoing development. In 1977, Watts, Griffis and McOuat
Limited of Toronto, Canada (WGM) was retained by the Company to study the deposits and an
underground development program was recommended to define the tonnage and grade of the deposit. By
September 1980, a permanent exploration camp including water supply and power plant had been
established. A program of 3,700 m of underground access and development using trackless mining
equipment and 25,000 meters of underground diamond drilling and 20,000 meters of surface drilling
was completed by WGM in April 1981 (Phase I). Bulk metallurgical samples were taken from
underground and pilot plant testwork was done at the Colorado School of Mines Research to confirm
the laboratory testwork completed previously by Lakefield Research in Canada on the drill core.
This work was financed primarily with the $11 million interest-free loan from the Saudi Arabian
Ministry of Finance. Continued surface prospecting in the immediate area by the Company led to the
discovery of the Moyeath zone in late 1980. Although the surface expression of the
gossan1 was small, preliminary diamond drilling indicated a significant massive sulphide
deposit at depth. Between 1982 and 1987, infill diamond drilling was conducted on the Al Houra and
Moyeath deposits which expanded the ore reserves. In addition, a number of studies relating to
water supply for the project were completed. Environmental studies for the project were completed
by independent consultants in 1995 as part of the bankable feasibility studies. Description of Current Property Condition. WGM concluded that sufficient ore reserves had been
established to justify completion of a fully bankable feasibility study to determine the economic
potential of establishing a commercial mining and ore treatment operation at Al Masane. WGM and
SNC/GECO of Montreal, Canada conducted this study in 1982. They concluded that the Al Masane
deposits would support commercial production of copper, zinc, gold and silver and recommended
implementation of Phase II of the Al Masane development program, which would involve the
construction of underground mining, ore treatment and support facilities. WGMs September 1984
reevaluation of the project resulted in no substantial changes of their initial conclusions and
recommendations. In 1993, the Company commissioned WGM to prepare a new fully bankable feasibility
study to be used to obtain financing for commercial development of the project. The study, which
was completed in 1994, contained specific recommendations to insure that project construction was
accomplished expeditiously and economically. The engineering design and costing portions of the
study were performed by Davy International of Toronto, Canada (Davy). WGM   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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##### Table of Contents



and Davy updated this study in 1996. WGM recommended that the Al Masane reserves be mined by
underground methods using trackless mining equipment. Once the raw ore is mined, it would be
subjected to a grinding and treating process resulting in three products to be delivered to
smelters for further refining. These products are zinc concentrate, copper concentrate and
Dore2 bullion. The copper and zinc concentrates also contain valuable amounts of gold
and silver. These concentrates and the Dore bullion to be produced from the proposed cynidization
plant are estimated to be 22,000 ounces of gold and 800,000 ounces of silver and will be sold to
copper and zinc custom smelters and refineries worldwide. After the smelter refining process, the
metals could be sold by the Company or the smelter for the Companys account in the open market.
As recommended by WGM, the source of power for the Al Masane site will be from diesel powered
generators until such time as the site is connected to the national power grid, which is presently
20 km from the site. In the 1994 feasibility study, WGM stated that there is potential to find more reserves within the
lease area, as the ore zones are all open at depth. Further diamond drilling, which will be
undertaken by the Company, is required to quantify the additional mineralization associated with
these zones. A significant feature of the Al Masane ore zones is that they tend to have a much
greater vertical plunge than strike length; relatively small surface exposures such as the Moyeath
zone are being developed into sizeable ore tonnages by thorough and systematic exploration.
Similarly, systematic prospecting of the small gossans in the area could yield significant tonnages
of new ore. The 1996 update showed the estimated capital cost to bring the project into operation
to be $89 million. At a production rate of 700,000 tonnes per year, the operating cost of the
project (excluding concentrate freight, ship loading, smelter charges, depreciation, interest and
taxes) was estimated to be $38.49 per tonne of ore milled. Based only on average metal prices for 2002 through 2004, when metal prices were at their lowest
level during 2002 and 2003, and WGMs bankable feasibility studies, an analysis prepared by A.
Molinari & Associates concludes that the Al Masane project is noteconomically viable. However, if
spot prices as of December 31, 2004 or ten year average prices are used in the analysis, the
economic viability of the project becomes very attractive. The following chart illustrates the
change from the record low prices of 2002 and 2003 to current levels: Average Price
    
    
    Spot Price as
of
    
    
    Increase/for 2002-2004
    
    
    December 31, 2004
    
    
    (Decrease)Gold
    
    $360.00/oz.
    
    $435.00/oz.
    
    $75.00/oz.Silver
    
    $    5.39/oz.
    
    $    6.77/oz.
    
    $  1.38/oz.Copper
    
    $   0.945/lb.
    
    $    1.42/lb.
    
    $0.475/lb.Zinc
    
    $   0.405/lb.
    
    $    0.58/lb.
    
    $0.175/lb.
 Other than a base camp with accompanying facilities and equipment, as well as 3,700 m of
underground access and water wells completed by WGM in April 1981, there has been no other
significant infrastructure development by the Company at the Al Masane project. As noted   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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##### Table of Contents



above, the estimated total capital cost to bring the Al Masane project into production is $89
million. The Company does not presently have sufficient funds to bring this project into
production. Also, see Item 7. Managements Discussion and Analysis of Financial Condition and
Results of Operationsfor a further discussion of these matters. Pursuant to the mining lease agreement, when the Al Masane project is profitable the Company is
obligated to form a Saudi public stock company with the Saudi Arabian Mining Company, a corporation
wholly owned by the Saudi Arabian government (Maaden), as successor to and assignee of the
mining interests formerly held by the Petroleum Mineral Organization (Petromin). Maaden is the
Saudi Arabian governments official mining company. In 1994, the Company received instructions from
the Saudi Ministry of Petroleum and Mineral Resources stating that it is possible for the Company
to form a Saudi company without Petromin (now Maaden), but the sale of stock to the Saudi public
could not occur until the mines commercial operations were profitable for at least two years. The
instructions added that Petromin (now Maaden) still had the right to purchase shares in the Saudi
public stock company any time it desires. Title to the mining lease and the other obligations
specified in the mining lease would be transferred to the Saudi public stock company. However, the
Company would remain responsible for repaying the $11 million loan to the Saudi Arabian government. In order to commercially develop the Al Masane project, the Company entered into a joint venture
arrangement with Al Mashreq Company for Mining Investments (Al Mashreq), a Saudi limited
liability company owned by Saudi Arabian investors (including certain of the Companys
shareholders). The partners formed The Arabian Shield Company for Mining Industries Ltd., a Saudi
limited liability company (Arabian Mining), which was officially registered and licensed in
August 1998 to conduct business in Saudi Arabia and authorized to mine and process minerals from
the Al Masane lease area. Arabian Mining received conditional approval for a $38.1 million
interest-free loan from SIDF, and deposited $26 million of equity capital into its bank account.
In 1998, due to the severe decline in the open market prices for the minerals to be produced by the
Al Masane project and the financial crisis affecting southeast Asia, SIDF and other potential
lenders required additional guarantees and other financing conditions which were unacceptable to
the Company and Al Mashreq. As a consequence, Al Mashreq withdrew from the joint venture and all
equity capital was returned. By letter dated May 11, 1999, the Company informed the Ministry of
Petroleum and Mineral Resources (the Ministry) that the recent sharp drop in the market prices of
the metals to be produced from the mine at Al Masane, as a result of the economic crisis in
southeast Asia, made implementation of the development of the mine uneconomical at that time and
that, as a result, the Company would delay implementation of the project until metal prices
recovered. The Ministry notified the Company one year later that it must immediately implement the project and
in the fall of 2000 further notified the Company 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. A
written notice from the Ministry in the Summer of 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 and winter of 2001 and into 2002 reiterated the threat to terminate the
mining lease if the project was not immediately 11




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##### Table of Contents



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. 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 its letters to the
Ministry and the Crown Prince, 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 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, signed by William H. Lash III, Assistant Secretary for Market
Access and Compliance, dated March 6, 2003, it was stated: 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. On February 23, 2004, the Companys President received a letter from the Deputy Minister of
Petroleum and Mineral Resources 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 the
payment of the past due surface rentals. If agreeable, a document is to be signed to that effect.
The resolution stated further that if no agreement is reached, the Ministry of Finance will give
the Council of Ministers its recommendation regarding the $11 million loan granted to the Company.
After discussions with the Deputy Minister, the Company President responded, in a letter to the
Minister dated March 23, 2004, that the Company will agree to abide by the resolution and will
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 was attached to the letter. The Company also will agree to pay the past
due surface rentals, which now total approximately $586,000, in two equal installments, the first
on December 31, 2004 (which was paid) and the second on December 31, 2005 and will continue to pay
the surface rentals as specified in the Mining Lease Agreement. On May 15, 2004, an agreement was
signed with the Ministry covering these provisions. In the event the Company does not start to
implement the program during the two-year period, the matter will be referred to the concerned
parties to seek direction in accordance with the Mining Code and other concerned codes. The Saudi Government published and implemented the new Mining Code on October 22, 2004 which
contains several provisions the Company believes beneficial, not the least of which is a reduction
of taxes on profits from 45% to 20%. The Company, in a letter to the Minister dated 12




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##### Table of Contents



February 2, 2005, asked that the Company be granted fair compensation for the loss it incurred due
to the severe drop in the value of its stock. The drop in value coincided with the delay in
issuing the mining lease, and with the threat of termination of the lease during the 1999 to 2004
time frame and continued through the May 15, 2004 agreement when the Council of Ministries resolved
to allow the Company two more years to implement the project. The Ministry in its reply did not
agree that the Company deserved compensation. On February 24, 2005, the Company again wrote the
Minister, re-stating the arguments for fair compensation, and asked that the matter be referred to
arbitration in accordance with Article (58) of the new Mining Code. On March 4, 2005 the Company
received the Ministrys reply rejecting the request for arbitration and suggested that the Company
refer the matter to the Court of Grievances, which is the governing court of law in the Kingdom. The Company is consulting with counsel on further steps which might be taken, however any such
action will not affect the Companys right to implement the Al Masane project. The feasibility
study is being updated and if positive, as expected, the Company will again seek joint venture
partners to assist in implementing the project. There are no assurances that the Companys efforts
will be successful. Rock Formations and Mineralization. Three mineralized zones, the Saadah, Al Houra and Moyeath,
have been outlined by diamond drilling. The Saadah and Al Houra zones occur in a volcanic sequence
that consists of two mafic-felsic sequences with interbedded exhalative cherts and metasedimentary
rocks. The Moyeath zone was discovered after the completion of underground development in 1980.
It is located along an angular unconformity with underlying felsic volcanics and shales. The
principle sulphide minerals in all of the zones are pyrite, sphalerite, and chalcopyrite. The
precious metals occur chiefly in tetrahedrite and as tellurides and electrum. The following table
sets forth a summary of the diluted recoverable, proven and probable mineralized materials at the
Al Masane project, along with the estimated average grades of these mineralized materials: 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
 For purposes of calculating proven and probable mineralized materials, a dilution of 5% at zero
grade on the Saadah zone and 15% at zero grade on the Al Houra and Moyeath zones was assumed. A
mining recovery of 80% has been used for the Saadah zone and 88% for the Al Houra and Moyeath
zones. Mining dilution is the amount of wallrack adjacent to the ore body that is included in the
ore extraction process. Proven mineralized materials are those mineral deposits for which quantity is computed from
dimensions revealed in outcrops, trenches, workings or drill holes, and grade is computed from
results of detailed sampling. For ore deposits to be proven, the sites for inspection, sampling and
measurement must be spaced so closely and the geologic character must be so well defined that the
size, shape, depth and mineral content of reserves are well established. Probable mineralized 13




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materials are those for which quantity and grade are computed from information similar to that used
for proven mineralized materials, but the sites for inspection, sampling and measurement are
farther apart or are otherwise less adequately spaced. However, the degree of assurance, although
lower than that for proven mineralized materials, must be high enough to assume continuity between
points of observation. The metallurgical studies conducted on the ore samples taken from the zones indicated that 87.7% of
the copper and 82.6% of the zinc could be recovered in copper and zinc concentrates. Overall, gold
and silver recovery from the ore was estimated to be 77.3% and 81.3%, respectively, partly into
copper concentrate and partly as bullion through cyanide processing of zinc concentrates and mine
tailings. Further studies recommended by consultants may improve those recoveries and thus the
potential profitability of the project; however, there can be no assurances of this effect. Other Exploration Areas in Saudi Arabia During the course of its exploration and development work in the Al Masane area, the Company has
carried on exploration work in other areas in Saudi Arabia. In 1971, the Saudi Arabian government
awarded the Company exclusive mineral exploration licenses to explore and develop the Wadi Qatan
area in southwestern Saudi Arabia. The Company was subsequently awarded an additional license in
1977 for an area north of Wadi Qatan at Jebel Harr. These licenses have expired. In 1999, the Company applied for an exploration license covering an area of approximately 2,850
square kilometers, which surrounds the Al Masane mining lease area and includes the Wadi Qatan and
Jebel Harr areas. This area is referred to as the Greater Al Masane area. The Company has been
authorized in writing by the Saudi Arabian government to carry out exploration work in the area.
Previous exploration work has been carried on and paid for by the Company. The application for the
new exploration licenses is still pending and is expected to be acted upon now that the new Saudi
Arabian Mining Code has been approved. Reference is made to the map on page 16 of this Report for information concerning the location of
the foregoing areas. Wadi Qatan and Jebel Harr. The Wadi Qatan area is located in southwestern Saudi Arabia.
Jebel Harr is north of Wadi Qatan. Both areas are approximately 30 kilometers east of the Al Masane
area. These areas consist of 40 square kilometers, plus a northern extension of an additional 13
square kilometers. The Companys geological, geophysical and limited core drilling disclosed the
existence of massive sulfides containing an average of 1.2% nickel. Reserves for these areas have
not yet been classified and additional exploration work is required. When the Company obtains an
exploration license for the Wadi Qatan and Jebel Harr areas, the Company intends to continue its
exploratory drilling program in order to prove whether enough ore reserves exist to justify a
viable mining operation; however there is no assurance that a viable mining operation could be
established. Greater Al Masane. On June 22, 1999, the Company submitted a formal application for a
five-year exclusive mineral exploration license for the Greater Al Masane area of approximately
2,850 square kilometers, which surrounds the Al Masane mining lease area and includes the Wadi
Qatan and Jebel Harr areas. The Company previously worked in the Greater Al Masane area after
obtaining written authorization from the Saudi Ministry of Petroleum and Mineral Resources and has
expended over $3 million on exploration work. Geophysical, geochemical and 14




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geological work and diamond core drilling on the Greater Al Masane area has revealed mineralization
similar to that discovered at Al Masane. A detailed exploration program and expenditures budget
accompanied the application. The Company indicated on its application that it would welcome the
participation of Maaden in this license. Maaden, which has expressed an interest in the Greater
Al Masane area, also was informed directly by the Company that its participation as a joint venture
partner in the license would be welcomed. As previously stated, the Company does not possess current formal exploration licenses for any of
the above areas. The absence of such licenses creates uncertainty regarding the Companys rights
and obligations, if any, in these areas. The Company believes it has satisfied the Saudi Arabian
governments requirements in these areas and that the government should honor the Companys claims. The new Mining Code, adopted by the Saudi government in October, 2004, specifies that the size of
an exploration license cannot exceed one hundred (100) square kilometers. However, there is no
restriction on how many exploration licenses can be held by one party simultaneously. The Company
intends to select the best areas of the previously explored Greater Al Masane Area, and to re-apply
for those individually. The applications, per the Mining Code should be acted upon by the Minister
within 30 working days. Any refusal may be appealed to the Board of Grievances within 30 days of
the date of the ruling notice. 
 United States Mineral Interests The Companys mineral interests in the United States are its ownership interests in Pioche. Pioche
has been inactive for many years. Nevada Mining Properties. Pioches properties include 48 patented and 5 unpatented claims totaling
approximately 1,500 acres. All the claims are located in the Pioche Mining District, Lincoln
County, Nevada. There are prospects and mines on these claims that previously produced silver,
gold, lead, zinc and copper. The ore bodies are both oxidized and sulfide deposits, classified into
three groups: fissure veins in quartzite, mineralized granite porphyry and replacement deposits in
carbonate rocks (limestone and dolomites). There is a 300-ton-a-day processing mill on property
owned by Pioche. The mill is not currently in use and a significant expenditure would be required
in order to put the mill into continuous operation, if commercial mining is to be conducted on the
property. 
 Offices The Company has a year-to-year lease on space in an office building in Jeddah, Saudi Arabia, used
for office occupancy. The Company also leases a house in Jeddah that is used as a technical office
and for staff housing. The Company continues to lease office space in Dallas, Texas on a
month-to-month basis. 15




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(MAP) 16




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ITEM 3.Legal Proceedings. South Hampton is presently a defendant in ten lawsuits. The suits, seven of which are filed in
Madison County, Illinois, and which include up to 70 other defendants, primarily claim illness and
disease resulting from alleged exposure to chemicals, including benzene, butadiene and/or isoprene,
during their employment at various occupations. The plaintiffs claim that the companies engaged in
the business of manufacturing, selling and/or distributing these chemicals in a manner which
subjected them to liability for unspecified actual and punitive damages. South Hampton does not
believe any of plaintiffs in the Illinois lawsuits ever came in contact with its products and is
vigorously defending itself against these claims. The Company also believes it has adequate
insurance coverage to protect it financially from any damage awards that might be incurred. South Hampton is a defendant in two lawsuits filed in Jefferson County, Texas. The first lawsuit
was filed on September 2001, and alleges that the plaintiff became ill from exposure to asbestos
while employed by South Hampton from 1961 through 1975. Mediation occurred during 2003 in which
the plaintiff made a financial offer. South Hampton counter-offered a structured settlement. To
date the plaintiff has not accepted or rejected the counter-offer or withdrawn settlement offer. A
new trial date has been set for September 2005. Due to the time period in which the claimant was
allegedly injured, the Company has not been able to locate insurance coverage for this particular
suit. The Company plans on continuing negotiations in an attempt to settle the case. The
consolidated financial statements do not include any amounts related to this case. The second lawsuit was filed on May 29, 2003, and alleges that the plaintiff was exposed to
asbestos containing products in his duties as a welder, pipefitter assistant, laborer, floor hand
and mud hand/derrick hand from 1950  1984. Plaintiff claims that he suffers from an asbestos
related disease, although this has not been confirmed by a pathologist. Plaintiff testified in his
deposition that he worked as a pipefitter assistant building a plant for South Hampton in Vidor,
Orange County, Texas for approximately three months. Plaintiff made a settlement demand and South
Hampton has countered. This matter is currently on the Courts trial docket for May, 2005. Due to
the time period in which the claimant was allegedly injured, the Company has not been able to
locate insurance coverage for this particular suit. The Company plans to vigorously defend this
matter and continue negotiations to settle the case for nuisance value. The consolidated financial
statements do not include any amounts related to this case. In August 1997, the Executive Director of the Texas Commission on Environmental Quality (TCEQ),
filed a preliminary report and petition with the TCEQ alleging that South Hampton violated various
TCEQ rules, TCEQ permits issued to South Hampton, a TCEQ order issued to South Hampton, the Texas
Water Code, the Texas Clean Air Act and the Texas Solid Waste Disposal Act. The violations
generally relate to the management of volatile organic compounds in a manner that allegedly
violates the TCEQs air quality rules and the storage, processing and disposal of hazardous waste
in a manner that allegedly violates the TCEQs industrial and hazardous waste rules. The TCEQs
Executive Director recommended that the TCEQ enter an order assessing administrative penalties
against South Hampton in the amount of $709,408 and order South Hampton to undertake such actions
as are necessary to bring its operations at its facility and its bulk terminal into compliance with
Texas Water Code, the Texas Health and Safety Code, TCEQ rules, permits and orders. Appropriate
modifications were made by South Hampton where it appeared there were legitimate concerns. A
preliminary hearing was held in November 1997, but no further action was taken at that time. 17




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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 action be taken. On December 13, 2001, the TCEQ notified South Hampton that it found several alleged violations of
TCEQ 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. In April 2003 South Hampton received a revised Notice of Violation from the TCEQ. Various claims of
alleged violation were dropped, modified and added in the revised report and the total dollar
amount of the proposed administrative penalty was reduced to approximately $690,000. On May 25,
2003, a settlement hearing with the TCEQ was held and additional information was submitted on June
2, 2003, October 2, 2003 and November 4, 2003. South Hampton believes that the revised notice
contains incorrect information and erroneously delineates as ongoing problems matters that were
corrected immediately upon discovery several years ago. South Hampton has continued to communicate
with the TCEQ concerning ongoing emission control facility upgrades which are being implemented
independently of this action and the Company intends to continue to vigorously defend itself
against the outstanding Notice of Violation. Negotiations between South Hampton and the TCEQ are
expected to continue in order to reach a final settlement. 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. On February 23, 2004, by court order, a creditor was awarded Coins plant facilities as a result of
a mortgage foreclosure proceeding. The foreclosure proceedings were brought about by the lack of
activity at the facility during the 2000-2003 time period when market conditions did not allow the
Coin facility to be competitive. When the market appeared to be changing in early 2004, the Company
immediately took legal steps to delay and, if possible, prevent seizure of the plant. The Company
has remained in control of (and operates) the facility and is continuing its legal challenge to the
foreclosure. The ultimate outcome of the proceedings is difficult to predict and there is no
assurance the Company will maintain control and possession. The operation is continuing on a 18




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month to month basis as the dispute continues. Management recorded a loss on the foreclosure of
the facility with a charge to consolidated operations of $2,900,964 during the fourth quarter of
2004. See Note 18 to the Consolidated Financial Statements. 
 ITEM 4.Submission Of Matters To A Vote Of Security Holders. No matters were submitted to a vote of the Companys shareholders since the last shareholders
meeting in May 2001. 19




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PART II 
 ITEM 5.Market For Registrants Common Equity And Related Shareholder Matters. The Companys common stock has traded on the OTC Bulletin Board and the Pink Sheets at various
times during the last two fiscal years under the symbol: ARSD. The following table sets forth the
range of high and low bid prices for each quarter as reported by the OTC Bulletin Board and the
Pink Sheets. The quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not represent actual transactions. Pink SheetsHigh
    
    
    LowFiscal Year Ended December 31, 2004First Quarter ended March 31, 2004
    
    $
    0.05
    
    
    $
    0.04Second Quarter ended June 30, 2003
    
    $
    0.06
    
    
    $
    0.05Third Quarter ended September 30, 2004
    
    $
    0.10
    
    
    $
    0.06Fourth Quarter ended December 31, 2004
    
    $
    0.13
    
    
    $
    0.10
 OTC Bulletin BoardHigh
    
    
    LowFiscal Year Ended December 31, 2003First Quarter ended March 31, 2003
    
    $
    0.04
    
    
    $
    0.04Second Quarter from April 1, 2003 to May 27, 2003
    
    $
    0.06
    
    
    $
    0.05
 Pink SheetsHigh
    
    
    LowSecond Quarter from May 28, 2003 to June 30, 2003
    
    $
    0.06
    
    
    $
    0.06Third Quarter ended September 30, 2003
    
    $
    0.06
    
    
    $
    0.03Fourth Quarter ended December 31, 2003
    
    $
    0.07
    
    
    $
    0.05
 At December 31, 2004, there were approximately 753 record holders of the Companys common stock.
The Company has not paid any dividends since its inception and, at this time, does not have any
plans to pay any dividends in the foreseeable future. The provisions of the Refining Company
agreements with its lender restrict the declaration and payment of dividends and other
distributions to an amount not exceeding $50,000 per month, provided there is no event of default
under the relevant loan agreement. See Note 8 to the Consolidated Financial Statements. See Note 11 to the Consolidated Financial Statementsfor information about stock options
outstanding at December 31, 2004. 20




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##### Table of Contents



ITEM 6.Selected Financial Data. The following is a five-year summary of selected financial data of the Company (in thousands,
except per share amounts): 2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Revenues
    
    $
    59,793
    
    
    $
    39,625
    
    
    $
    36,753
    
    
    $
    32,713
    
    
    $
    42,612Net Income (Loss)
    
    $
    (2551
    )
    
    $
    (3,505
    )
    
    $
    692
    
    
    $
    (2,601
    )
    
    $
    (4,288
    )Net Income
(Loss) Per Share-Diluted
    
    $
    (.11
    )
    
    $
    (.15
    )
    
    $
    .03
    
    
    $
    (.11
    )
    
    $
    (.19
    )Total Assets (at December 31)
    
    $
    51,048
    
    
    $
    52,672
    
    
    $
    55,621
    
    
    $
    55,748
    
    
    $
    57,599Notes Payable (at December 31)
    
    $
    11,744
    
    
    $
    11,744
    
    
    $
    11,744
    
    
    $
    11,744
    
    
    $
    11,924Current Portion of Long-Term
Debt (at December 31)
    
    $
    3,071
    
    
    $
    3,170
    
    
    $
    7,127
    
    
    $
    7,599
    
    
    $
    8,061Total Long-Term Obligations
(at December 31)
    
    $
    4,916
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
 
 ITEM 7. Managements Discussion And Analysis Of Financial Condition And Results Of Operations. 
 General Statements in Items 7 and 7A, as well as elsewhere in, or incorporated by reference in, this
Annual Report on Form 10-K regarding the Companys financial position, business strategy and plans
and objectives of the Companys management for future operations and other statements that are not
historical facts, are forward-looking statements as that term is defined under applicable Federal
securities laws. In some cases, forward-looking statements can be identified by terminology such
as may, will, should, expects, plans, anticipates, contemplates, proposes,
believes, estimates, predicts, potential or continue or the negative of such terms and
other comparable terminology. Forward-looking statements are subject to risks, uncertainties and
other factors that could cause actual results to differ materially from those expressed or implied
by such statements. Such risks, uncertainties and factors include, but are not limited to, general
economic conditions domestically and internationally; insufficient cash flows from operating
activities; difficulties in obtaining financing; outstanding debt and other financial and legal
obligations; lawsuits; competition; industry cycles; feedstock, specialty petrochemical product and
mineral prices; feedstock availability; technological developments; regulatory changes;
environmental matters; foreign government instability; foreign legal and political concepts; and
foreign currency fluctuations, as well as other risks detailed in the Companys filings with the
U.S. Securities and Exchange Commission, including this Annual Report on Form 10-K, all of which
are difficult to predict and many of which are beyond the Companys control. 
 Liquidity And Capital Resources The Company operates in two business segments, specialty petrochemicals (which is composed of the
entities owned by the Petrochemical 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 all of the Companys
internally generated cash flows. Throughout the 1990s the Petrochemical Company 21




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enjoyed the benefits of economic expansion in the US and relatively low and stable energy prices.
In 2000, energy prices became more volatile and the economy slowed, and the Company suffered
operating losses as the petrochemical industry struggled to adjust to the new environment.
Beginning in February 2001, the decline of feedstock and natural gas prices returned the
Petrochemical Company to a positive cash flow, which it attained for the remainder of 2001 and
throughout 2002. Demand for specialty solvents, while not enough to justify operating the plant at
capacity, was strong enough to cover fixed and variable costs. The toll processing segment of the
business remained strong throughout 2001 and 2002 and contributed to the Petrochemical Companys
steady performance. The Company also was able to successfully hedge its feedstock and a portion of
its fuel gas to dampen the effects of the new volatility in the energy markets. During 2003, the
industry again experienced tighter margins resulting from the rise in feedstock prices and
unfortunately, due to increased scrutiny of the industry after the Enron fiasco, several of the
Companys trading partners in the hedging program dropped out of the business and the Company was
again at the mercy of rising petroleum costs. Feedstock prices remained at historically higher
prices throughout 2003 which resulted in operating losses for the segment in 2003. After January
2004, feedstock prices temporarily began to fall back to more moderate levels and at the same time
the Company was able to establish a trading relationship with an international integrated oil
concern. When oil prices began their dramatic rise in 2004, the Company had financial swaps in
place which gave it protection against sudden and volatile price swings in feedstock prices and to
a lesser extent, fuel gas costs. Product demand also grew in 2004. South Hampton obtains its feedstock requirements from a sole source vendor. At April 30, 2004,
South Hampton owed this supplier approximately $7,000,000. As discussed in Note 8 to the
Consolidated Financial Statements, on May 7, 2004, South Hampton agreed to provide the supplier a
first lien on the Silsbee plant as security for the feedstock account. In addition to agreeing to
continue the feedstock supply arrangement, the supplier also signed a letter of intent whereby the
supplier will purchase up to $1,800,000 of capital equipment for use by South Hampton to facilitate
the execution of a new processing agreement between a large toll processing customer and South
Hampton. Under the agreement, South Hampton would share the revenue of the toll processing
agreement and ownership of the equipment would revert to South Hampton after a specified period of
time. South Hampton is still considering this agreement as one option for financing the project. South Hampton entered into a $3,250,000 revolving credit agreement in September 1999 with a bank,
which terminated in June 2003. In July 2003, a Purchase and Sale (Factoring) Agreement with a limit
of $4,500,000 was instituted with the same bank. In July, 2004, the Bank raised the limit to
$6,000,000 on the factoring arrangement to accommodate the increased sales volume of South Hampton
and higher sales prices, which increased Accounts Receivable amounts. The limit was raised to
$8,500,000 in January, 2005 as sales volume and prices continued to increase. Product imported
from Coin increased volume during the latter part of 2004. South Hampton generally operates with
sufficient working capital by having sold an average of approximately 68% of Accounts Receivable
under the agreement at any one time. The terms and conditions of this agreement are discussed in
Note 4 to the Consolidated Financial Statements. In connection with the acquisition of the common stock of Coin, South Hampton and Gulf State
entered into a $3,500,000 loan agreement in December 1999 with a commercial lending company. The
loan was paid in full in 2003. 22




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At December 31, 2004 Coin had two loans payable to Mexican banks in the outstanding principal
amounts of $0 and $2,044,096. The terms and conditions of these loans are discussed in Note 8 to
the Consolidated Financial Statements. Also the creditor of the first loan initiated a mortgage
foreclosure proceeding in February, 2004 that resulted in a court ordered award of the plant
facilities to the creditor. The Company continues to control and operate the facility and is
vigorously protesting the foreclosure action by the lender. The final outcome of the proceedings
is difficult to predict and there is no assurance the Company will maintain possession or ownership
of the facility. Management recorded a loss on the foreclosure of the facility with a charge to
consolidated operations of $2,900,964 during the fourth quarter of 2004. See Note 18 to the
Consolidated Financial Statements. Mining Segment. This segment is in the development stage. Its most significant asset is the Al
Masane mining project in Saudi Arabia, which is a net user of the Companys available cash and
capital resources. As discussed in Item 2. Properties, implementation of the project has been
delayed until the open market prices for the minerals to be produced by the mine improve. At that
time, the Company will attempt to locate a joint venture partner, form a joint venture and,
together with the joint venture partner, attempt to obtain acceptable financing to commercially
develop the project. There is no assurance that a joint venture partner can be located, a joint
venture formed or, if it is formed, that the joint venture would be able to obtain acceptable
financing for the project. Management also is addressing two other significant financing issues within this segment. These
issues are the $11,000,000 note payable due the Saudi Arabian government and accrued salaries and
termination benefits of approximately $947,000 due employees working in Saudi Arabia (this amount
does not include any amounts due the Companys President and Chief Executive Officer who also
primarily works in Saudi Arabia and is owed accrued salary and termination benefits of
approximately $1,195,000). Regarding the note payable, this loan was originally due in ten annual installments beginning in
1984. The Company has not made any repayments nor has it received any payment demands or other
communications regarding the note payable from the Saudi government. By memorandum to the King of
Saudi Arabia in 1986, the Saudi Ministers of Finance and Petroleum recommended that the $11,000,000
note be incorporated into a loan from SIDF to finance 50% of the cost of the Al Masane project,
repayment of the total amount of which would be made through a mutually agreed upon repayment
schedule from the Companys share of the operating cash flows generated by the project. The Company
remains active in Saudi Arabia and received the Al Masane mining lease at a time when it had not
made any of the agreed upon repayment installments. Based on its experience to date, management
believes that as long as the Company diligently attempts to explore and develop the Al Masane
project no repayment demand will be made. The Company has communicated to the Saudi government that
its delay in repaying the note is a direct result of the governments lengthy delay in granting the
Al Masane lease and requested formal negotiations to restructure this obligation. Based on its
interpretation of the Al Masane mining lease and other documents, management believes the
government is likely to agree to link repayment of this note to the Companys share of the
operating cash flows generated by the commercial development of the Al Masane project and to a
long-term installment repayment schedule. In the event the Saudi government was to demand immediate
repayment of this obligation, which management considers unlikely, the Company would be unable to
pay the entire amount due. Under the most recent agreement signed with the Ministry in May 2004,
the Company has an obligation, among other things, to start development of the mining operation
within two years from the date of the agreement. If the Company does not 23




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##### Table of Contents



comply with this obligation, it is unsure what will be the resulting status of the lease or of the
future of the debt as discussed. With respect to the accrued salaries and termination benefits due employees working in Saudi
Arabia, the Company plans to continue employing these individuals until it is able to generate
sufficient excess funds to begin payment of this liability. Management will then begin the process
of gradually releasing certain employees and paying its obligation as they are released from the
Companys employment. At this time, the Company has no definitive plans for the development of its domestic mining
assets. It periodically receives proposals from outside parties who are interested in possibly
developing or using certain assets. Management will continue to review these proposals as they are
received, but at this time does not anticipate making any significant domestic mining capital
expenditures or receiving any significant proceeds from the sale or use of these assets. If the Company seeks additional outside financing, there is no assurance that sufficient funds can
be obtained. It is also possible that the terms of any additional financing that the Company would
be able to obtain would be unfavorable to the Company and its existing shareholders. The report of the Companys independent registered public accounting firm states that the Company
had incurred cumulative losses through December 31, 2004 of $19,108,460 and had an excess of
current liabilities over current assets of $20,428,408 at December 31, 2004. As discussed in Notes
2 and 8 to the Consolidated Financial Statements, the Company was in default of various loan
agreements totaling $17,509,108, including accrued interest. All of these matters raise substantial
doubt about the Companys ability to continue as a going concern in its present structure. While
the petrochemical segment is able to operate within its environment, it does not have or generate
sufficient resources to meet the debt or development needs of the mining operation. The table below summarizes the following contractual obligations of the Company: Payments due by periodLess thanContractual Obligations
    
    Total
    
    
    1 year
    
    
    1-3 years
    
    
    3-5 years
    
    
    More than 5 yearsLong-Term Debt Obligations
    
    
    7,859,168
    
    
    
    3,044,096
    
    
    
    4,815,072
    
    
    
    
    
    
    
    Capital Lease Obligations
    
    
    153,407
    
    
    
    33,471
    
    
    
    66,942
    
    
    
    52,994
    
    
    
    Operating Lease Obligations
    
    
    4,832,028
    
    
    
    1,090,666
    
    
    
    1,242,600
    
    
    
    738,600
    
    
    
    1,760,162Purchase Obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other Long-Term
Liabilities Reflected on
the Companys Balance
Sheet under GAAP
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    12,844,603
    
    
    
    4,168,233
    
    
    
    6,124,614
    
    
    
    791,594
    
    
    
    1,760,162
 24




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Results of Operations Comparison of the Years 2004, 2003, 2002 Specialty Petrochemicals Segment This discussion of the petrochemicals segment of the business uses the table below for purposes of
illustration and discussion. The reader should rely on the Audited Financial Statements attached to
this report for financial analysis under United States generally accepted accounting principles. South Hampton facility sales increased in each of the last three years. Historically, over the
last twenty years, specialty products markets generally did not experience significant volatility
and prices might only be adjusted once or twice a year. After the unstable years of 2000 and 2001,
which saw a great deal of price volatility, the petroleum markets in 2002 were relatively stable as
compared to what has become the norm during recent times. The Company learned in 2003 that a more
aggressive approach to product pricing is required in todays environment. From 2002 to 2003, the Company experienced an increase of 17% in Gross Sales on products while
volume during the same period increased by only 3%, indicating that despite demand being somewhat
flat, the Company successfully increased sales prices in response to rising feedstock costs. But,
as seen in the final results, price increases alone were not sufficient to maintain the desired
level of profitability. From 2003 to 2004, the same Gross Sales figures indicate an increase of
48% with a volume increase of approximately 12%. Thus, results of the dramatic rise in oil prices
over the period are evident. It is important to note that the utilization rates described
previously in this report and increased sales volumes for 2004 indicate that market demand played a
major role in the increased success of the Company. Strong demand allowed the Company to raise
prices to the necessary level and still maintain market share. Toll Processing Revenue fell during the period 2002 to 2003 and again in 2004 due to the loss of a
major customer in August, 2003. The Company successfully serviced the customers needs for over
five years and in early 2003, processing difficulties developed. Analysis indicated the customers
feedstock supply had changed characteristics and the Companys equipment was no longer suitable for
producing the products required. The contract was terminated by mutual consent. The Company
remains dedicated to maintaining a certain level of toll processing business in the facility and
will continue to pursue opportunities. The Company, in January 2005, signed a contract with a
current toll processing customer to add equipment sufficient to increase production capacity to up
to twice the current levels by October 2005. The Coin facility has had difficult times in recent years as discussed in Note 18 of the
Consolidated Financial Statements. Sales in 2002 were the result of periodically operating the
plant, reselling material purchased from the South Hampton facility, and other miscellaneous
activities. As indicated, very little activity took place in 2003, and then in early 2004 the
market conditions changed to allow the Company to start the plant and operate almost continuously
from March through the end of the year. The Coin facility has during that time supplied the
majority of pentane product sold in Mexico and has exported about half of its production into the
US to be marketed by South Hampton. The future of the plant and its ownership by TOCCO is
uncertain but the Company intends to pursue every legal remedy possible to maintain its position.
During March 2005, an additional procedure in the process to transfer title occurred, such that, 25




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management believes that it is probable title to the plant in Coatzacolacos will ultimately be
transferred to the creditor or its assignee. As a result, management recorded the loss on
foreclosure of the facility with a charge to consolidated operations of $2,900,964 during the
fourth quarter of 2004. The following is a three year summary of selected financial data of the
Company (in thousands): 2004
    
    
    2003
    
    
    2002TOCCOProduct Sales
    
    $
    52,428
    
    
    $
    34,988

    
    
    $
    29,943Toll Processing
    
    $
    3,775
    
    
    $
    3,864
    
    
    $
    4,114Gross Revenue
    
    $
    56,203
    
    
    $
    38,852
    
    
    $
    34,057Volume of sales (thousand
gallons)
    
    
    32,685
    
    
    
    29,154
    
    
    
    28,252COINGross Revenue
    
    $
    3,590
    
    
    $
    773
    
    
    $
    2,696TOCCOCost of Materials
    
    $
    34,986
    
    
    $
    23,877
    
    
    $
    17,199Total Operating Expense
    
    $
    15,193
    
    
    $
    13,107
    
    
    $
    12,054Natural Gas Expense
    
    $
    4,472
    
    
    $
    4,295
    
    
    $
    3,070General & Administrative
Expense
    
    $
    3,326
    
    
    $
    3,086
    
    
    $
    2,944Capital Expenditures
    
    $
    2,091
    
    
    $
    126
    
    
    $
    614
 Total Cost of Materials increased dramatically over the last three years as mentioned in the
discussion of Gross Sales. After a fairly flat 2002, prices increased dramatically to record highs
in early 2003, declined in early spring, and began a steady climb for the next eighteen months.
Prices continue to climb today. The Company uses natural gasoline for its feedstock which is the
heavier liquid remaining after butane and propane are removed from liquids produced by natural gas
wells. The material is a commodity product in the oil/petrochemical markets and generally is
readily available. Alternative uses are in motor gasoline blending and as a feedstock in other
petrochemical processes, including ethylene crackers. The price of natural gasoline generally has
an 88% correlation to the price of crude oil, meaning its market price rises and falls with crude
oil approximately 88% of the time. The Company maintains a hedge position on approximately half of
its feedstock needs, buying financial swaps to protect the price for three to six months in advance
as opportunities arise. The numbers in the table above reflect the final price of materials,
including results of the realized and unrealized gains and losses of the hedging program. Material
purchases rose by 39% from 2002 to 2003 and by 47% from 2003 to 2004. Operating Expenses for the petrochemical segment have increased over the past three years, with
natural gas, its single largest expense, leading the way. The cost of natural gas purchases rose
40% from 2002 to 2003, and another 4% from 2003 to 2004. The dramatic rise from 2002 to 2003 was a
major contributor to the weak financial results for that time period. The Company also hedges a
portion of its natural gas supply costs using primarily options contracts for up to nine months
ahead. That program and its results are discussed in Note 17 to the Consolidated 26




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Financial Statements. Operating Expenses in general increased over the three year period  9%
from 2002 to 2003; and another 16% from 2003 to 2004. The rise from 2002 to 2003 was primarily due
to fuel gas cost increases. The increase in Operating Expenses during 2004 resulted from higher
fuel gas usage with increased plant utilization, increased maintenance due to increased production,
and catch up of maintenance which had been delayed in the prior year due to weak financial
performance. By the end of 2004, maintenance was current and equipment reliability was good. General and Administrative costs have remained relatively flat for the periods discussed above.
There were no changes in the number of personnel employed and insurance costs have been flat,
reflecting only increased amounts needed to cover expanding operations and sales. The Company has
successfully emphasized its safety program to assist in keeping insurance costs under control. Capital Expenditures were average for the needs of the plant during 2002, and were minimized during
2003 as the Company struggled with high fuel and feedstock costs. In 2004, as conditions improved,
the Company invested money into key areas of the plant and pipeline to ensure a safe and reliable
facility. In the later part of 2004, the Company began acquiring equipment needed to de-bottleneck
the PenHex Unit and increase capacity. The TCEQ permit to begin construction was obtained in
January 2005. The expanded operation is expected to be completed in the first quarter of 2005. Mining Segment and General Corporate Expenses. None of the Companys mining operations generate 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 had net operating loss carry forwards of approximately $7,610,000 at December 31, 2004.
These loss carry forwards expire during the years 2005 through 2023. New Accounting Standards In 2004, the FASB issued SFAS No. 123R, Share-Based Payments,which will require that the cost
resulting from all share-based payments be recognized in the financial statements, based upon the
application of a fair value-based measurement method. SFAS 123R is effective as of the beginning
of the third quarter of 2005. The Company does not anticipate the adoption of the Statement to
have a material impact on the results of operations. In November 2004, the FASB issued SFAS No. 151, Inventory Costs. SFAS No. 151 amends guidance in
ARB No. 43, Chapter 4, Inventory Pricing, to clarify the accounting for abnormal amounts of idle
facility expense, freight, handling costs, and wasted material (spoilage). The Statement requires
that these items be recognized as current-period charges. SFAS No. 151 is effective for fiscal
years beginning after June 15, 2005. The Company does not expect the adoption of SFAS No. 151 to
have a material impact on the results of operations. In December 2004, the FASB issued SFAS No. 153, Exchanges of Non-monetary Assets. SFAS No. 153
amends APB Opinion No. 29, Accounting for Non-monetary Transactions to eliminate 27




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the exception for non-monetary exchanges of similar productive assets and replaces it with a
general exception for exchanges of non-monetary assets that do not have commercial substance. A
non-monetary exchange has commercial substance if the future cash flows of the entity are expected
to change significantly as a result of the exchange. The Statement is effective for fiscal periods
beginning after June 15, 2005. The Company does not expect adoption of SFAS No 153 to have a
material impact on the results of operations. 
 Critical Accounting Policies Recoverability of Investments Management periodically reviews and evaluates the recoverability of the Companys investments,
which primarily include its mineral exploration and development projects. The significant judgment
required in managements recoverability assessment is the determination of the fair value of the
investment. Accounting standards require that if the sum of the future cash flows expected to
result from a companys asset, undiscounted and without interest charges, is less than the reported
value of the asset, an asset impairment must be recognized in the financial statements. The amount
of impairment to recognize is calculated by subtracting the fair value of the asset from the
reported value of the asset. The recoverability of the carrying values of the Companys development
properties are assessed by comparing the carrying values to estimated future net cash flows from
each property. The Companys most significant asset is the Al Masane mining project in Saudi
Arabia. In February 2005, for purposes of estimating future cash flows, the price assumptions
contained in the 1996 update to the Al Masane projects feasibility study, which was prepared by
WGM, were updated by an independent consultant. See Item 2. Properties. These price assumptions are
averages over the projected ten-year life of the Al Masane mine and are $1.40 per pound for copper,
$.53 per pound for zinc, $400 per ounce for gold and $6.50 per ounce for silver. Copper and zinc
comprise in excess of 80% of the expected value of production. For its other mineral properties and
related assets, carrying values were compared to estimated net realizable values based on market
comparables. Using these price assumptions, no asset impairments existed. The Company assesses the carrying values of its assets on an ongoing basis. Factors which may
affect carrying values include, but are not limited to, mineral prices, capital cost estimates, the
estimated operating costs of any mines and related processing, ore grade and related metallurgical
characteristics, the design of any mines and the timing of any mineral production. There are no
assurances that, 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 any of its mineral properties. Environmental Liabilities The petrochemical operations by South Hampton are subject to the rules and regulations of the TCEQ,
which inspects the operations at various times for possible violations relating to air, water and
industrial solid waste requirements. As noted in Item 1. Businessand Item 3. Legal Proceedings,
evidence of groundwater contamination was discovered in 1993. The recovery process, initiated in
1998, is proceeding as planned and is expected to continue for many years. Also, in 1997 the TCEQ notified South Hampton of several alleged violations relating to air quality
rules and the storage, processing and disposal of hazardous waste. Some claims have 28




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been dropped, some have been settled and others continue to be negotiated. It is the Companys
policy to accrue remediation costs based on estimates of known environmental remediation exposure.
At December 31, 2004, a liability of $200,000 has been accrued to cover future estimated costs of
these environmental issues. Foreign Currency and Operations The Company has undeveloped mining interests in Saudi Arabia and a majority interest in a refining
company in Mexico. These interests are subject to foreign laws and foreign conditions, with the
attendant varying risks and advantages. Foreign exchange controls, foreign legal and political
concepts, foreign government instability, international economics and other factors create risks
not necessarily comparable with those involved in doing business in the United States. Any changes
in these conditions and influences could have a material adverse effect on the Companys financial
condition, operating results and cash flows. The functional currency for each of the Companys two foreign operations is the U.S. dollar.
Transaction gains or losses, as a result of conversion from the local currency to the U.S. dollar,
are reflected in the statements of operations as a foreign exchange transaction gain or loss. The
Company does not employ any practices to minimize foreign currency risks. The exchange rate of the
Saudi riyal to the U.S. dollar has not changed in many years, but there is no guarantee that this
will not change. The foreign exchange transaction gains and losses as reflected in the statements
of operations are a result of changes in the exchange rate of the Mexican peso to the U.S. dollar,
which does fluctuate periodically. These changes have not been material. 
 ITEM 7A.Quantitative and Qualitative Disclosures about Market Risk. The market risk inherent in the Companys financial instruments represents the potential loss
resulting from adverse changes in interest rates, foreign currency rates and commodity prices. The
Companys exposure to interest rate changes results from its variable rate debt instruments which
are vulnerable to changes in short term United States prime interest rates. At December 31, 2004,
2003 and 2002, the Company had approximately $2,500,000, $2,500,000 and $5,800,000, respectively,
in variable rate debt outstanding. A hypothetical 10% change in interest rates underlying these
borrowings would result in annual changes in the Companys earnings and cash flows of approximately
$18,200, $18,200 and $34,300 at December 31, 2004, 2003 and 2002, respectively. The Company is also exposed to market risk in the exchange rate of the Saudi Arabian riyal and the
Mexican peso as measured against the United States dollar. The Company does not view these
exposures as significant and has not acquired or issued any foreign currency derivative financial
instruments. The Petrochemical Company purchases all of its raw materials, consisting of feedstock and natural
gas, on the open market. The cost of these materials is a function of spot market oil and gas
prices. As a result, the Petrochemical Companys revenues and gross margins could be affected by
changes in the price and availability of feedstock and natural gas. As market conditions dictate,
the Petrochemical Company from time to time will engage in various hedging techniques including
financial swap and option agreements. The Petrochemical Company does not use such financial
instruments for trading purposes and is not a party to any leveraged derivatives. The Companys
policy on such hedges is to buy positions as opportunities present themselves in the market and to
hold such positions until maturity, thereby offsetting the physical purchase and price of the
materials 29




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##### Table of Contents



At the end of 2003, market risk for 2004 was estimated as a hypothetical 10% increase in the cost
of natural gas and feedstock over the market price prevailing on December 31, 2003. To help
mitigate this risk, as of December 31, 2003, the Company had natural gas option agreements in
effect expiring in September 2004 through March 2005. Additionally, the Company entered into option
agreements for natural gas and financial swap agreements for feedstock throughout the year. Had
the option and swap agreements outstanding as of December 31, 2003 not been in place, and assuming
2004 total product sales volumes at the same rate as 2003, such an increase would have resulted in
an increase in the cost of natural gas and feedstock of approximately $3,500,000 in fiscal 2004,
The results of the option agreements and financial swaps for 2004 are discussed further in Note 17
to the Consolidated Financial Statements. At the end of 2004, market risk for 2005 was again estimated as a hypothetical 10% increase in the
cost of natural gas and feedstock over the market price prevailing on December 31, 2004. To
mitigate this risk, at December 31, 2004, the Company had natural gas option agreements in effect
expiring in February 2005 and March 2005, which covered approximately 70% of the fuel gas usage.
Additionally, during the first quarter of 2005 the Company entered into natural gas option
agreements that expire through October 2005. The options cover approximately 50% of the average
monthly fuel gas requirements. The Company also entered into financial swap agreements covering
approximately 50% of the feedstock requirements through the second quarter of 2005. Assuming 2005
total refined product sales volumes at the same rate as 2004, the 10% market risk increase will
result in an increase in the cost of natural gas and feedstock of approximately $4,000,000 in
fiscal 2005, before considering the effect of the option and swap agreements outstanding as of
December 31, 2004. 
 ITEM 8.Financial Statements And Supplementary Data. The financial statements of the Company and the financial statement schedules, including the report
of the independent registered public accounting firm thereon, are included elsewhere in this
document. 
 ITEM 9.Changes In and Disagreements with Accountants on Accounting and Financial Disclosure. The disclosure required by this item has been previously reported by the Company by a Current
Report on Form 8-K dated January 31, 2003, a Current Report on Form 8-K/A dated January 31, 2003
and a Current Report on Form 8-K dated June 16, 2003. 
 ITEM 9A.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 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 30




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##### Table of Contents



the President and Chief Executive Officer and Treasurer, as appropriate to allow timely decisions
regarding required disclosure. During the quarter ended December 31, 2004, there were 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. 31




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##### Table of Contents



PART III 
 ITEM 10.Directors and Executive Officers of the Registrant. The following sets forth the name and age of each director of the Company, the date of his election
as a director and all other positions and offices with the Company presently held by him. Name; Business Experience; Other Directorships
    
    Age
    
    Date of ElectionJohn A. Crichton
    
    88
    
    May 1967Chairman of the Board of the Company since
1967; Chief Executive Officer of the Company
from 1967 to February 1994Hatem El-Khalidi
    
    80
    
    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
    
    61
    
    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
    
    67
    
    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
 Each director of the Company is elected annually to serve until his successor is elected
and qualified. Each person listed in the foregoing table has served as a director since the date of
election indicated. In connection with an increase in the number of positions on the Board of
Directors in 1993, at the request of Sheik Fahad Al-Athel, the Company appointed Mohammed O.
Al-Omair, who had served as a director of the Company from November 1989 to March 1991, to fill one
of the newly-created vacancies. See Item 3. Legal Proceedingsfor a discussion of the cease and
desist order entered into with the SEC enjoining Mr. El-Khalidi from future violations of the
federal securities laws. The Board of Directors of the Company has an Audit Committee which is currently composed of Messrs.
Ghazi Sultan and Mohammed O. Al-Omair. The Board has determined that each of the members of the
Audit Committee meets the Securities and Exchange Commission and National Association of Securities
Dealers standards for independence. The Board has also determined that Mohammed O. Al-Omair meets
the Securities and Exchange Commission criteria of an audit committee financial expert. 32




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##### Table of Contents



The following table sets forth the name of each executive officer of the Company, his age and all
the positions and offices with the Company held by him: Name
    
    Positions
    

AgeJohn A. Crichton
    
    Chairman of the Board and Director
    
    
    88Hatem El-Khalidi
    
    President, Chief Executive Officer and Director
    
    
    80Nicholas N. Carter
    
    Secretary and Treasurer/President - TOCCO
    
    
    58
 Each executive officer of the Company serves for a term extending until his successor is
elected and qualified. Information concerning Messrs. Crichton and El-Khalidi is set forth above.
Mr. Carter was elected Secretary /Treasurer of the Company effective October 1, 2004 upon the
retirement of the previous officeholder, Mr. Drew Wilson, who had served in that capacity since
1986. Mr. Carter is a Certified Public Accountant and has worked for Texas Oil and Chemical Co.
and subsidiaries since 1977. Mr. Carter has been President of TOCCO and its subsidiaries since
1987, prior to which time he served as Treasurer and Controller of those companies. The Company has adopted a Code of Ethics that applies to the Companys principal executive officer,
principal financial officer, principal accounting officer and controller, and to persons performing
similar functions. A copy of the Code of Ethics has been filed as an exhibit to this Annual Report
on Form 10-K. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act 1934 requires the Companys officers and directors,
and persons who own more than 10% of a registered class of the Companys equity securities, to file
reports of ownership and changes in ownership with the SEC. Officers, directors and greater than
10% stockholders are required by SEC regulation to furnish the Company with copies of all Section
16(a) forms they file. To the best of the Companys knowledge, during the fiscal year ended
December 31, 2004, all Section 16(a) filing requirements applicable to its officers, directors and
greater than 10% beneficial owners were complied with. 
 ITEM 11.Executive Compensation. The following information summarizes annual compensation for services in all capacities to the
Company for the fiscal years ended December 31, 2004, 2003 and 2002 of the Chief Executive Officer
and the other four most highly compensated executive officers of the Company: 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,
    
    
    2004
    
    
    $
    72,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    8,000President and Chief
    
    
    2003
    
    
    $
    72,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    8,000Executive Officer
    
    
    2002
    
    
    $
    72,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    8,000Nicholas N. Carter
    
    
    2004
    
    
    $
    139,629
    
    
    $
    10,680
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    President, TOCCO
    
    
    2003
    
    
    $
    113,874
    
    
    $
    26,250
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2002
    
    
    $
    84,500
    
    
    $
    61,700
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 33




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##### Table of Contents



(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, 2004.(2)
    
    Includes $28,591, $37,639 and $55,898 in compensation for the fiscal years ended December 31,
2004, December 31, 2003 and December 31, 2002, respectively, that was deferred at the election
of Mr. El-Khalidi. All present deferred compensation owing to Mr. El-Khalidi aggregating
$910,746 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, 2004,
December 31, 2003 and December 31, 2002, 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, 2004 was $284,000. In accordance with Saudi Arabian employment laws, the Company is required to accrue
termination benefits for Mr. El-Khalidi. The amount accrued for the benefit of Mr. El-Khalidi is
based on the number of years of service and compensation. Accrued benefits are payable upon
termination of employment. The Company has engaged in other transactions and entered into other
arrangements, directly or indirectly, with its officers and directors, the primary purpose of
certain of which was to provide additional compensation to such persons. See Item 13,Certain
Relationships and Related Transactions. The Company is authorized to pay its non-employee directors a fee of $200 for each Board meeting
and $100 for each committee meeting which they attend, in addition to reimbursing them for expenses
incurred in connection with their attendance. No compensation or expense was paid in relation to
Board activities during 2004. AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTIONS/SAR VALUES
 The following table shows information concerning the exercise of stock options during the fiscal
year ended December 31, 2004 by the executive officers named in the Summary Compensation Table and
the estimated value of unexercised options held by such individuals at year-end: Number of Securities
    
    Value of UnexercisedUnderlying Unexercised
    
    In-The-MoneyOptions/SARs at
    
    Options/SARs atShares Acquired on
    
    Value
    

    FY-End(#)
    
    FY-End ($)(1)Name
    
    Exercise (#)
    
    Realized($)
    
    Exercisable/Unexercisable
    
    Exercisable/UnexercisableHatem El-Khalidi
    
    
    0
    
    
    
    0
    
    
    400,000/0
    
    $0/0
   (1)
    
    Based on the closing price of $.14 of the Companys Common Stock on the Pink Sheets
on December 31, 2004. 
 ITEM 12.Security Ownership of Certain Beneficial Owners and Management. The following table sets forth, as of December 31, 2004, information as to the beneficial ownership
of the Companys Common Stock by each person known by the Company to beneficially own more than 5%
of the Companys outstanding Common Stock, by each of the Companys executive officers named in the
Summary Compensation Table, by each of the Companys directors and by all directors and executive
officers of the Company as a group. 34




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##### Table of Contents



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
    
    
    3,586,468
    
    
    
    15.8
    %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. 35




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##### Table of Contents



Based on its stock ownership records, the Company believes that, as of December 31, 2004,
Saudi Arabian stockholders currently hold approximately 61% of the Companys outstanding Common
Stock, without giving effect to the exercise of presently exercisable stock options held by certain
of such stockholders. Accordingly, if all or any substantial part of the Saudi Arabian stockholders
were considered as a group, they could be deemed to control the Company as that term is defined
in regulations promulgated by the SEC. Although they have orally waived their rights, certain of
the Companys Saudi Arabian stockholders are parties to written agreements providing them with the
right to purchase their proportionate share of additional shares sold by the Company. The management of the Company has welcomed the substantial stock investment by its Saudi
stockholders. Saudi investors have contributed vitally needed capital to the Company since 1974.
Whether the Companys Saudi stockholders will be a continuing source of future capital is not known
at this time. In confronting the need for additional funds, management of the Company will follow
the policy of considering all potential sources consistent with prudent business practice and the
best interests of all its stockholders. In the course of considering methods of future financing
and other matters relating to the operations of the Company, management of the Company anticipates
that in the ordinary course of business it will receive recommendations and suggestions from its
principal stockholders. 
 ITEM 13.Certain Relationships And Related Transactions. The Company directly owns approximately 55% of the outstanding capital stock of Pioche. Mr. John A.
Crichton is currently a director and President of Pioche, and Mr. Hatem El-Khalidi is currently a
director and Executive Vice President of Pioche. The Company is providing the funds necessary to
cover the Pioche operations. During 2004 and 2003, the Company made payments of approximately
$19,000 and $17,800, respectively, for such purposes. As of December 31, 2004, Pioche owed the
Company $97,339 as a result of advances made by the Company. The indebtedness bears no interest. Pursuant to a sharing arrangement, the Company and its subsidiaries share personnel, office space
and other overhead expenses in Dallas, Texas with Mr. John A. Crichton, Chairman of the Board of
the Company. Monthly rental on the office space is approximately $1,600. The Company pays
approximately $1,100 per month for rent and approximately $980 per month for personnel and other
overhead expenses pursuant to such arrangement. During 2004, South Hampton incurred product transportation costs of approximately $414,000 with
Silsbee Trading and Transportation Corp. (STTC), a private trucking and transportation carrier in
which Nicholas N. Carter, the President of TOCCO, and Richard Crain, former Vice President of
TOCCO, each had a 50% equity interest. Mr. Crain resigned on January 2, 2004 as an officer of
TOCCO and a co-owner of STTC. Pursuant to a lease agreement, South Hampton leases transportation
equipment from STTC. Lease payments at the beginning of 2004 were approximately $34,500 per month
and were raised to approximately $45,000 per month as new and additional tractors and trailers were
added to the fleet throughout the year. With the increase in volume of the products produced with
the new expansion of the facility which is currently underway, additional transportation equipment
is expected to be required. Under the lease arrangement, STTC provides the transportation
equipment and all normal maintenance on such equipment and South Hampton provides the drivers,
fuel, management of transportation operations and insurance on the transportation equipment.
Approximately 95% of STTCs 36




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##### Table of Contents



income will be derived from such lease arrangement. The lease agreement operated on a
month-to-month basis until January 1, 2004, when a new five year agreement was signed. The
transportation company also entered into a capital lease with South Hampton for acquisition of a
motorized man lift. At the end of the five year lease period, title to the equipment will be
transferred to South Hampton for a final payment of one dollar. 
 ITEM 14.Principal Accountant Fees and Services. The table below sets forth the fees that Moore Stephens Travis Wolff, LLP billed the Company for
the audit of its financial statements for the fiscal years ended December 31, 2004 and 2003 and the
review of its financial statements for the quarterly periods in the year ended December 31, 2004,
and all other fees Moore Stephens Travis Wolff, LLP billed the Company for services rendered during
the fiscal years ended December 31, 2004 and December 31, 2003, respectively: 2004
    
    
    2003Audit Fees
    
    $
    131,626
    
    
    $
    96,874Audit-Related Fees
    
    $
    0
    
    
    $
    0Tax Fees
    
    $
    0
    
    
    $
    0All Other Fees
    
    $
    
    
    
    $
    2500
 Under its charter, the Audit Committee must pre-approve all auditing services and permitted
non-audit services (including the fees and terms thereof) to be performed for the Company by its
independent auditor, subject to the de minimis exceptions for non-audit services under the
Securities Exchange Act of 1934, as amended, which are approved by the Audit Committee prior to the
completion of the audit. The Audit Committee may delegate authority to grant pre-approvals of
audit and permitted non-audit services to subcommittees, provided that decisions of the
subcommittee to grant pre-approvals must be presented to the full Audit Committee at its next
scheduled meeting. During 2004, each new engagement of Moore Stephens Travis Wolff, LLP was
approved in advance by the Audit Committee. 37




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##### Table of Contents



PART IV 
 ITEM 15.Exhibits, Financial Statement Schedules, And Reports On Form 8-K. (a)1. The following financial statements are filed with this Report: Reports of Independent Registered Public Accounting Firm.Consolidated Balance Sheets dated December 31, 2004 and 2003.Consolidated Statements of Operations for the three years ended
December 31, 2004.Consolidated Statement of Stockholders Equity for the three years
ended December 31, 2004.Consolidated Statements of Cash Flows for the three years ended
December 31, 2004.Notes to Consolidated Financial Statements.
 2. The following financial statement schedules are filed with this Report: Schedule II  Valuation and Qualifying Accounts for the three years
ended December 31, 2004.
 3. Independent Auditors Report covering the financial statements of Productos Quimicos Coin,
S.A. de C.V. 4. 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. 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)).
 38




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##### Table of Contents



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)).
 39




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##### Table of Contents



ExhibitNumber
    
    
    
    Description10(l)
    
    -
    
    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(m)
    
    -
    
    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(n)
    
    -
    
    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(o)
    
    -
    
    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(p)
    
    -
    
    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)).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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POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS that each of Arabian American Development Company, a Delaware
corporation, and the undersigned directors and officers of Arabian American Development Company,
hereby constitutes and appoints John A. Crichton its or his true and lawful attorney-in-fact and
agent, for it or him and in its or his name, place and stead, in any and all capacities, with full
power to act alone, to sign any and all amendments to this Report, and to file each such amendment
to the Report, with all exhibits thereto, and any and all other documents in connection therewith,
with the Securities and Exchange Commission, hereby granting unto said attorney-in-fact and agent
full power and authority to do and perform any and all acts and things requisite and necessary to
be done in and about the premises as fully to all intents and purposes as it or he might or could
do in person, hereby ratifying and confirming all that said attorney-in-fact and agent may lawfully
do or cause to be done by virtue hereof. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Company has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly
authorized. ARABIAN AMERICAN DEVELOPMENTCOMPANYDated: April 8, 2005
    
    
    
    By:
    
    /s/ Hatem El-KhalidiHatem El-KhalidiPresident and Chief Executive Officer
 42




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Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed
below by the following persons on behalf of the Company in the capacities indicated on April 8,
2005. Signature
    
    Title/s/ Hatem El-Khalidi
    
    President, Chief Executive Officer and DirectorHatem El-Khalidi
    
    (principal executive officer)/s/ Nicholas N. Carter
    
    Secretary and TreasurerNicholas N. Carter
    
    (principal financial and accounting officer)/s/ John A. Crichton
    
    Chairman of the Board and DirectorJohn A. Crichton/s/ Mohammed O. Al-Omair
    
    DirectorMohammed O. Al-Omair/s/ Ghazi Sultan
    
    DirectorGhazi Sultan
 43




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INDEX TO FINANCIAL STATEMENTS PageReport of Independent Registered Public Accounting Firm
    
    
    F-1Consolidated Balance Sheets at December 31, 2004 and 2003
    
    
    F-3Consolidated Statements of OperationsFor the Years Ended December 31, 2004, 2003 and 2002
    
    
    F-5Consolidated Statement of Stockholders EquityFor the Years Ended December 31, 2004, 2003 and 2002
    
    
    F-6Consolidated Statements of Cash FlowsFor the Years Ended December 31, 2004, 2003 and 2002
    
    
    F-7Notes to Consolidated Financial Statements
    
    
    F-8INDEX TO FINANCIAL STATEMENT SCHEDULESReport of Independent Registered Public Accounting Firm on Schedules
    
    
    F-29Schedule II  Valuation and Qualifying AccountsFor the Three Years Ended December 31, 2004
    
    
    F-30INDEX TO SUPPLEMENTAL INDEPENDENT AUDITORS REPORTSIndependent Auditors Report on Productos Quimicos Coin, S.A. DE D.V.For the Financial Statements at December 31, 2004
    
    
    F-31Independent Auditors Report on Productos Quimicos Coin, S.A. DE D.V.For the Financial Statements at December 31, 2003
    
    
    F-33Independent Auditors Report on Productos Quimicos Coin, S.A. DE D.V.For the Financial Statements at December 31, 2002
    
    
    F-35
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Arabian American Development Company and Subsidiaries
Dallas, Texas We have audited the accompanying consolidated balance sheets of Arabian American Development
Company and Subsidiaries (the
Company) as of December 31, 2004 and 2003 and the related consolidated statements of operations,
stockholders equity and cash flows for each of the three years in the period ended December 31,
2004. These consolidated financial statements are the responsibility of the Companys management.
Our responsibility is to express an opinion on these financial statements based on our audits. We
did not audit the financial statements of Productos Quimicos Coin S.A. de. C.V. (Coin), a
majority-owned subsidiary, as of December 31, 2004 and 2003, or for the three years in the period
ended
December 31, 2004, the statements of which reflect total assets constituting 1% and 5%,
respectively, and total revenues constituting 10%, 3% and 10%, respectively, of the consolidated
totals. These statements were audited by other auditors whose reports thereon have been furnished
to us and our opinion, insofar as it relates to amounts included for Coin, is based solely on the
reports of the other auditors. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, based on our audits and the reports of other auditors, the consolidated financial
statements referred to above present fairly, in all material respects, the consolidated financial
position of Arabian American Development Company and Subsidiaries as of December 31, 2004 and 2003
and the consolidated results of operations and cash flows for each of the three years in the period
ended
December 31, 2004 in conformity with U. S. generally accepted accounting principles. F-1




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The accompanying financial statements have been prepared assuming that the Company will continue as
a going concern. As shown in the consolidated financial statements, the Company incurred cumulative
losses through December 31, 2004 of $19,108,460 and had an excess of current liabilities over
current assets of $20,428,408 at December 31, 2004. As discussed in Notes 2 and 8 to the
consolidated financial statements, at December 31, 2004, the Company was in default of various loan
agreements totaling $17,509,108, including accrued interest. If resolution with the
Companys creditors is not achieved, and the Company does not generate positive cash flow adequate
for its operations and loan obligations, the Company will have to raise debt or equity capital.
There is no assurance that debt financing or capital would be available. These matters raise
substantial doubt about the Companys ability to continue as a going concern. The financial
statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ MOORE STEPHENS TRAVIS WOLFF, LLP Dallas, Texas
March 20, 2005 F-2




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ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES 
 CONSOLIDATED BALANCE SHEETS December 31,2004
    
    
    2003ASSETSCURRENT ASSETSCash
    
    $
    623,202
    
    
    $
    177,716Trade receivables, net
    
    
    3,198,081
    
    
    
    2,810,858Inventories
    
    
    1,243,693
    
    
    
    656,481Total current assets
    
    
    5,064,976
    
    
    
    3,645,055PLANT, PIPELINE AND EQUIPMENT  AT COST
    
    
    14,536,618
    
    
    
    18,406,665LESS ACCUMULATED DEPRECIATION
    
    
    (9,044,884
    )
    
    
    (9,659,837
    )PLANT, PIPELINE AND EQUIPMENT, NET
    
    
    5,491,734
    
    
    
    8,746,828AL MASANE PROJECT
    
    
    36,420,565
    
    
    
    36,165,120OTHER INTERESTS IN SAUDI ARABIA
    
    
    2,431,248
    
    
    
    2,431,248MINERAL PROPERTIES IN THE UNITED STATES
    
    
    1,058,102
    
    
    
    1,211,674OTHER ASSETS
    
    
    581,258
    
    
    
    472,572TOTAL ASSETS
    
    $
    51,047,883
    
    
    $
    52,672,497
 F-3




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ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS  Continued December 31,2004
    
    
    2003LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIESAccounts payable
    
    $
    2,649,899
    
    
    $
    7,587,963Accrued interest
    
    
    4,133,964
    
    
    
    3,467,657Accrued liabilities
    
    
    1,145,399
    
    
    
    832,236Accrued liabilities in Saudi Arabia
    
    
    2,749,128
    
    
    
    2,671,840Notes payable
    
    
    11,025,833
    
    
    
    11,025,780Notes payable to stockholders
    
    
    718,000
    
    
    
    718,000Current portion of long-term debt
    
    
    3,071,161
    
    
    
    3,169,821Total current liabilities
    
    
    25,493,384
    
    
    
    29,473,297LONG-TERM DEBT
    
    
    4,915,534
    
    
    
    DEFERRED REVENUE
    
    
    175,141
    
    
    
    166,543MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES
    
    
    816,879
    
    
    
    834,956COMMITMENTS AND CONTINGENCIESSTOCKHOLDERS EQUITYCommon stock  authorized, 40,000,000 shares of $.10
par value; issued and outstanding, 22,431,994 shares
in 2004 and 2003
    
    
    2,243,199
    
    
    
    2,243,199Additional paid-in capital
    
    
    36,512,206
    
    
    
    36,512,206Accumulated deficit
    
    
    (19,108,460
    )
    
    
    (16,557,704
    )Total stockholders equity
    
    
    19,646,945
    
    
    
    22,197,701TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    51,047,883
    
    
    $
    52,672,497
 The accompanying notes are an integral part of the consolidated financial statements.




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ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF OPERATIONS For the years ended December 31, 2004
    
    
    2003
    
    
    2002RevenuesRefined product sales
    
    $
    56,018,926
    
    
    $
    35,760,439
    
    
    $
    32,638,719Processing fees
    
    
    3,774,528
    
    
    
    3,864,294
    
    
    
    4,114,28159,793,454
    
    
    
    39,624,733
    
    
    
    36,753,000Operating costs and expensesCost of refined product sales and processing
    
    
    52,465,984
    
    
    
    36,374,346
    
    
    
    29,529,641General and administrative
    
    
    4,257,957
    
    
    
    4,387,957
    
    
    
    4,087,875Depreciation
    
    
    1,123,474
    
    
    
    1,367,218
    
    
    
    1,414,20257,847,415
    
    
    
    42,129,521
    
    
    
    35,031,718Operating income (loss)
    
    
    1,946,039
    
    
    
    (2,504,788
    )
    
    
    1,721,282Other income (expense)Interest income
    
    
    28,089
    
    
    
    31,954
    
    
    
    37,621Interest expense
    
    
    (1,600,718
    )
    
    
    (1,244,749
    )
    
    
    (1,354,042
    )Minority interest
    
    
    9,095
    
    
    
    9,343
    
    
    
    9,064Foreign exchange transaction gain (loss)
    
    
    (94,040
    )
    
    
    149,551
    
    
    
    240,106Miscellaneous income
    
    
    61,743
    
    
    
    53,826
    
    
    
    38,032Loss on foreclosure of Coin plant assets (Note 18)
    
    
    (2,900,964
    )
    
    
    
    
    
    
    (4,496,795
    )
    
    
    (1,000,575
    )
    
    
    (1,029,219
    )Income (loss) before income taxes
    
    
    (2,550,756
    )
    
    
    (3,505,363
    )
    
    
    692,063Income tax expense
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    (2,550,756
    )
    
    $
    (3,505,363
    )
    
    $
    692,063Basic and diluted net income (loss) per common share
    
    $
    (0.11
    )
    
    $
    (0.15
    )
    
    $
    0.03Basic and
diluted weighted average number of common shares outstanding
    
    
    22,731,994
    
    
    
    22,731,994
    
    
    
    22,731,994
 The accompanying notes are an integral part of the consolidated financial statements.




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ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES 
 CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY For the years ended December 31, 2004, 2003, and 2002 AdditionalCommon stock
    
    
    paid-in
    
    
    AccumulatedShares
    
    
    Amount
    
    
    capital
    
    
    deficit
    
    
    TotalDECEMBER 31, 2001
    
    
    22,431,994
    
    
    $
    2,243,199
    
    
    $
    36,512,206
    
    
    $
    (13,744,404
    )
    
    $
    25,011,001Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    692,063
    
    
    
    692,063DECEMBER 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
    )
    
    $
    19,646,945
 The accompanying notes are an integral part of the consolidated financial statements.




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ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 31, 2004
    
    
    2003
    
    
    2002Operating activitiesNet income (loss)
    
    $
    (2,550,756
    )
    
    $
    (3,505,363
    )
    
    $
    692,063Adjustments to reconcile net income (loss)
to net cash provided by operating activities:Depreciation
    
    
    1,123,474
    
    
    
    1,367,218
    
    
    
    1,414,202Increase (decrease) in deferred revenue
    
    
    8,598
    
    
    
    (11,263
    )
    
    
    56,934Unrealized (gain) loss on feedstock swaps
    
    
    184,800
    
    
    
    
    
    
    
    (505,890
    )Loss on foreclosure of Coin plant assets
    
    
    2,900,964
    
    
    
    
    
    
    
    Changes in operating assets and liabilities:(Increase) decrease in trade receivables
    
    
    (387,223
    )
    
    
    (1,511,489
    )
    
    
    (111,807
    )(Increase) decrease in inventories
    
    
    (587,212
    )
    
    
    243,580
    
    
    
    (176,748
    )(Increase) decrease in other assets
    
    
    (108,686
    )
    
    
    (36,328
    )
    
    
    51,581(Decrease) increase in accounts payable and accrued
liabilities
    
    
    1,436,722
    
    
    
    3,443,594
    
    
    
    (871,743
    )Increase in accrued interest
    
    
    853,832
    
    
    
    909,179
    
    
    
    801,590Increase in accrued liabilities in
Saudi Arabia
    
    
    77,288
    
    
    
    181,835
    
    
    
    63,898Other
    
    
    (18,077
    )
    
    
    (11,476
    )
    
    
    (74,447
    )Net cash provided (used) by operating activities
    
    
    2,933,724
    
    
    
    1,069,487
    
    
    
    1,339,633Investing activitiesAdditions to Al Masane Project
    
    
    (255,445
    )
    
    
    (346,963
    )
    
    
    (202,016
    )Additions to plant, pipeline and equipment
    
    
    (1,949,760
    )
    
    
    (156,363
    )
    
    
    (545,939
    )(Additions to) reduction in mineral properties in
the United States
    
    
    153,572
    
    
    
    (664
    )
    
    
    (41
    )Net cash used in investing activities
    
    
    (2,051,633
    )
    
    
    (503,990
    )
    
    
    (747,996
    )Financing activitiesAdditions to notes payable and long-term obligations
    
    
    
    
    
    
    
    
    
    
    299,236Reduction of notes payable and long-term obligations
    
    
    (436,605
    )
    
    
    (706,952
    )
    
    
    (771,231
    )Net cash used in financing activities
    
    
    (436,605
    )
    
    
    (706,952
    )
    
    
    (471,995
    )Net increase (decrease) in cash
    
    
    445,486
    
    
    
    (141,455
    )
    
    
    119,642Cash at beginning of year
    
    
    177,716
    
    
    
    319,171
    
    
    
    199,529Cash at end of year
    
    $
    623,202
    
    
    $
    177,716
    
    
    $
    319,171
 The accompanying notes are an integral part of the consolidated financial statements.




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ARABIAN AMERICAN
DEVELOPMENT COMPANY AND SUBSIDIAIRES  NOTE 1 
    BUSINESS AND OPERATIONS OF THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES Business and Operations of the Company Arabian American Development Company (the Company) was organized as a Delaware corporation in
1967. The Companys principal business activities include manufacturing various specialty
petrochemical products (also referred to as the Petrochemical Segment) and developing mineral
properties in Saudi Arabia and the United States (also referred to as the Mining Segment). All
of its mineral properties are presently undeveloped and require significant capital expenditures
before beginning any commercial operations (see Notes 2, 6 and 7). The Companys Petrochemical Segment activities are primarily conducted through a wholly-owned
subsidiary, American Shield Refining Company (the Petrochemical Company), which owns all of the
capital stock of Texas Oil and Chemical Co. II, Inc. (TOCCO). TOCCO owns all of the capital
stock of South Hampton Refining Company (South Hampton), and approximately 93% of the capital
stock of Productos Quimicos Coin S.A. de. C.V. (Coin). South Hampton owns all of the capital
stock of Gulf State Pipe Line Company, Inc. (Gulf State). South Hampton owns and operates a
specialty petrochemical products facility near Silsbee, Texas that is one of the largest domestic
manufacturers of pentanes. Gulf State owns and operates three pipelines that connect the South
Hampton facility to a natural gas line, to South Hamptons truck and rail loading terminal and to
a marine terminal owned by an unaffiliated third party. Coin owns and operates a specialty
petrochemical products facility in Coatzacoalcos, on the Yucatan Peninsula. The Company also
owns approximately 55% of the capital stock of a Nevada mining company, Pioche-Ely Valley Mines,
Inc. (Pioche), which does not conduct any substantial business activity. Pioche and the
Companys mineral properties in Saudi Arabia constitute its Mining Segment. The Company consolidates all subsidiaries for which it has majority ownership or voting control
that is other than temporary. All material inter-company accounts and transactions are
eliminated. Summary of Significant Accounting Policies Cash, Cash Equivalents and Short-Term Investments- The Companys principal banking and
short-term investing activities are with local and national financial institutions. Short-term
investments with an original maturity of three months or less are classified as cash equivalents.
At December 31, 2004 and 2003, there were no cash equivalents or short-term investments. Inventories- Finished products and feedstock are recorded at the lower of cost, determined on
the last-in, first-out method (LIFO), or market for inventories in the United States and on the
average cost method, or market, for inventories held in Mexico. Mineral Exploration and Development Costs- All costs related to the acquisition, exploration,
and development of mineral deposits are capitalized until such time as (1) the Company commences
commercial exploitation of the related mineral deposits at which time the costs will be
amortized, (2) the related project is abandoned and the capitalized costs are charged to
operations, or (3) when any or all deferred costs are permanently impaired. At December 31,
2004, none of the projects had reached the commercial exploitation stage. No indirect overhead
or general and administrative costs have been allocated to any of the projects. Plant, Pipeline and Equipment- Plant, pipeline and equipment are stated at cost. Depreciation
is provided over the estimated service lives using the straight-line method. Gains and losses
from disposition are included in operations in the period incurred. Other Assets- Other assets include catalysts used in petrochemical operations, prepaid expenses,
a note receivable and certain petrochemical assets. F-8




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ARABIAN AMERICAN
DEVELOPMENT COMPANY AND SUBSIDIAIRES  NOTE 1 
    BUSINESS AND OPERATIONS OF THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
Continued Environmental Liabilities- Remediation costs are accrued based on estimates of known
environmental remediation exposure. Ongoing environmental compliance costs, including
maintenance and monitoring costs, are expensed as incurred. Deferred Revenue- Deferred revenue represents funds advanced by three suppliers and customers to
defray development and processing costs and are being amortized over
five year and fifteen year periods. Statements of Cash Flows- In the statements of cash flows, cash includes cash held in the United
States, Mexico, and Saudi Arabia. Significant non-cash investing and financing activities in
2004 include: (a) South Hampton entered into a security agreement with its feedstock supplier on
an open account of $6.9 million to be reduced quarterly by $250,000, (b) South Hampton entered
into a capital lease with a transportation equipment leasing company for the purchase of a
manlift for approximately $137,000, and (c) the foreclosure of Coin plant assets resulted in the
write-off of plant assets of $4,218,256, notes payable of $1,129,767 and accrued interest of
$187,525 for a loss of $2,900,964. Significant activities in 2003 include the pay-off of South
Hamptons $3.25 million revolving bank note with proceeds from sales of accounts receivables
under a Purchase and Sale Agreement with the bank. Net Income (Loss) Per Share- The Company computes basic income (loss) per common share based on
the weighted-average number of common shares outstanding. Diluted income (loss) per common share
is computed based on the weighted-average number of common shares outstanding plus the number of
additional common shares that would have been outstanding if dilutive potential common shares,
consisting of stock options and shares which could be issued upon conversion of debt, had been
issued (Note 14). Foreign Currency and Operations- The functional currency for each of the Companys subsidiaries
is the US dollar. Transaction gains or losses as a result of conversion from the subsidiaries
local currency to the US dollar are reflected in the statements of operations as a foreign
exchange transaction gain or loss. The Company does not employ any practices to minimize foreign
currency risks. The Companys foreign operations have been, and will continue to be, affected by periodic changes
or developments in the foreign countries political and economic conditions as well as changes in
their laws and regulations. Any such changes could have a material adverse effect on the
Companys financial condition, operating results or cash flows. Saudi Arabian investors, including certain members of the Companys board of directors, own
approximately 61% of the Companys outstanding common stock at December 31, 2004. Management Estimates- The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual results could
differ from those estimates. Stock-Based Compensation- The Company accounts for employee stock options under the intrinsic
value method prescribed by Accounting Principles Board Opinion No. 25 and has adopted the
disclosure requirements of Statement of Financial Accounting Standards (SFAS) No. 123, as amended
by Statement
of Financial Accounting Standards No. 148. Accordingly, the compensation expense of any employee
stock options granted is the excess, if any, of the quoted market price of the Companys F-9




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ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIAIRES NOTE 1  BUSINESS AND OPERATIONS OF THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
Continued common stock at the grant date over the amount the employee must pay to acquire the stock. See
Note 11 for additional information relating to stock options. Derivatives- Statement of Financial Accounting Standard (SFAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended by SFAS Nos. 138 and 149, 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.
SFAS No. 133, as amended, was adopted by the Company on January 1, 2001 and SFAS No. 149 was
adopted on June 30, 2003. The Company has periodically entered into commodity swap derivative agreements to decrease the
price volatility of its natural gasoline feedstock requirements and has entered into option
contracts to decrease the price volatility of its natural gas fuel requirements in 2003 and 2004.
These derivative agreements were not designated as hedges by the Company. (See Note 17.) Fair Value of Financial Instruments- The Companys financial instruments include cash and cash
equivalents, notes payable and long-term debt. The carrying amount of cash and cash equivalents
approximates fair value at December 31, 2004 and 2003 due to the short-term maturity of these
items. The Companys long-term debt is fixed rate debt. It is not practical to estimate the
fair value of the Companys notes payable because quoted market prices do not exist for similar
type debt instruments, and there are no available comparative instruments as a basis to value the
notes. New Accounting Standards-In August 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 143 Accounting for Asset Retirement Obligations
(SFAS No. 143), that established uniform methodology for accounting for estimated costs
associated with legal obligations related to retirement of assets. SFAS No. 143 is effective for
fiscal years beginning after June 15, 2002. The adoption of SFAS No. 143 at January 1, 2003 did
not have a material impact on the consolidated financial statements. In April 2002, the FASB issued SFAS No. 145, Rescission of No. 4, (Reporting Gains and Losses
from Extinguishment of Debt), No. 44 (Accounting for Intangible Assets of Motor Carriers), No.
64, (Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements), Amendment of FASB
Statement No. 13 (Accounting for Leases) and Technical Corrections. The adoption
of SFAS No. 145 at January 1, 2003 did not have a material impact on the Companys financial
position, results of operations or cash flows. In November 2002, the FASB issued FASB Interpretation (FIN) No. 45, Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,
an interpretation of FASB Statements No. 5, 57 and 107 and Rescission of FASB Interpretation No.
34. FIN 45 elaborates on the existing disclosure requirements for most guarantees, including
loan guarantees
such as standby letters of credit and warranty obligations. The disclosure requirements of FIN
45 were effective for both interim and annual periods that end after December 15, 2002. The
adoption of FIN 45 did not have a material impact on the Companys consolidated financial
statements. F-10




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ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIAIRES NOTE 1  BUSINESS AND OPERATIONS OF THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 
Continued In January 2003, the FASB issued FIN No. 46, Consolidation of Variable Interest Entities and in
December 2003, issued FIN 46R, which superceded FIN 46 (collectively FIN 46) to address perceived
weaknesses in the accounting and financial reporting for investments or interests in entities
commonly
known as special purpose or off-balance-sheet entities. The adoption of FIN 46 did not have a
material impact on the Companys consolidated financial statements. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity. The adoption of SFAS No. 150 did not have a
material impact on the Companys consolidated financial position. In 2004, the FASB issued SFAS No. 123R, Share-Based Payments,which will require that the cost
resulting from all share-based payments be recognized in the financial statements, based upon the
application of a fair value-based measurement method. SFAS 123R is effective as of the beginning
of the third quarter of 2005. The Company does not anticipate the adoption of the Statement to
have a material impact on the results of operations. In November 2004, the FASB issued SFAS No. 151, Inventory Costs. SFAS No. 151 amends guidance
in ARB No. 43, Chapter 4, Inventory Pricing, to clarify the accounting for abnormal amounts of
idle facility expense, freight, handling costs, and wasted material (spoilage). The Statement
requires that these items be recognized as current-period charges. SFAS No. 151 is effective for
fiscal years beginning after June 15, 2005. The Company does not expect the adoption of SFAS No.
151 to have a material impact on the results of operations. In December 2004, the FASB issued SFAS No. 153, Exchanges of Non-monetary Assets. SFAS No.
153 amends APB Opinion No. 29, Accounting for Non-monetary Transactions to eliminate the
exception for non-monetary exchanges of similar productive assets and replaces it with a general
exception for  exchanges of non-monetary assets that do not have commercial substance. A
non-monetary exchange has commercial substance if the future cash flows of the entity are
expected to change significantly as a result of the exchange. The Statement is effective for
fiscal periods beginning after June 15, 2005. The Company does not expect adoption of SFAS No
153 to have a material impact on the results of operations. NOTE 2  LIQUIDITY MATTERS, REALIZATION OF ASSETS AND BUSINESS RISKS The accompanying consolidated financial statements have been prepared in conformity with accounting
principles generally accepted in the United States of America, which contemplate the realization of
assets and the satisfaction of liabilities in the normal course of business. As shown in the
financial statements, the Company had an excess of current liabilities over current assets of
$20,428,408 at December 31, 2004. Saudi Arabia
    
    
    United States
    
    
    Mexico
    
    
    TotalCurrent assets
    
    $
    322,964
    
    
    $
    4,429,927
    
    
    $
    312,085
    
    
    $
    5,064,976Current liabilities
    
    
    14,856,165
    
    
    
    3,584,406
    
    
    
    7,052,813
    
    
    
    25,493,384Excess of current liabilities
 over current assets
    
    $
    (14,533,201
    )
    
    $
    845,521
    
    
    $
    (6,740,728
    )
    
    $
    (20,428,408
    )
 F-11




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ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIAIRES NOTE 2  LIQUIDITY MATTERS, REALIZATION OF ASSETS AND BUSINESS RISKS -
Continued As discussed in Note 8, the Companys Mining Segment was not in compliance with certain covenants
in its loan agreements. Also, in the petrochemical segment, the plant facilities of Coin have
been foreclosed by a lender (See Note 18). Historically, the Companys cash flows from operating activities in the petrochemical segment have
been insufficient to meet the operating needs, planned capital expenditures and debt service
requirements of the mining segment. The Company has continually sought additional debt and equity
financing in order to fund its mineral development and other investing activities and experienced
difficulties obtaining additional financing. The Company presently needs additional financing in
order to fund its planned mineral development and other activities. The Companys mining segment is in the development stage and has no operating revenue or cash flow.
Its most significant asset is the Al Masane mining project in Saudi Arabia, which is a net user of
the Companys available cash and capital resources. As discussed in Note 6, the Company intends to
take steps to finance commercial development of the Al Masane mining project. However, there is no
assurance the Company will be able to arrange financing. Management is also addressing two other significant financing issues within this segment.
These issues are the $11.0 million note payable due the Saudi Arabian government and accrued
salaries and termination benefit of approximately $947,000 due employees working in Saudi Arabia
(this amount does not include amounts due the Companys President and Chief Executive
Officer who also primarily works in Saudi Arabia and is owed accrued salaries and termination
benefits of approximately $1,195,000). The note payable was originally due in ten annual
installments beginning in 1984. While the Company has not made any repayments, it has not
received any payment demands or other communications from the Saudi government regarding the
note payable. This is despite the fact the Company remains active in Saudi Arabia and received
the Al Masane mining lease at a time when it had not made any of the agreed upon repayment
installments. Based on its experience to date, management believes as long as the Company
diligently attempts to explore and develop the Al Masane project, that no repayment demand will
be made. The Company has communicated to the Saudi government that its delay in repaying the
note is a direct result of the governments lengthy delay in granting the Al Masane lease and
requested
formal negotiations to restructure this obligation. Based on its interpretation of the Al
Masane mining lease and other documents, management believes the government is likely to agree
to link repayment of this note to the operating cash flows generated by the commercial
development of the Al Masane project, which would result in a long-term installment repayment
schedule. In the event the Saudi government was to demand immediate repayment of this
obligation, which management considers unlikely, the Company would be unable to pay the entire
amount due. The second issue is the accrued salaries and termination benefits due employees working in Saudi
Arabia. The Company plans to continue employing these individuals until it is able to generate
sufficient excess funds to begin payment of this liability. Management will then begin the
process of
gradually releasing certain employees and paying its obligation as they are released from the
Companys employment. A significant component of the Companys assets consists of undeveloped mineral deposits. There
is no assurance that the Company will ultimately successfully develop either the Al Masane
project or any of the other properties discussed in Notes 6 and 7, and, if developed, whether
the mineral acquisition and development costs incurred will be recovered. The recovery of these
costs is dependent upon a number of factors and future events, many of which are beyond the
Companys control. Furthermore, the Companys ability to develop and realize its investment in
these properties F-12




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##### Table of Contents



ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIAIRES NOTE 2  LIQUIDITY MATTERS, REALIZATION OF ASSETS AND BUSINESS RISKS  Continued is dependent upon (i) obtaining significant additional financing and (ii) attaining successful
operations from one or more of these projects. The Company assesses the carrying values of its mining assets on an
ongoing basis. Factors which may affect carrying values include, but are not limited to,
mineral prices, capital cost estimates, the estimated operating costs of any mines and related
processing, ore grade and related metallurgical characteristics, the design of any mines and the
timing of any mineral production. Prices currently used to assess recoverability, based on
production to begin no sooner than 2005, are $1.40 per pound for copper and $.53 per pound for
zinc. Copper and zinc comprise in excess of 80% of the expected value of production. There are
no assurances, particularly in the event of a prolonged period of depressed mineral prices, the
Company will not be required to take a material write-down of its mineral properties. NOTE 3  CONCENTRATIONS OF REVENUES AND CREDIT RISK The Petrochemical Segment sells its products and services to companies in the chemical and
plastics industries. It performs periodic credit evaluations of its customers and generally does
not require collateral from its customers. The largest customer accounted for 22.3% and 9% of
the total product sales in 2004 and 2002, respectively. No one customer accounted for more than
10% of sales in 2003. The increase in sales to a single customer in 2004 was due to industry
consolidation for the use of a by-product. Additional markets are available for those products.
Minimal credit losses have been incurred. The carrying amount of accounts receivable
approximates fair value at December 31, 2004. South Hamptons operations are dependent upon one major supplier for its feedstock supply. At
December 31, 2004, South Hampton owed the supplier approximately $5,800,000 for feedstock
purchases. In June of 2004, South Hampton signed a Purchase Agreement with the feedstock
supplier
with several conditions including a lien on the facility at Silsbee, Texas to secure the account.
The agreement solidified the supply of feedstock to the facility for a two year period as long
as certain conditions are met. Coins operations are dependent upon Pemex (Mexican government owned vendor) for its feedstock
supply. Coins operations have been negatively impacted in 2003, 2002 and 2001 by the inability
to obtain feedstock for production at a price that would allow it to be competitive in the
market. In late 2003, Coin secured a purchase contract with Pemex for feedstock and purchased
material throughout 2004 on a prepaid basis at a price which was compatible with normal market
pricing. NOTE 4  SALE OF ACCOUNTS RECEIVABLE The Company accounts for the transfers of accounts receivable as sales transactions.
South Hampton entered into a $3.25 million revolving credit agreement in September 1999 with a
bank, which terminated in June 2003. In July 2003 a Purchase and Sale (Factoring) Agreement with
a limit of $4.5 million was instituted with the same bank. In July, 2004, the Bank raised the
limit to $6.0 million on the factoring arrangement to accommodate the increased sales volume of
the Company and also the higher sales prices which created higher Accounts Receivable amounts.
The limit was raised to $8.5 million in January, 2005 as the sales volume and prices continued to
increase. As collections reduce previously sold receivables, South Hampton may replenish these
with new receivables. At December 31, 2004 and 2003, approximately $7.4 million and $3.4 million,
respectively had been sold and, due to the revolving nature of the agreement, also remained
outstanding. The initial sales proceeds under this agreement were used to retire the $3.25
million revolving credit agreement balance outstanding at December 31, 2002. F-13




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##### Table of Contents



ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIAIRES NOTE 4  SALE OF
ACCOUNTS RECEIVABLE  Continued The agreement contains restrictions on dividends payable to the Company by South Hampton and is
collateralized by accounts receivable. South Hampton was not in compliance with the dividend
restriction at December 31, 2004. The Bank has waived the event of non-compliance as of December
31, 2004. The risk South Hampton bears from bad debt losses on U.S. trade receivables sold is
retained since it holds a retained interest in the sold receivables of approximately $1.1 million
and $0.5 million at December 31, 2004 and 2003, respectively. Receivables sold may not include
amounts over 90 days past due. Expenses incurred under this program of approximately $434,000 and
$114,000 are included in interest expense in the statements of operations for 2004 and 2003,
respectively. NOTE 5  INVENTORIES Inventories include the following at December 31: 2004
    
    
    2003Finished products
    
    $
    1,243,693
    
    
    $
    656,481
 At December 31, 2004 and 2003, current cost exceeded the LIFO value by approximately $344,000 and
$256,000, respectively. NOTE 6  MINERAL EXPLORATION AND DEVELOPMENT COSTS IN SAUDI ARABIA In the accompanying consolidated financial statements, the deferred exploration and
development costs have been presented based on the related projects geographic location within
Saudi Arabia. This includes the Al Masane Project (the Project) and Other Interests in Saudi
Arabia which primarily pertains to the costs of rentals, field offices and camps, core drilling
and labor incurred at the Wadi Qatan and Jebel Harr properties. In 1971, the Saudi Arabian government awarded the Company exclusive mineral exploration
licenses to explore and develop the Wadi Qatan area in southwestern Saudi Arabia. The Company
was subsequently awarded an additional license in 1977 for an area north of Wadi Qatan at Jebel
Harr. These licenses have expired. On June 22, 1999, the Company submitted a formal application
for a five-year exclusive exploration license for the Greater Al Masane area of approximately
2,850 square kilometers that surrounds the Al Masane mining lease area and includes the Wadi
Qatan and Jebel Harr areas. Although a license has not been formally granted for the Greater Al
Masane area, the Company has been authorized in writing by the Saudi Arabian government to carry
out exploration work on the area. The Company previously worked the Greater Al Masane area after
obtaining written authorization from the Saudi Ministry of Petroleum and Mineral Resources, and
has expended over $3 million in exploration work. 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 approved. 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 Company intends to formalize its
claims in these areas. The Al Masane project, consisting of a mining lease area of approximately 44 square kilometers,
contains extensive ancient mineral workings and smelters. From ancient inscriptions in the area,
it is believed that mining activities went on sporadically from 1000 BC to 700 AD. The ancients
are believed to have extracted mainly gold, silver and copper. The Project includes various
quantities of proved zinc, copper, gold and silver reserves. As the holder of the Al Masane mining lease, the Company is solely responsible to the Saudi
Arabian government for the rental payments and other obligations provided for by the mining lease
and repayment of the previously discussed $11 million loan. The Companys interpretation of the
mining lease is that repayment of this loan will be made in accordance with a repayment schedule
to be agreed F-14




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##### Table of Contents



ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIAIRES NOTE 6  MINERAL EXPLORATION AND DEVELOPMENT COSTS IN SAUDI ARABIA  Continued upon with the Saudi Arabian government from the Companys share of the projects cash flows. The
initial term of the lease is for a period of thirty (30) years from May 22, 1993, with the
Company having
the option to renew or extend the term of the lease for additional periods not to exceed twenty
(20) years. Under the lease, the Company is obligated to pay advance surface rental in the
amount of 10,000 Saudi Riyals (approximately $2,667 at the current exchange rate) per square
kilometer per year (approximately
$117,300 annually) during the period of the lease. At December 31, 2003, approximately $586,000
of rental payments was in arrears. The Company, in accordance with the most recent agreement
with the Ministry, paid $266,000 of the back payments on January 3, 2005, and is scheduled to pay
the remaining $320,000 on December 31, 2005. In addition, the Company must pay income
tax in accordance with the income tax laws of Saudi Arabia then in force and pay all
infrastructure costs. The Saudi Arabian Mining Code provides that income tax will not be due
during the first stage of mining operations, which is the period of five years starting from the
earlier of (i) the date of the first sale of products or (ii) the beginning of the fourth year
since the issue of the mining lease. The lease gives the Saudi Arabian government priority to
purchase any gold production from the project as well as the right to purchase up to 10% of the
annual production of other minerals on the same terms and conditions then available to other
similar buyers and at current prices then prevailing in the free market. Furthermore, the lease
contains provisions requiring that preferences be given to Saudi Arabian suppliers and
contractors, that the Company employ Saudi Arabian citizens and provide training to Saudi Arabian
personnel. Pursuant to the mining lease agreement, when the Al Masane project is profitable the Company is
obligated to form a Saudi public stock company with the Saudi Arabian Mining Company, a
corporation
wholly owned by the Saudi Arabian government (Maaden), as successor to and assignee of the
mining interests formerly held by the Petroleum Mineral Organization (Petromin). Maaden is
the Saudi Arabian governments official mining company. In 1994, the Company received
instructions from the Saudi Ministry of Petroleum and Mineral Resources stating that it is
possible for the Company to form a Saudi company without Petromin (now Maaden), but the sale of
stock to the Saudi public could not occur until the mines commercial operations were profitable
for at least two years. The instructions added that Petromin (now 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 believes that the Ministrys F-15




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##### Table of Contents



ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIAIRES NOTE 6  MINERAL EXPLORATION AND
DEVELOPMENT COSTS IN SAUDI ARABIA  Continued 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 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. On February 23, 2004, the Companys President received a letter from the Deputy Minister of
Petroleum and Mineral Resources 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 is to be signed to
that effect. The resolution stated further that, if no agreement is reached, the Ministry of
Finance will give the Council of Ministers its recommendation regarding the $11 million loan
granted to the Company. After discussions with the Deputy Minister, the Company President responded, in a letter
to the Minister dated March 23, 2004, that the Company will agree to abide by the resolution and
will 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 was attached to the letter. The Company also will agree to
pay the past due surface rentals, which now total approximately $586,000, in two equal
installments, the first on December 31, 2004 and the second on December 31, 2005 and will continue
to pay the surface rentals as specified in the Mining Lease Agreement. On May 15, 2004, an
agreement was signed with the Ministry covering these provisions. In the event the Company does not
implement the program during the two-year period, the matter will be referred to the concerned
parties to seek direction in accordance with the Mining Code and other concerned codes. The Company
paid $266,000 of the back payments on January 3, 2005, and is scheduled to pay the remaining
$320,000 on December 31, 2005. Because of the very significant rise in the price of copper, zinc, gold, and silver which
can be mined from the Al Masane mine, the Company is in the process of updating the feasibility
study by its technical consultants. This will take approximately eight to ten weeks. When
updating is completed, and if proven positive, the Company will attempt to locate a joint venture
partner or partners and acceptable financing to develop the Al Masane mining project in
accordance with the work program agreed upon with the Saudi Ministry of Petroleum and Mineral
Resources. Once started, it will take approximately twenty-two months to complete. At that
point, commercial production can begin from the mine. 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 F-16




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##### Table of Contents



ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIAIRES NOTE 6  MINERAL EXPLORATION AND DEVELOPMENT COSTS IN SAUDI ARABIA  Continued 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, 2004,
2003 and 2002, 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,
    
    
    Activity2004
    
    
    for 2004
    
    
    2003
    
    
    for 2003
    
    
    2002
    
    
    for 2002Property 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
    
    $
    22,036,863
    
    
    $
    255,445
    
    
    $
    21,781,418
    
    
    $
    346,963
    
    
    $
    21,434,455
    
    
    $
    319,349Materials and
maintenance
    
    
    6,175,232
    
    
    
    
    
    
    
    6,175,232
    
    
    
    
    
    
    
    6,175,232
    
    
    
    Feasibility study
    
    
    2,907,771
    
    
    
    
    
    
    
    2,907,771
    
    
    
    
    
    
    
    2,907,771
    
    
    
    Total
    
    
    31,119,866
    
    
    
    255,445
    
    
    
    30,864,421
    
    
    
    346,963
    
    
    
    30,517,458
    
    
    
    319,349$
    36,420,565
    
    
    $
    255,445
    
    
    $
    35,165,120
    
    
    $
    346,963
    
    
    $
    35,818,157
    
    
    $
    319,349
 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. 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-17




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##### Table of Contents



ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIAIRES NOTE 8  NOTES PAYABLE, LONG-TERM DEBT AND LONG-TERM OBLIGATIONS Notes payable, long-term debt and long-term obligations at December 31 are summarized as
follows: 2004
    
    
    2003Notes payable:Secured note to Saudi Arabian government (See Note A)
    
    $
    11,000,000
    
    
    $
    11,000,000Unsecured demand notes payable to Saudi investors
    
    
    13,333
    
    
    
    13,280Other
    
    
    12,500
    
    
    
    12,500Total
    
    $
    11,025,833
    
    
    $
    11,025,780Notes payable to stockholders:Secured notes to investors (See Note B)
    
    $
    698,000
    
    
    $
    698,000Unsecured note to Saudi investor (See Note C)
    
    
    20,000
    
    
    
    20,000Total
    
    $
    718,000
    
    
    $
    718,000Long-term debt:Revolving notes to foreign banks (See Note D)
    
    $
    2,044,096
    
    
    $
    3,169,821Secured note with vendor (See Note E)
    
    
    5,815,072
    
    
    
    Capital lease with affiliated party (See Note F)
    
    
    127,527
    
    
    
    Total
long-term debt
    
    
    7,986,695
    
    
    
    3,169,821Less current portion
    
    
    (3,071,161
    )
    
    
    (3,169,821
    )Total long-term debt, less Current Portion
    
    $
    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 are 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 are due on demand with
interest at 9%. All of these loans are 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.(C)
    Represents loan payable to a stockholder of the Company, which is due on demand with
interest at 9%. F-18




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##### Table of Contents



ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIAIRES NOTE 8  NOTES PAYABLE, LONG-TERM DEBT AND LONG-TERM OBLIGATIONS  Continued  (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 and bears an
interest rate 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 is payable in quarterly payments through March, 2007 and
bears interest at the LIBOR rate plus seven points (LIBOR was 2.418% at December 31, 2004).
The lender of the second loan holds a second lien on the plant facilities. This lender was
placed in receivership by the Mexican government in 2001 and Coin has been 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 is classified as current in the financial statements. Unpaid interest and penalty
interest of $3,721,179 and $3,103,009 are included in accrued interest at December 31, 2004
and 2003, respectively.(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. 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 $5,815,072 has been classified as current at December 31, 2004.(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. Principal payments of long-term debt for the next five years and thereafter
ending December 31 are as follows: Capital LeaseYear Ending December 31,
    
    Long-Term Debt
    
    
    Obligations2005
    
    $
    3,044,096
    
    
    $
    33,4712006
    
    
    4,815,072
    
    
    
    33,4712007
    
    
    
    
    
    
    33,4712008
    
    
    
    
    
    
    33,4712009
    
    
    
    
    
    
    33,471Thereafter
    
    
    
    
    
    
    Total
    
    $
    7,859,168
    
    
    
    153,407Less: Amount representing interest
    
    
    
    
    
    
    (25,880
    )Present value of future minimum
lease payments
    
    
    
    
    
    $
    127,527
 Interest of $ 746,444, $335,397 and $552,452 was paid in 2004, 2003, and 2002, respectively. F-19




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##### Table of Contents



ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIAIRES NOTE 9  ACCRUED LIABILITIES IN SAUDI ARABIA Accrued liabilities in Saudi Arabia at December 31 are summarized as follows: 2004
    
    
    2003Salaries
    
    $
    1,433,712
    
    
    $
    1,407,821Termination benefits
    
    
    708,317
    
    
    
    683,010Surface rentals
    
    
    586,666
    
    
    
    543,246Other liabilities
    
    
    20,433
    
    
    
    37,763Total
    
    $
    2,749,128
    
    
    $
    2,671,840
 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 $42,000 per
month as new and additional tractors and trailers were added to the fleet throughout the year.
Total rental costs were approximately $414,000 in 2004, $388,000 in 2003 and $422,000 in 2002.
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, 2004 annual payments due totaled $586,666. See Note 6. Future minimum lease payments under these lease agreements are as follows: Year EndingDecember 312005
    
    $
    1,090,6662006
    
    
    621,3002007
    
    
    621,3002008
    
    
    621,3002009
    
    
    117,300Thereafter
    
    
    1,760,162Total
    
    $
    4,832,028
 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, 2004 and 2003 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. South Hampton is presently a defendant in ten lawsuits. The suits, seven of which are filed
in Madison County, Illinois, and which include up to 70 other defendants, primarily claim illness
and disease resulting from alleged exposure to chemicals, including benzene, butadiene and/or
isoprene, during their employment at various occupations. The plaintiffs claim that the companies
engaged in F-20




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##### Table of Contents



ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIAIRES NOTE 10  COMMITMENTS AND CONTINGENCIES  Continued 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 does not
believe the plaintiffs in the Illinois lawsuits ever came in contact with its products and is
vigorously defending itself against these claims. The Company also believes it has adequate
insurance coverage to protect it financially from any damage awards that might be incurred. South Hampton is a defendant in two lawsuits filed in Jefferson County, Texas. The first lawsuit
was filed on September 2001, and alleges that the plaintiff became ill from exposure to asbestos
while employed by South Hampton from 1961 through 1975. Mediation occurred during 2003 in which
the plaintiff made a financial offer. South Hampton counter-offered a structured settlement. To
date the plaintiff has not accepted or rejected the counter-offer or withdrawn settlement offer. A
new trial date has been set for September 2005. Due to the time period in which the claimant was
allegedly injured, the Company has not been able to locate insurance coverage for this particular
suit. The Company plans on continuing negotiations in an attempt to settle the case. The
consolidated financial statements do not include any amounts related to this case. The second
lawsuit was filed on May 29, 2003, and alleges that the plaintiff was exposed to asbestos
containing products in his duties as a welder, pipefitter assistant, laborer, floor hand and mud
hand/derrick hand from 1950  1984. Plaintiff claims that he suffers from an asbestos related
disease, although this has not been confirmed by a pathologist. Plaintiff testified in his
deposition that he worked as a pipefitter assistant building a plant for South Hampton in Vidor,
Orange County, Texas for approximately three months. Plaintiff made a settlement demand and South
Hampton has countered. This matter is currently number 46 on the Courts trial docket for May,
2005. Due to the time period in which the claimant was allegedly injured, the Company has not been
able to locate insurance coverage for this particular suit. The Company plans to
vigorously defend this matter and continue negotiations to settle the case for nuisance value. The
consolidated financial statements do not include any amounts related to this case. In 1993, at the request of the Texas Commission on Environmental Quality (TCEQ), formerly
Texas Natural Resources Conservation Commission (TNRCC), 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, the 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, the 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. The TCEQ proposed that administrative penalties
be increased to approximately $765,000 and that certain corrective actions be taken. 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,
October 2
and November 4, 2003. South Hampton believes the original penalty and the additional allegations
are incorrect and 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 the TCEQ are expected to continue in order to reach a
final F-21




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##### Table of Contents



ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIAIRES NOTE 10  COMMITMENTS AND CONTINGENCIES- Continued settlement. South Hampton has a liability of $200,000 recorded at December 31, 2004 and
2003, related to these environmental issues. A further amendment on separate issues was made by the TCEQ on December 13, 2001 for further
violations relating to air quality control and waste requirements. The TCEQ proposed
administrative penalties of $59,000. South Hampton settled this particular claim with the TCEQ
in April 2002 for approximately $5,900. Amounts charged to expense for various activities related to environmental monitoring,
compliance, and improvements were approximately $232,100 in 2004, $232,500 in 2003 and $291,000 in
2002. 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, 2004, 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-22




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##### Table of Contents



ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIAIRES NOTE 11  STOCK
OPTIONS  Continued Additional information with respect to all options outstanding at December 31, 2004, and changes
for the three years then ended was as follows: 2002Weighted averageShares
    
    
    exercise priceOutstanding at beginning of year
    
    
    872,000
    
    
    $
    1.12Forfeited
    
    
    (62,000
    )
    
    
    1.38Options at end of year
    
    
    810,000
    
    
    $
    1.10Options exercisable at December 31, 2002
    
    
    810,000
    
    
    $
    1.10
 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
 Additional information about stock options outstanding at December 31, 2004 is summarized as
follows: Options outstanding and exercisableWeighted averageRemaining
    
    
    ExerciseRange of exercise prices
    
    Number
    
    
    contractual life
    
    
    price$1.00
    
    
    400,000
    
    
    10 years
    
    $
    1.00
 F-23




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##### Table of Contents



ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIAIRES NOTE 12  INCOME TAXES Income tax expense (benefit) for the years ended December 31, 2004, 2003, and 2002 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: 2004
    
    
    2003
    
    
    2002Income taxes at U.S. statutory rate
    
    $
    (867,257
    )
    
    $
    (1,191,823
    )
    
    $
    235,301State taxes, net of federal benefit
    
    
    37,013
    
    
    
    270,844
    
    
    
    64,170Net operating losses expired
    
    
    
    
    
    
    3,704,513
    
    
    
    155,079Change in valuation allowance
    
    
    (460,734

    )
    
    
    (3,344,171
    )
    
    
    (799,426
    )Foreign operations losses with no
benefit provided
    
    
    1,276,609
    
    
    
    580,210
    
    
    
    337,946Other items
    
    
    14,369
    
    
    
    (19,573
    )
    
    
    6,930Total tax expense
    
    $
    
    
    
    $
    
    
    
    $
    
 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 31,2004
    
    
    2003
    
    
    2002Deferred tax liabilities:Plant, pipeline and equipment
    
    $
    (377,000
    )
    
    $
    (396,000
    )
    
    $
    (481,000
    )Deferred tax assets:Accounts receivable
    
    
    36,000
    
    
    
    82,000
    
    
    
    76,000Mineral interests
    
    
    236,000
    
    
    
    236,000
    
    
    
    236,000Accrued liabilities
    
    
    184,000
    
    
    
    149,000
    
    
    
    123,000Net operating loss and contribution
carry-forwards
    
    
    2,870,000
    
    
    
    3,389,000
    
    
    
    6,837,000Tax credit carry-forwards
    
    
    212,000
    
    
    
    212,000
    
    
    
    212,000Deferred gain on sale of property
    
    
    50,000
    
    
    
    63,000
    
    
    
    76,000Unrealized losses on swap agreements
    
    
    64,000
    
    
    
    
    
    
    
    Gross deferred tax assets
    
    
    3,652,000
    
    
    
    4,131,000
    
    
    
    7,560,000Valuation allowance
    
    
    (3,275,000
    )
    
    
    (3,735,000
    )
    
    
    (7,079,000
    )Net deferred tax assets
    
    
    377,000
    
    
    
    396,000
    
    
    
    481,000Net deferred taxes
    
    $
    
    
    
    $
    
    
    
    $
    
 The Company has provided a valuation allowance against the deferred tax assets because of
uncertainties regarding their realization. At December 31, 2004, the Company had approximately $7,610,000 of net operating loss
carry-forwards. These carry-forwards expire during the years 2005 through 2023. In addition, the
Company has alternative minimum tax credit carry-forwards of approximately $212,000 that may be
carried over indefinitely. F-24




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##### Table of Contents



ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIAIRES NOTE 12  INCOME TAXES  Continued The Company has no Saudi Arabian or Mexican tax liability. At December 31, 2004, Coin had
available net operating loss carry-forwards and recoverable tax on assets of approximately
$6,514,000 and $562,000, respectively, expiring through 2014, which are limited to the income of
Coin. NOTE 13  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,
foreign exchange transaction gain and (loss), miscellaneous income and minority interest.
Information on segments is as follows: December 31, 2004Refining
    
    
    Mining
    
    
    TotalRevenue from external customers
    
    $
    59,793,454
    
    
    $
    
    
    
    $
    59,793,454Depreciation
    
    
    1,123,063
    
    
    
    411
    
    
    
    1,123,474Operating income (loss)
    
    
    2,559,527
    
    
    
    (613,488
    )
    
    
    1,946,039Total assets
    
    $
    10,796,800
    
    
    $
    40,251,083
    
    
    $
    51,047,883
 December 31, 2003Refining
    
    
    Mining
    
    
    TotalRevenue from external customers
    
    $
    39,624,733
    
    
    $
    
    
    
    $
    39,624,733Depreciation
    
    
    1,365,506
    
    
    
    1,712
    
    
    
    1,367,218Operating income (loss)
    
    
    (1,749,691
    )
    
    
    (755,097
    )
    
    
    (2,504,788
    )Total assets
    
    $
    12,787,676
    
    
    $
    39,884,821
    
    
    $
    52,672,497
 December 31, 2002Refining
    
    
    Mining
    
    
    TotalRevenue from external customers
    
    $
    36,753,000
    
    
    $
    
    
    
    $
    36,753,000Depreciation
    
    
    1,412,389
    
    
    
    1,813
    
    
    
    1,414,202Operating income (loss)
    
    
    2,211,310
    
    
    
    (490,028
    )
    
    
    1,721,282Total assets
    
    $
    16,114,394
    
    
    $
    39,506,415
    
    
    $
    55,620,809
 Information regarding foreign operations for the years ended December 31, 2004, 2003 and 2002
follows (in thousands). Revenues are attributed to countries based upon the origination of the
transaction. Year ended December 31,2004
    
    
    2003
    
    
    2002RevenuesUnited States
    
    $
    56,203
    
    
    $
    38,852
    
    
    $
    34,057Mexico
    
    
    3,590
    
    
    
    773
    
    
    
    2,696Saudi Arabia
    
    
    
    
    
    
    
    
    
    
    $
    59,793
    
    
    $
    39,625
    
    
    $
    36,753
 F-25




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##### Table of Contents



ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIAIRES NOTE 13  SEGMENT INFORMATION  Continued Year ended December 31,2004
    
    
    2003
    
    
    2002Long-lived assetsUnited States
    
    $
    6,550
    
    
    $
    5,392
    
    
    $
    6,252Mexico
    
    
    
    
    
    
    4,567
    
    
    
    4,915Saudi Arabia
    
    
    38,852
    
    
    
    38,596
    
    
    
    38,249$
    45,402
    
    
    $
    48,555
    
    
    $
    49,416
 NOTE 14  NET INCOME (LOSS) PER COMMON SHARE Net income (loss) per share has been calculated as follows: 2004
    
    
    2003
    
    
    2002Basic and dilutedNet income (loss)
    
    $
    (2,550,756
    )
    
    $
    (3,505,363
    )
    
    $
    692,063Weighted average shares outstanding
    
    
    22,731,994
    
    
    
    22,731,994
    
    
    
    22,731,994Per share
    
    $
    (0.11
    )
    
    $
    (0.15
    )
    
    $
    0.03
 In 2004, 2003 and 2002, options for 400,000, 445,000 and 810,000 shares, respectively were
excluded from diluted shares Options excluded from diluted shares outstanding because their
effect was is anti-dilutive. NOTE 15  QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The quarterly results of operations shown below are derived from unaudited financial statements for
the eight quarters ended December 31, 2004 (in thousands, except per share data): 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
    )
 Year Ended December 31, 2003First
    
    
    Second
    
    
    Third
    
    
    FourthQuarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    TotalRevenues
    
    $
    8,900
    
    
    $
    9,890
    
    
    $
    10,703
    
    
    $
    10,132
    
    
    $
    39,625Net income (loss)
    
    
    (1,320
    )
    
    
    (603
    )
    
    
    (746
    )
    
    
    (836
    )
    
    
    (3,505
    )Basic and diluted EPS
    
    $
    (0.06
    )
    
    $
    (0.03
    )
    
    $
    (0.03
    )
    
    $
    (0.03
    )
    
    $
    (0.15
    )
    F-26




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##### Table of Contents



ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIAIRES NOTE 16  RELATED PARTY TRANSACTIONS At December 31, 2004, the Company has a liability to its President and Chief Executive Officer
of approximately $1,195,000 in accrued salary and termination benefits, a loan payable to him for
$53,000 and a loan payable to his wife for $100,000. There are also loans payable to two
stockholders of the Company for $465,000 and $100,000. Pursuant to a sharing arrangement, the Company shares personnel, office space and other
overhead expenses in Dallas, Texas with the Companys Chairman of the Board. The Company paid
approximately $24,700, $23,500 and $24,700 in 2004, 2003 and 2002, respectively, pursuant to such
arrangement. South Hampton incurred product transportation costs of approximately $414,000, $388,000 and
$397,000 in 2004, 2003 and 2002, respectively, with STTC, which is currently owned by the President
of TOCCO. A previous 50% owner of STTC and officer of TOCCO retired in January 2004. On August 1, 2004, South Hampton entered into a $136,876 capital lease with STTC for the purchase
of a diesel powered manlift. The lease bears interest at 6.9% for a 5 year term with monthly
payments in the amount of $3,250. Title transfers to South Hampton at the end of the term. In
2004, gross payments of $16,250 were made. NOTE 17  DERIVATIVE INSTRUMENTS South Hampton periodically enters into financial instruments to hedge the cost of natural
gasoline, the primary source of feedstock, and natural gas, used as fuel to operate the plant.
Since 1992, the Company has used a varying number of financial swaps on feedstock and options on
natural gas to limit the effect of significant fluctuations in price on operating results. The
effect of these agreements is to limit the Companys exposure by fixing the price of a portion of
its feedstock purchases, and/or its fuel gas costs, over the term of the agreements. The
agreements have covered approximately 20% to 40% of the average monthly feedstock requirements
and up to 100% of natural gas purchases. Commodity swap agreements were entered into during 2004
with the last agreement expiring on June 30, 2005. South Hampton had option contracts
outstanding as of December 31,2004 covering various natural gas price movement scenarios through
March of 2005 and covering from 50% to 100% of the natural gas requirements for each month. For the years ended December 31, 2004, 2003 and 2002 the net realized gain (loss) from the
derivative agreements was $1,779,240, ($71,492) and $1,032,045, respectively. The unrealized
gain (loss) for the years ended December 31, 2004, 2003, and 2002 was ($184,800), $ -0-, and
$505,890, respectively. The realized and unrealized gain (loss) is recorded in cost of refined
product sales and processing in the consolidated statements of operations. NOTE 18  COIN ASSET FORECLOSURE A creditor of Coin, holding a first lien, initiated a mortgage foreclosure proceeding
that resulted in the court ordered public auction of the plant facilities in Mexico on February 23,
2004. As a result, the court awarded the plant facilities to the creditor in partial settlement of
the outstanding debt owed by Coin. The court order required legal transfer of the assets to the
creditor within three days, however, the transfer had not occurred as of December 31, 2004.
Management had been engaged with the creditor in negotiations to stop the legal transfer. As a
result management of Coin and Coins legal counsel were unable to determine if or when the legal
transfer of ownership would occur. Coin remains in control and operates the facility. In March
2005, an additional procedure in the process to F-27




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ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIAIRES NOTE 18  COIN ASSET FORECLOSURE  Continued transfer title occurred, such that, management believes that it is probable title to the
plant in Coatzacoalcos will ultimately be transferred to the creditor or its assignee. As a
result, management recorded the loss on the foreclosure of the facility with a charge to
consolidated operations of $2,900,964 during the fourth quarter of 2004. NOTE 19  SUBSEQUENT EVENTS On January 28, 2005 South Hampton signed a contract with a major toll processing customer to
double the capacity of the White Oils Fractionation Unit. Under the terms of the contract, the
Company has eight (8) months to procure the equipment and complete construction. If construction
is not completed timely, a monthly penalty will be assessed. The design of the addition is
completed and all regulatory permits have been granted. The customer will reimburse the Company
for capital expenditures in monthly payments over a five year period. Process fees are based upon
the expanded capacity and contain minimum throughput requirements. Capital expenditure is expected
to be approximately $2.0 million. On March 1, 2005 South Hampton signed a letter of intent with an investment group to finance
the expansion of the White Oils Fractionation Unit. The interest rate of the note will be 12% and
the loan will be repaid in quarterly installments over a five year period. The note will be
secured by the assignment of the capital repayment portion of the proceeds of the contract with the
customer. Other fees and conditions will apply. The loan is expected to close in early April,
2005. The procurement of the major equipment is in process and the financing is expected to mesh
with the cash flow needs of the capital project. On March 15, 2005 the Board of Directors approved an agreement whereby a shareholder would
loan the Company approximately $100,000 to be used to update the 1996 feasibility study of the Al
Masane project. It is expected to take six to eight weeks to update the study. F-28




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON SCHEDULES Arabian American Development Company and Subsidiaries
Dallas, Texas We have audited the consolidated financial statements of Arabian American Development Company and
Subsidiaries (the Company) as of December 31, 2004 and 2003 and for each of the three years in
the period ended December 31, 2004, and have issued our report thereon dated March 20, 2005. Our
audits also include Schedule II for this Form 10-K. This schedule is the responsibility of the
Companys management. Our responsibility is to express an opinion based on our audits. In our opinion, the Schedule II at December 31, 2004, 2003, and 2002 and for the years then ended,
when considered in relation to the basic financial statements taken as a whole, presents fairly, in
all material respects, the information required to be set forth therein. /s/ MOORE STEPHENS TRAVIS WOLFF, LLP Dallas, Texas
March 20, 2005 F-29




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ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES 
 VALUATION AND QUALIFYING ACCOUNTS Three years ended December 31, 2004 ChargedBeginning
    
    
    (credited)
    
    
    
    
    
    
    EndingDescription
    
    balance
    
    
    to earnings
    
    
    Deductions
    
    
    balanceALLOWANCE
FOR DEFERRED TAX ASSETDecember 31, 2002
    
    
    7,878,919
    
    
    
    
    
    
    
    (799,426
    )(a)(b)
    
    
    7,079,493December 31, 2003
    
    
    7,079,493
    
    
    
    
    
    
    
    (3,344,171
    )(a)
    
    
    3,735,322December 31, 2004
    
    
    3,735,322
    
    
    
    
    
    
    
    (460,734
    )(b)
    
    
    3,274,586
   (a)
    
    Expiration of carryforwards(b)
    
    Utilization of carryforwards F-30




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INDEPENDENT AUDITOR  ́S REPORT To the Shareholders of
Productos Quimicos Coin, S.A. de C.V.
Mexico City, Mexico We have audited the accompanying statement of financial position of Productos Quimicos Coin, S.A.
de C.V. as of December 31 2004, and the related statements of income (loss) and comprehensive
income (loss), changes in equity (deficit) and cash flows for the year then ended. These financial
statements are the responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards in Mexico. Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement and prepared in accordance with
generally accepted accounting principles. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statements presentation. We believe that our audit provides a
reasonable basis for our opinion. As described by the Company in note 2A1 to the financial statements, the accompanying
financial statements are presented using accounting principles generally accepted in the United
States of America and translated into U.S. dollars to comply with specific request by the
shareholders. Separately, the Company has issued financial statements as of December 31, 2004 and
for the year then ended in conformity with accounting principles generally accepted in Mexico and
are expressed in Mexican currency, as to which we have issued a qualified opinion on February 22,
2005. In our opinion, the financial statements referred to above present fairly, in all material
respects, the financial position of Productos Quimicos Coin, S.A. de C.V. as of December 31, 2004,
the results of its operations and cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America. As described in note 8 to the financial statements, as a result of the mortgage foreclosure
initiated by a Company creditor, the installations where the industrial facilities are located, by
court resolution, were placed for sale under public auction on February 23, 2004. On March 3, 2004,
the court awarded the industrial facilities in favor of the creditor. On February 22, 2005,
Companys legal counsel and management concluded that there is no reasonable
basis to estimate a date for the formal and legal transfer of ownership of the industrial
facilities to the creditor. In the same manner, the terms and conditions, and the period during
which management would continue to operate the industrial plant, are unknown. As a result of the
legal action, and not withstanding that formal notarization has not been formalized granting the
creditor ownership of the assets, Company  ́s management has resolved to recognize in its results for
year ended December 31, 2004 the book value loss of the industrial plant representing an amount of
$ 1,330,786, net of the amount in which Banco Internacional, S.A. obtained judicial award of the
industrial plant for $ 1,059,769. This loss is included in results of operation as an extraordinary
item. Company ́s management does not foresee to carry out activities leading to continue with its
operations once the Company stops operating the industrial facilities. As discussed in note 1 to the financial statements, the Company has reported accumulated
losses for $12,772,428 and the statement of financial position shows excess of current liabilities
over current assets for $6,400,280. Moreover, the Company has defaulted in meeting scheduled
payments of principal and interest amounts under certain loan agreements, as discussed in notes 8
and 9 to the financial statements. The default related to a Company creditor gave origin to the
legal transfer of ownership of the industrial facilities mentioned in the above paragraph.
Accumulated losses exceed capital stock, which in conformity with the provisions of Mexican General
Corporate Law, these losses may represent cause for dissolution of the F-31




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Company as a result of legal
action followed by any business-related third party. Additionally, during the period January-May
2004, installed production capacity of the Company was used only partially, representing a cost of
maintaining idle the industrial plant as described in note 1 to the financial statements. Additionally, as discussed in note 13 to the financial statements, the Company has received
notice of labor strike by the labor union, to take effect on March 1, 2005. Prior to February 22,
2005, a meeting was held before the Mexican Labor Authorities, having obtained an extension to
formalize an agreement which guarantees the terms of the current labor contract. The labor union is
calling for a review of the Collective Bargaining Agreement, to include, mainly, salary increases.
If the Company and the labor union do not reach an agreement, the labor strike will break on March
1, 2005. Company  ́s management estimates that a satisfactory agreement will be reached, allowing
the continuation of production activities. The issues described in the preceding three paragraphs raise substantial doubt about the
Companys ability to continue as a going concern. The accompanying financial statements have
been prepared assuming that the Company will continue as a going concern. The financial
statements do not include any adjustments that might result from the outcome of the
uncertainties described above. Despacho Freyssinier Morin, S.C./s/ C.P. JUAN PABLO SOTOC.P.C. Juan Pablo SotoPartner
 Mexico City, Mexico
February 22, 2005 F-32




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INDEPENDENT AUDITOR  ́S REPORT To the Shareholders of
Productos Quimicos Coin, S.A. de C.V.
Mexico City, Mexico We have audited the accompanying statement of financial position of Productos Quimicos Coin, S.A.
de C.V. as of December 31, 2003, and the related statements of income (loss) and comprehensive
income (loss), changes in equity (deficit) and cash flows for the year then ended. These financial
statements are the responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards in Mexico. Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement and prepared in accordance with
generally accepted accounting principles. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statements presentation. We believe that our audit provides a
reasonable basis for our opinion. As described by the Company in note 2A1 to the financial statements, the accompanying financial
statements are presented using accounting principles generally accepted in the United States of
America and translated into U.S. dollars to comply with specific request by the shareholders.
Separately, the Company has issued financial statements as of December 31, 2003 and for the year
then ended in conformity with accounting principles generally accepted in Mexico and are expressed
in Mexican currency, as to which we have issued a qualified opinion on February 23, 2004. In our opinion, the financial statements referred to above present fairly, in all material
respects, the financial position of Productos Quimicos Coin, S.A. de C.V. as of December 31, 2003,
the results of its operations and cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America. As a result of the mortgage foreclosure initiated by a Company creditor, as explained in note 13 to
the financial statements, the installations where the industrial facilities are located, by court
resolution, were placed for sale under public auction on February 23, 2004. As disclosed in note
13B to the financial statements, on March 3, 2004, the court awarded the industrial facilities in
favor of the creditor. On May 14, 2004, Company  ́s legal counsel and management concluded that a
there is no reasonable basis to estimate a date for the formal and legal transfer of ownership of
the industrial facilities to the creditor. In the same manner, the terms and conditions, and the
period during which management would continue to operate the industrial plant, are unknown. As discussed in note 1 to the financial statements, the Company has reported accumulated losses for
$ 11,456,068 and the statement of financial position shows excess of current liabilities over
current assets for $ 7,478,468. Moreover, the Company has defaulted in meeting scheduled payments
of principal and interest amounts under certain loan agreements, as discussed in notes 8 and 9 to
the financial statements. The default related to a Company creditor gave origin to the legal
transfer of ownership of the industrial facilities mentioned in the above paragraph. Accumulated
losses exceed capital stock, which in conformity with the provisions of Mexican General Corporate
Law, these losses may represent cause for dissolution of the Company as a result of legal action
followed by any business-related third party. Additionally, during the period January-December
2003, installed production capacity of the Company was used only partially, representing a cost of
maintaining idle the industrial plant as described in note 1 to the financial statements. F-33




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The issues described in the preceding two paragraphs raise substantial doubt about the Company  ́s
ability to continue as a going concern. The accompanying financial statements have been prepared
assuming that the Company will continue as a going concern. The financial statements do not include
any adjustments that might result from the outcome of the uncertainties described above. Despacho Freyssinier Morin, S.C./s/ C.P. JUAN PABLO SOTOC.P. Juan Pablo SotoPartner
 Mexico City, Mexico
February 23, 2004, except for
Note 13B, as to which the date is
May 14, 2004 F-34




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INDEPENDENT AUDITOR  ́S REPORT To the Shareholders of
Productos Quimicos Coin, S.A. de C.V.
Mexico City, Mexico We have audited the accompanying statement of financial position of Productos Quimicos Coin, S.A.
de C.V. as of December 31, 2002, and the related statements of income (loss) and comprehensive
income (loss), changes in equity (deficit) and cash flows for the year then ended. These financial
statements are the responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards in Mexico. Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement and prepared in accordance with
generally accepted accounting principles. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statements presentation. We believe that our audit provides a
reasonable basis for our opinion. As described by the Company in note 2A1 to the financial statements, the accompanying financial
statements are presented using accounting principles generally accepted in the United States of
America and translated into U.S. dollars to comply with specific request by the shareholders.
Separately, the Company has issued financial statements as of December 31, 2002 and for the year
then ended in conformity with accounting principles generally accepted in Mexico and are expressed
in Mexican currency, as to which we have issued a qualified opinion on February 24, 2003. In our opinion, the financial statements referred to above present fairly, in all material
respects, the financial position of Productos Quimicos Coin, S.A. de C.V. as of December 31, 2003,
the results of its operations and cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America. As discussed in note 1 to the financial statements, the Company has reported accumulated losses for
$ 9,762,125 and the statement of financial position shows excess of current liabilities over
current assets for $ 6,149,133. Moreover, the Company has defaulted in meeting scheduled payments
of principal and interest amounts under certain loan agreements, as discussed in notes 8 and 9 to
the financial statements. Accumulated losses exceed capital stock, which in conformity with the
provisions of Mexican General Corporate Law, these losses may represent cause for dissolution of
the Company as a result of legal action followed by any business-related third party. Additionally,
during the period January-December 2002, installed production capacity of the Company was only
partially utilized, representing a cost of maintaining idle the industrial plant as described in
note 1 to the accompanying financial statements. As a result of the preceding issues, the Company
may be unable to continue its operations. The accompanying financial statements have been prepared
on the basis applicable to a going concern and , accordingly, do not purport to give effect to
adjustments relating to the valuation and reclassification of recorded liabilities that may be
necessary in the event the company could not continue its operations. In our opinion, the financial statements referred to above present fairly, in all material
respects, the financial position of Productos Quimicos Coin, S.A. de C.V. as of December 31, 2002,
the results of its operations and cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America. Despacho Freyssinier Morin, S.C./s/ C.P. JUAN PABLO SOTOC.P. Juan Pablo SotoPartner
 Mexico City, Mexico
February 14, 2003 F-35