UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549




FORM 10-Q



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

For the quarterly period ended September 30, 2007

or

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

For the transition period from _________ to __________

COMMISSION FILE NUMBER 0-6247

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


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

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

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
Yes  X    No                                

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Act).
Large accelerated filer ____                                                                           Accelerated filer ____                                                                Non-accelerated filer  X

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
YesNo  X                                

Number of shares of the Registrant's Common Stock (par value $0.10 per share), outstanding at November 9, 2007: 22,901,994.




PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

   
SEPTEMBER 30, 2007
(unaudited)
   
DECEMBER 31,
2006
 
ASSETS
           
 Current Assets
           
  Cash and cash equivalents
  $
1,909,213
    $
2,939,022
 
   Trade Receivables, Net of allowance for doubtful accounts
     of $35,000 and $35,000, respectively
   
12,239,558
     
8,893,182
 
   Current portion of notes receivable, net of discount and
     deferred gross profit of $139,341 and $200,492,
      respectively
   
572,055
     
605,955
 
   Financial contracts
   
423,639
     
--
 
   Financial contract deposits
   
--
     
1,500,000
 
   Prepaid expenses and other assets
   
538,750
     
576,751
 
   Inventories
   
2,922,845
     
3,576,317
 
   Income tax receivable
   
--
     
619,598
 
          Total Current Assets
   
18,606,060
     
18,710,825
 
                 
  Plant, Pipeline and Equipment
   
29,399,276
     
21,643,903
 
   Less: Accumulated Depreciation
    (12,148,577 )     (11,017,503 )
     Net Plant, Pipeline and Equipment
   
17,250,699
     
10,626,400
 
                 
  Al Masane Project
   
37,416,719
     
37,137,022
 
  Other Assets in Saudi Arabia
   
2,431,248
     
2,431,248
 
  Mineral Properties in the United States
   
1,085,209
     
1,084,711
 
Notes Receivable, net of discount of $65,551 and
     $172,041, respectively, net of current portion
   
1,118,655
     
1,545,714
 
Other Assets
   
22,875
     
54,246
 
                 
     TOTAL ASSETS
  $
77,931,465
    $
71,590,166
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
  Current Liabilities
               
    Accounts payable
  $
4,313,935
    $
2,989,203
 
    Accrued interest
   
60,242
     
59,857
 
    Financial contracts
   
--
     
765,672
 
    Accrued liabilities
   
2,124,305
     
1,210,054
 
    Accrued liabilities in Saudi Arabia
   
1,378,923
     
1,645,257
 
    Notes payable
   
11,012,000
     
11,012,500
 
    Current portion of long-term debt
   
28,172
     
488,828
 
    Current portion of other liabilities
   
621,806
     
584,349
 
          Total Current Liabilities
   
19,539,383
     
18,755,720
 
                 
  Long-Term Debt, net of current portion
   
3,087,399
     
5,108,309
 
  Other Liabilities, net of current portion
   
1,660,686
     
1,621,105
 
  Deferred Income Taxes
   
798,604
     
540,000
 
  Minority Interest in Consolidated Subsidiaries
   
803,529
     
817,558
 
                 
STOCKHOLDERS' EQUITY
               
  Common Stock-authorized 40,000,000 shares of $.10 par value;     issued and outstanding, 22,601,994 and 22,571,994 shares
      in 2007 and 2006, respectively
   
2,260,199
     
2,257,199
 
  Additional Paid-in Capital
   
37,183,206
     
37,087,206
 
Retained Earnings
   
12,598,459
     
5,403,069
 
       Total Stockholders' Equity
   
52,041,864
     
44,747,474
 
     TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY   $
77,931,465
    $
71,590,166
 
    
               

See notes to consolidated financial statements.

1



ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

   
THREE MONTHS ENDED
   
NINE MONTHS ENDED
 
   
SEPTEMBER 30
   
SEPTEMBER 30
 
   
2007
   
2006
   
2007
   
2006
 
                         
REVENUES
                       
  Petrochemical Product Sales
  $
26,600,738
    $
26,253,133
    $
74,706,740
    $
72,635,032
 
  Processing Fees
   
1,437,684
     
1,288,351
     
4,135,064
     
3,305,099
 
     
28,038,422
     
27,541,484
     
78,841,804
     
75,940,131
 
                                 
OPERATING COSTS AND EXPENSES
                               
  Cost of Petrochemical Product
                               
    Sales and Processing
   
25,597,105
     
24,763,985
     
61,969,234
     
61,158,976
 
   GROSS PROFIT
   
2,441,317
     
2,777,499
     
16,872,570
     
14,781,155
 
                                 
GENERAL AND ADMINISTRATIVE EXPENSES
                               
  General and Administrative
   
1,613,612
     
1,522,286
     
5,509,742
     
4,289,185
 
  Depreciation
   
268,180
     
230,391
     
772,096
     
637,589
 
     
1,881,792
     
1,752,677
     
6,281,838
     
4,926,774
 
                                 
OPERATING INCOME
   
559,525
     
1,024,822
     
10,590,732
     
9,854,381
 
                                 
OTHER INCOME (EXPENSE)
                               
  Interest Income
   
70,253
     
72,592
     
219,296
     
171,918
 
  Interest Expense
    (10,037 )     (92,973 )     (115,742 )     (632,804 )
  Minority Interest
   
3,680
     
3,184
     
14,029
     
6,791
 
  Miscellaneous Income (Expense)
    (22,621 )     (192,174 )     (3,356 )     (104,404 )
     
41,275
      (209,371 )    
114,227
      (558,499 )
                                 
  INCOME BEFORE INCOME TAXES
   
600,800
     
815,451
     
10,704,959
     
9,295,882
 
                                 
INCOME TAXES
   
219,200
     
300,849
     
3,509,569
     
3,432,267
 
                                 
  NET INCOME
  $
381,600
    $
514,602
    $
7,195,390
    $
5,863,615
 
                                 
Basic Earnings per Common Share
                               
  Net Income
  $
0.017
    $
0.023
    $
0.314
    $
0.257
 
Basic Weighted Average Number
                               
  of Common Shares Outstanding
   
22,901,994
     
22,808,954
     
22,893,194
     
22,782,092
 
                                 
Diluted Earnings per Common Share
                               
  Net Income
  $
0.016
    $
0.022
    $
0.309
    $
0.255
 
Diluted Weighted Average Number
                               
  of Common Shares Outstanding
   
23,299,289
     
23,073,902
     
23,274,093
     
22,967,626
 


See notes to consolidated financial statements.

2


ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007

               
ADDITIONAL
             
   
COMMON STOCK
   
PAID-IN
   
RETAINED
       
   
SHARES
   
AMOUNT
   
CAPITAL
   
EARNINGS
   
TOTAL
 
DECEMBER 31, 2006
   
22,571,994
    $
2,257,199
    $
37,087,206
    $
5,403,069
    $
44,747,474
 
                                         
Common Stock
                                       
  Issued to Employees
   
30,000
     
3,000
     
96,000
     
--
     
99,000
 
                                         
  Net Income
   
--
     
--
     
-
     
7,195,390
     
7,195,390
 
                                         
SEPTEMBER 30, 2007
   
22,601,994
    $
2,260,199
    $
37,183,206
    $
12,598,459
    $
52,041,864
 
                                         


See notes to consolidated financial statements.


3


ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

   
NINE MONTHS ENDED
 
   
SEPTEMBER 30,
 
   
2007
   
2006
 
OPERATING ACTIVITIES
           
  Net Income
  $
7,195,390
    $
5,863,615
 
  Adjustments to Reconcile Net Income
               
    To Net Cash Provided by Operating Activities:
               
    Depreciation
   
772,096
     
637,589
 
    Accretion of notes receivable discounts
    (115,501 )     (135,340 )
    Accretion of unrealized gross profit
    (52,138 )     (49,415 )
    Unrealized Gain on Financial Contracts
    (1,189,311 )    
2,336,036
 
    Stock Compensation
   
99,000
     
589,000
 
    Deferred Income Taxes
   
258,604
      (297,000 )
    Postretirement Obligation
   
589,455
     
--
 
    Minority interest
    (14,029 )     (6,790 )
  Changes in Operating Assets and Liabilities:
               
    (Increase) Decrease in Trade Receivables
    (3,346,376 )    
2,290,021
 
    Decrease in Notes Receivable
   
628,598
     
604,165
 
    Decrease in Income Tax Receivable
   
619,598
     
--
 
    Decrease in Inventories
   
653,472
     
795,345
 
    Decrease in Other Assets
   
34,070
     
281,214
 
    (Increase) Decrease in Financial Contract Deposits
   
1,500,000
      (2,300,000 )
    Decrease in Prepaid Expenses
   
35,302
     
91,724
 
    Increase (Decrease) in Accounts Payable and
               
        Accrued Liabilities
   
2,091,028
      (589,415 )
    Increase in Accrued Interest
   
385
     
7,063
 
    Decrease in Accrued Liabilities in Saudi Arabia
    (266,334 )     (787,363 )
    Net Cash Provided by Operating Activities
   
9,493,309
     
9,330,449
 
                 
INVESTING ACTIVITIES
               
  Additions to Al Masane Project
    (279,697 )     (281,033 )
  Additions to Plant, Pipeline and Equipment
    (7,760,857 )     (2,743,179 )
  (Additions)Reductions to Mineral Properties in the U.S.
    (498 )    
413
 
                 
    Net Cash Used in Investing Activities
    (8,041,052 )     (3,023,799 )
                 
FINANCING ACTIVITIES
               
  Additions to Long-Term Debt
   
--
     
4,558,726
 
  Repayment of Long-Term Debt
    (2,481,566 )     (8,776,340 )
  Repayment of Note to Stockholders
    (500 )     (13,333 )
                 
    Net Cash Used in Financing Activities
    (2,482,066 )     (4,230,947 )
                 
NET INCREASE (DECREASE) IN CASH
    (1,029,809 )    
2,075,703
 
                 
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
   
2,939,022
     
1,738,558
 
                 
CASH AND CASH EQUIVALENTS AT END OF PERIOD
  $
1,909,213
    $
3,814,261
 
                 

Supplemental disclosure of cash flow information:
           
  Cash payments for interest
  $
225,890
    $
625,740
 
  Cash payments for taxes
  $
2,800,000
    $
3,882,398
 
Supplemental disclosure of non-cash items:
               
  Notes Receivable issued for capital expansion
  $
--
    $
857,508
 
  Capital expansion amortized to depreciation expense
  $
364,462
    $
308,447
 

See notes to consolidated financial statements.

4


ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. BASIS OF PRESENTATION

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements, but, in our opinion, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of consolidated financial position, consolidated results of operations, and consolidated cash flows at the dates and for the periods presented have been included.  Interim period results are not necessarily indicative of the results for the calendar year. When reading the financial information contained in this quarterly report, reference should be made to the financial statements and footnotes contained in Arabian American Development Company’s Form 10-K for the year ended December 31, 2006.

These financial statements include the accounts of Arabian American Development Company (the “Company”) and its wholly-owned subsidiary, American Shield Refining Company (the “Petrochemical Company” or “ASRC”), which owns all of the capital stock of Texas Oil and Chemical Company II, Inc. (“TOCCO”). TOCCO owns all of the capital stock of South Hampton Resources, Inc., formerly known as South Hampton Refining Co. (“South Hampton”).  South Hampton owns all of the capital stock of Gulf State Pipe Line Company, Inc. (“Gulf State”). 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. The Petrochemical Company and its subsidiaries constitute the Company’s Specialty Petrochemicals Segment. Pioche and the Company’s mineral properties in Saudi Arabia constitute its Mining Segment.

2. RECENT ACCOUNTING PRONOUNCEMENTS

 FASB Statement No. 157

In September 2006 the FASB issued Statement No. 157, “Fair Value Measurements” (“SFAS 157”).  SFAS 157 defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measures.  SFAS 157 is effective for fiscal years beginning after November 15, 2007, with early adoption encouraged.  The provisions of SFAS 157 are to be applied on a prospective basis, with the exception of certain financial instruments for which retrospective application is required.  The Company is currently evaluating the impact adoption of SFAS 157 may have on the financial statements.

 FASB Statement No. 159

In February 2007 the FASB issued Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities-Including an Amendment of FASB Statement No. 115” (“SFAS 159”).  SFAS 159 permits an entity to choose to measure many financial instruments and certain other items at fair value.  Most of the provisions of SFAS 159 are elective, however, the amendment of SFAS 115, “Accounting for Certain Investments in Debt and Equity Securities”, applies to all entities with available for sale or trading securities.  SFAS 159 is elective as of the beginning of an entity’s first fiscal year beginning after November 15, 2007.  The Company is currently evaluating the impact adoption may have on the financial statements.

5


3. INVENTORIES

Inventories include the following:

   
September 30, 2007
   
December 31, 2006
 
Raw material
  $
1,913,273
    $
2,577,555
 
Petrochemical products
   
1,009,572
     
998,762
 
Total inventory
  $
2,922,845
    $
3,576,317
 

Inventories are recorded at the lower of cost, determined on the last-in, first-out method (LIFO), or market.  AtSeptember 30, 2007, and December 31, 2006, current cost exceeded LIFO value by approximately $1,416,000 and $445,000, respectively.
 
4. PLANT, PIPELINE AND EQUIPMENT

Plant, Pipeline and Equipment includes Construction in Progress of approximately $4.1 million and $0.5 million at September 30, 2007 and 2006, respectively.  Interest capitalized for the nine months ended September 30, 2007 and 2006 was $110,534 and $0, respectively.
 
5. NET INCOME PER COMMON SHARE

The following table (in thousands, except per share amounts) sets forth the computation of basic and diluted net income per share for the three and nine months ended September 30, 2007 and 2006, respectively.

   
Three Months Ended
   
Three Months Ended
 
   
September 30, 2007
   
September 30, 2006
 
               
Per Share
               
Per Share
 
   
Income
   
Shares
   
Amount
   
Income
   
Shares
   
Amount
 
Basic Net Income per Share:
                                   
Net Income
  $
382
     
22,902
    $
0.02
    $
515
     
22,809
    $
0.02
 
                                                 
Dilutive stock options outstanding
           
397
                     
265
         
                                                 
Diluted Net Income per Share:
                                               
Net Income
  $
382
     
23,299
    $
0.02
    $
515
     
23,074
    $
0.02
 

   
Nine Months Ended
   
Nine Months Ended
 
   
September 30, 2007
   
September 30, 2006
 
               
Per Share
               
Per Share
 
   
Income
   
Shares
   
Amount
   
Income
   
Shares
   
Amount
 
Basic Net Income per Share:
                                   
Net Income
  $
7,195
     
22,893
    $
0.31
    $
5,864
     
22,782
    $
0.26
 
                                                 
Dilutive stock options outstanding
           
381
                     
186
         
                                                 
Diluted Net Income per Share:
                                               
Net Income
  $
7,195
     
23,274
    $
0.31
    $
5,864
     
22,968
    $
0.26
 

At September 30, 2007, and 2006, 500,000 potential common stock shares were issuable upon the exercise of options.

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

 
6



Three Months ended September 30, 2007
 
Petrochemical
   
Mining
   
Total
 
                   
  Revenue from external customers
  $
28,038,422
    $
--
    $
28,038,422
 
  Depreciation
   
268,102
     
78
     
268,180
 
  Operating income (loss)
   
771,752
      (212,227 )    
559,525
 
                         
Total assets
  $
36,771,041
    $
41,160,424
    $
77,931,465
 
                         
Three Months ended September 30, 2006
                       
                         
  Revenue from external customers
  $
27,541,484
    $
--
    $
27,541,484
 
  Depreciation
   
230,312
     
79
     
230,391
 
  Operating income (loss)
   
1,160,760
      (135,938 )    
1,024,822
 
Total assets
  $
29,615,506
    $
40,690,951
    $
70,306,457
 
                         
Nine Months ended September 30, 2007
                       
                         
  Revenue from external customers
  $
78,841,804
    $
--
    $
78,841,804
 
  Depreciation
   
771,861
     
235
     
772,096
 
  Operating income (loss)
   
12,116,920
      (1,526,188 )    
10,590,732
 
                         
Nine Months ended September 30, 2006
                       
                         
  Revenue from external customers
  $
75,940,131
    $
--
    $
75,940,131
 
  Depreciation
   
637,421
     
168
     
637,589
 
  Operating income (loss)
   
10,445,345
      (590,964 )    
9,854,381
 

Information regarding foreign operations for the three and nine months ended September 30, 2007 and 2006 follows (in thousands). Revenues are attributed to countries based upon the origination of the transaction.

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2007
   
2006
   
2007
   
2006
 
Revenues
                       
  United States
  $
28,038
    $
27,541
    $
78,842
    $
75,940
 
  Saudi Arabia
   
--
     
-
     
--
     
--
 
    $
28,038
    $
27,541
    $
78,842
    $
75,940
 
Long-lived Assets
                               
  United States
  $
18,336
    $
11,082
                 
  Saudi Arabia
   
39,848
     
39,516
                 
    $
58,184
    $
50,598
                 

7. LEGAL PROCEEDINGS

In August 1997, the Executive Director of the Texas Commission on Environmental Quality (TCEQ) filed a preliminary report and petition with 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 Company is currently in negotiations with the TCEQ to resolve the proposed penalty.  The Company had previously revised and/or corrected the administrative and mechanical items in question.  The matter is expected to be resolved by year end.

On August 13, 2007, a lawsuit was filed against the Company and approximately 45 other defendants alleging the plaintiff was exposed to benzene which was the legal cause of his illness.  The Company has no known relationship with the plaintiff and intends to vigorously defend itself in the proceedings.  The Company’s insurance carriers are currently providing legal defense of the suit.  The resolution of this lawsuit is not expected to have a material affect on the Company’s financial condition.

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8.           LIABILITIES AND LONG-TERM DEBT

In September 2007, South Hampton signed a credit agreement with Bank of America for a $10.0 million term loan secured by plant, property, and equipment. The interest rate on the loan varies according to several options and may be based upon LIBOR or a base rate plus a markup.  The agreement expires October 31, 2018.  The proceeds of the credit line will be used to fund the facility expansion.  At September 30, 2007, no draws had been made on the loan.
 
In May 2006, South Hampton signed a credit agreement with Bank of America for a $12.0 million working capital line of credit secured by Accounts Receivable and Inventory. The agreement expires October 31, 2008.  The proceeds of the credit line were used to pay the outstanding balance of $1.8 million borrowed from the Catalyst Fund in 2005 for expansion of the tolling facilities at the petrochemical plant, the credit line with Amegy Bank, and for feedstock acquisition as necessary. The credit agreement contains a sub-limit of $3.0 million available to be used in support of the hedging program.  At September 30, 2007, approximately $3.1 million was outstanding and $8.9 million was unused.
A contract was signed on June 1, 2004, between South Hampton and a supplier for the purchase of 65,000 barrels per month of natural gasoline on open account for the period from June 1, 2004 through May 31, 2006 and year to year thereafter with thirty (30) days written notice of termination by either party.  The supplier is currently the sole provider of the facility’s feedstock supply although other sources are available.  On June 1, 2005, the contract was extended to May 31, 2008. The account was originally secured by a lien on plant assets.  The lien was removed in December 2006, and the account was placed on open status.

During the first nine months of 2006, $730,000 of the liability to the Company’s President and Chief Executive Officer was paid.  In the first nine months of 2007 approximately $326,000 of the liability to its President and Chief Executive Officer was paid, resulting in a balance of approximately $335,000 which remains due and owing as of September 30, 2007.  Approximately $306,000 of that amount relates to termination benefits due according to Saudi law upon Mr. El-Khalidi’s separation from the Company.

9.  DERIVATIVE INSTRUMENTS

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 treatment.

On January 30, 1992, the Board of Directors of TOCCO adopted a resolution authorizing the establishment of a commodities trading account to take advantage of opportunities to lower the cost of feedstock and natural gas for its subsidiary, South Hampton, through the use of short term commodity swap and option contracts.  The policy adopted by the Board specifically prohibits the use of the account for speculative transactions.  The operating guidelines adopted by management  generally limit exposures to 50% of the monthly feedstock volumes of the facility for up to six months forward and up to 100% of the natural gas requirements. The derivative

8


agreements are not designated as hedges per SFAS 133, as amended.  TOCCO had option and swap contracts outstanding as of September 30, 2007, covering various natural gas price movement scenarios through March of 2008 and covering from 50% to 100% of the natural gas requirements for each month.  As of the same date, TOCCO had committed to financial swap contracts for up to 50% of its required monthly feed stock volume with settlement dates through December of 2007.  For the nine months ended September 30, 2007 and 2006, the net realized gain/(loss) from the derivative agreements was approximately $2,520,000 and $1,192,000, respectively.  There was an unrealized gain for the nine months ended September 30, 2007 and 2006 of approximately $1,189,000 and $2,336,000, respectively.  The realized and unrealized gains are recorded in Cost of Petrochemical Product Sales and Processing for the periods ended September 30, 2007 and 2006.  The fair value of the derivative asset at September 30, 2007 totaled $423,639 and the fair value of the derivative liability at December 31, 2006 totaled $765,672.  Unexpired premiums (discounts) for derivatives were $60,000 and $(75,600) at September 30, 2007 and December 31, 2006, respectively.

10. SHARE-BASED COMPENSATION

 Common Stock

In March 2007, the Company issued 30,000 shares of its common stock to certain employees and executives of the Company for services rendered. In January 2006, the Company issued 40,000 shares of its common stock to certain employees and executives of the Company for services rendered. In August 2006, the Company issued 100,000 shares of its common stock to an independent director of the Company as recognition for many years of service.  The Company valued the common stock issued to employees and executives based on the fair value of its common stock on the date of grant.  Compensation expense recognized in connection with these issuances was $99,000 and $360,000 for the nine months ended September 30, 2007 and 2006, respectively.

Stock Options

A summary of the status of our stock option awards is presented below:


   
Number of Stock Options
   
Weighted Average Exercise Price per Share
 
             
Outstanding at January 1, 2007
   
500,000
    $
1.20
 
   Granted
   
--
         
   Exercised
   
--
         
   Forfeited
   
--
         
Outstanding at September 30, 2007
   
500,000
    $
1.20
 
Exercisable at September 30, 2007
   
500,000
    $
1.20
 

Outstanding options of 400,000 at January 1, 2007 have an indefinite life.  The remaining outstanding 100,000 options have a remaining contractual life of 23 months.

11. INCOME TAXES
 
The Company files an income tax return in the U.S. federal jurisdiction and Texas. Tax returns for the years 2004 through 2006 remain open for examination in various tax jurisdictions in which it operates.
 

9


 
The Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-An Interpretation of FASB Statement No. 109, Accounting for Income Taxes” (“FIN 48”), on January 1, 2007. As a result of the implementation of FIN 48, the Company recognized no material adjustment in the liability for unrecognized income tax benefits. At the adoption date of January 1, 2007, and at September 30, 2007, there were no unrecognized tax benefits.  Interest and penalties related to uncertain tax positions will be recognized in income tax expense. As of September 30, 2007, no interest related to uncertain tax positions had been accrued.
 

12. POST RETIREMENT OBLIGATIONS
 
In January 2007 a retirement agreement was entered into with Jack Crichton, Chairman of the Board. The agreement provides $3,000 per month in benefits to Mr. Crichton for five years after his retirement in addition to a lump sum of $30,000 that was paid upon the signing of the agreement.  A liability of approximately $148,000 was recorded at March 31, 2007 based upon the present value of the $3,000 payment per month using the Company’s borrowing rate of approximately 8%.  A current liability of approximately $148,000 remained outstanding at September 30, 2007 and was included in accrued liabilities.
 
 
In February 2007 a retirement agreement was entered into with Hatem El-Khalidi, President of the Company. The agreement provides $3,000 per month in benefits to Mr. El-Khalidi upon his retirement for the remainder of his life. Additionally, upon his death $2,000 per month will be paid to his surviving spouse for the remainder of her life. A health insurance benefit will also be provided.  A long term liability of approximately $440,000 based upon an annuity single premium value contract value was outstanding at September 30, 2007, and included in other liabilities.
 

13. SUBSEQUENT EVENTS

On October 22, 2007 the Company announced that it had received the approval of the Ministry of Commerce and Industry for the formation of the Al-Masane Al-Kobra Mining Company (ALAK).  The shareholders were instructed to publish the approval notice in the Official Gazette (the Saudi equivalent to the Federal Register) and to schedule a shareholder meeting during which the Board of Directors will be appointed and organized.  The notice was published as instructed, and the shareholders are to meet in late November or early December to formally organize their Board.  ALAK will then be approved to do business within the Kingdom.  The Company will then apply to the Ministry of Petroleum and Minerals to transfer the mining lease into the name of ALAK.  ALAK also expects, upon gaining official legal status, to sign the contracts for the construction of the processing facility.


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

GENERAL

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

 
On July 31, 2006, the Company, which was quoted on the Pink Sheets for the last four years, began trading on the OTC Bulletin Board. The change was pursued by the Company in an effort to expand the availability of information and increase the liquidity of the Company’s common stock for the benefit of its shareholders. Assisting the Company in changing its trading venue to the OTC Bulletin Board was Westminster Securities Corp., a full service brokerage firm headquartered in New York.
 

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. A discussion of each segment's liquidity and capital resources follows.

SPECIALTY PETROCHEMICALS SEGMENT. Since the acquisition of Texas Oil and Chemical Co. and subsidiaries in 1987, this segment has contributed all of the Company’s internally generated cash flows. As petroleum markets have fluctuated the last twenty years, the primary operating subsidiary, South Hampton, has been able to remain competitive by raising prices, cutting costs, shifting focus, or developing new markets as necessary.  As a smaller niche player in a capital intensive industry dominated by larger companies, continuing adjustments to the business plan have been necessary to achieve steady profitability and growth.  Product demand has continued to be strong during the last several years and these conditions allowed the Petrochemical segment to report significant earnings and adapt to continuing volatility of the markets.  A project to double the volume of products available for sale was approved by the Board of Directors on March 20, 2007.  Equipment procurement is underway, and the project is anticipated to be operational in the first half of 2008.  Financing is being provided by Bank of America on a secured basis.  The project will allow the Company to realize the benefits of increasing market demand domestically and internationally, and give it the product availability needed to maintain its present position as North American market leader.


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A contract is in place between South Hampton and the supplier for the purchase of 65,000 barrels per month of natural gasoline on open account through May 31, 2008, and year to year thereafter, with thirty days written notice of termination by either party.  The contract is based on a normal credit line with no security.  The supplier is currently the sole provider of feedstock, although other sources are available in the open market.  At September 30, 2007, South Hampton owed the supplier approximately $1,552,000.

On August 1, 2004, South Hampton entered into a capital lease with Silsbee Trading and Transportation, which is owned by an officer of the Company, for the purchase of a diesel powered man lift.  The lease is for five years with title transferring to South Hampton at the end of the term.

MINING SEGMENT. This segment is in the development stage. Its most significant asset is the Al Masane mining project in Saudi Arabia, which is a net user of the Company's available cash and capital resources. Implementation of the project has taken many years to come to fruition due to numerous factors such as insufficient world metal prices, lack of infrastructure nearby, and scarcity of investment capital for mining projects.  As the world economy and metal prices have improved over the last several years, investment viability has improved and steps are being taken to take advantage of the very active mining investment climate.

All lease payments were fully paid as of February 27, 2007.  The next payment will be due on January 1, 2008.

The Company is presently working with eight Saudi investors to form a closed Saudi joint stock company under the name Al Masane Al Kobra Mining Company (ALAK). The Company's mining lease will be transferred to ALAK.  ALAK will then build the mining and treatment facilities and start mining the ore reserves of zinc, copper, silver and gold which the Company has proven to exist with its previous geological work.  In addition, any other ore to be discovered and developed during the Company's mining lease period which ends in 2023 will also be developed. In accordance with the mining lease agreement, the lease can be extended for 20 years until 2043.  The ore will be treated on site, transforming it into copper, and zinc concentrates, to be sold to zinc and copper refineries, and gold and silver bullion.  On June 10, 2006 the Company entered negotiations with four potential Saudi investors and subsequently on August 6, 2006, a Partnership Agreement was signed by the Company and the investors. The agreement was approved by the Board of the Company on August 28, 2006, and draft Articles of Association and bylaws for ALAK were prepared.  While final details may change, the basic terms of agreement are as follows: (1) the capitalization of ALAK will be the amount necessary to develop the project, approximately $120 million, (2) the Company will own 50% of ALAK with the remainder being held by the Saudi investors, (3) the Company will contribute the mining assets and mining lease for a credit of $30 million and the Saudi investors will contribute $30 million cash, and (4) the remaining capital will be raised by ALAK by other means which may include application for a loan from the Saudi Industrial Development Fund, loans from private banks, and/or the inclusion of other investors. ALAK will have all powers of administration over the Al Masane mining project. Subsequent to the above agreement, four additional investors have been added to the group, and the cash contribution has been raised to $60 million, which was deposited in the accounts for ALAK in September and October of 2007.  The Company will have directors representing its interests on a board of directors with the Chairman of ALAK chosen from the directors representing the Saudi investors. The original documents are in Arabic, and English translations have been provided to the parties.  ALAK is in the process of being established under the rules of the Saudi Ministry of Commerce and Industry.  On October 22, 2007 the parties received notice of approval for formation of ALAK and the final steps are being taken to allow ALAK to conduct business within the Kingdom.  When the license to do business is issued, ARSD will request that the Ministry of Minerals and Petroleum transfer the lease into the name of ALAK, and contracts will be signed with the primary contractor on the construction of the processing mill.  These events are expected to take place in early 2008.

12


The Company on August 5, 2006, signed a one year Financial And Legal Services Agreement with a Saudi legal firm and a Saudi management consultant in Saudi Arabia to facilitate the: (1) formation of ALAK, (2) transfer of the mining assets and lease into ALAK, and (3) raising of additional capital. The attorney and consultant are to be paid in stock issued by the Company and up to one million shares will be issued in increments as each step is completed. The agreement has been extended on a month to month basis and remains in effect.

Between March 19, 2007, and March 27, 2007, a delegation of nine mining engineers, geologists and an economist from the China National Geological & Mining Corporation (CGM) visited the Company's office and the Al Masane mine site upon the invitation of the Saudi joint venture partners.  CGM collected data and information regarding the Al Masane project to determine whether it would submit a bid on construction on a turnkey basis together with NESMA.  NESMA is a major Saudi construction company and would be the primary contractor.  At the conclusion of the visit a Memorandum of Understanding was signed by a representative of ALAK, the Company, NESMA, and CGM, which stated that CGM would submit a preliminary general layout plan and drawing within ten days and that CGM will submit its final offer for turnkey construction and commissioning based on an updated feasibility study within three months after the invitation to tender offer by the Company is received. The tender offer is being prepared and will be provided to CGM once ALAK is officially formed and obtains its commercial registration from the Ministry of Commerce and Industry.

After initialization, the work plan is estimated to require approximately twenty-two months to complete after which commercial production will begin. On April 20, 2005, the Company signed an agreement with SNC-Lavalin Engineering and Construction Company of Toronto, Canada (SNC-Lavalin), to update the fully bankable feasibility study.  The prices of zinc, copper, gold and silver have increased significantly over the last several years, and the updated study with current prices was completed in August of 2005.  The study by SNC-Lavalin also updated the estimated capital cost and operating expenses of the project. SNC-Lavalin concluded that capital expenditure of approximately $115 million is required to bring the mine into production with an additional $6.7 million for a cyanide leach process for gold recovery.  The study was then turned over to a separate and independent consultant for further analysis and review of economic feasibility. The consultant, Molinari and Associates, Inc. of Toronto, Canada, (Molinari) concluded that the study by SNC-Lavalin was conservative and there were many opportunities for cost savings and improvements in the projections as presented.

Metal prices were at record lows worldwide during the early part of the 21st century, and consequently, a large number of mining projects were not economically feasible.  Based on recovering metal prices from 2004 through 2006, the project has become economically viable.  Using spot prices as of September 28, 2007, or even a ten year average of prices, the project becomes economically very attractive.  Mining economics, as with other capital intensive extractive industries such as offshore petroleum exploration, will vary over time as market prices rise and fall with worldwide economic performance.

The following chart illustrates the change from the prices of 2004 and 2006 to current levels:

 
Average Price
Spot Price as of
 
Percentage
 
 
For 2004-2006
09/28/07
 
Increase
 
Gold
$491.60 per ounce
$743.00 per ounce
    51.14 %
Silver
$  9.03 per ounce
$ 13.65 per ounce
    51.16 %
Copper
$  1.98 per pound
$  3.70 per pound
    86.87 %
Zinc
$  0.85 per pound
$  1.40 per pound
    64.71 %

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

13


2,850 square kilometers surrounding the Al Masane mining lease area and including the Wadi Qatan and Jebel Harr areas. The Company previously worked in the Greater Al Masane Area after obtaining written authorization from the Saudi Ministry of Petroleum and Mineral Resources, and has expended over $3 million in exploration work. Geophysical, geochemical and geological work and diamond core drilling in the Greater Al Masane areas revealed mineralization similar to that discovered at Al Masane.  In August 2006, the Ministry notified the Company that its application for a mineral exploration license did not comply with requirements of the new Mining Code adopted in 2004.  The Ministry invited the Company to re-apply, taking into consideration the new requirement that each application be limited to 100 square kilometers in area.  There is no limit on the number of applications, so the Company intends to re-apply for multiple areas, choosing the areas previously identified as the highest grade locations.  Exploration licenses are being prepared and will be submitted in the name of ALAK when commercial registration is obtained from the Saudi Ministry of Commerce and Industry.

Management is also addressing two other significant financing issues within the Mining Segment. These issues include: (1) the $11 million note payable to the Saudi Arabian government, and (2) accrued salaries and termination benefits of approximately $1,023,000 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 was owed approximately $601,000 at December 31, 2006 and $335,000 as of September 30, 2007).

Regarding the note payable, this loan was originally due in ten annual installments beginning in 1984. The Company has neither made any repayments nor 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 Ministry of Finance and National Economy recommended that the $11 million note be incorporated into a loan from the Saudi Industrial Development Fund (“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 final resolution of the $11 million note is undetermined at this time.  Management intends to address the issue once ALAK is established and in operation.  In the event the Saudi government demands immediate repayment of this obligation, which Management considers unlikely, the Company would have to investigate options available for refinancing the debt.

With respect to accrued salaries and termination benefits due employees working in Saudi Arabia, the Company plans to continue employing these individuals dependent upon the needs of the mining operation until such time as ALAK actually takes over the Al Masane mining project.  Management believes it has sufficient resources to manage this severance liability as necessary.  In 2007 the President of the Company was paid approximately $326,000 of the total amount owed and plans are to eliminate the balance by the end of the year.

The Company’s mineral interests in the United States consist solely of its holdings in Pioche, which has been inactive for many years. Pioche properties include forty-eight (48) patented and five (5) unpatented claims totaling approximately 1,500 acres in Lincoln County, Nevada. A claim consists of 22.5 acres and by being “patented”, the Company actually owns the surface area. “Unpatented” means the Company leases the surface area, and owns the mineral deposits.  There are prospects and mines on these claims that previously produced silver, gold, lead, zinc and copper. There is also a 300 ton/day processing mill on property owned by Pioche; however, 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. In August 2004, the Company exercised its option to purchase 720,000 shares of the common stock of Pioche at $0.20 a share for a total amount of $144,000. Pioche agreed to accept payment for the stock purchase by the cancellation of $144,000 of debt it owed to the Company. This purchase increased the Company’s ownership interest in Pioche to approximately 55%.  The recent high metal prices and positive outlook on the metals

14


markets have generated a renewed interest in the properties.  Inquiries are evaluated as they appear and the Company is investigating the best use of the properties.  A recent review of the property indicates the real estate value may preclude the practicality of developing mining operations.

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, Chairman Emeritus, has world wide experience as a renowned oil and mineral consultant to major companies.  He is the holder of a MSc. Degree in Petroleum Engineering from MIT.  Mr. Crichton served on the Board for over 40 years and remains an honorary member;
Mr. Hatem El-Khalidi, who holds a MSc. Degree in Geology from Michigan State University, is also a consultant in oil and mineral exploration.  He has served as President and Chief Executive Officer of the Company for many years.  Mr. El-Khalidi originally discovered the Al Masane deposits, and development has been under his direct supervision throughout the life of the project.  Mr. El-Khalidi’s current term expires in 2010;
Mr. Ghazi Sultan, a Saudi citizen, holds a MSc. Degree in Geology from the University of Texas.  Mr. Sultan served as the Saudi Deputy Minister of Petroleum and Mineral Resources 1965-1988 and was responsible for the massive expansion of the mineral resources section of the Ministry. Mr. Sultan is a member of the Audit and Compensation Committees of the Company.  Mr. Sultan’s current term expires in 2010;
Mr. Nicholas Carter, the Company’s Secretary and Treasurer, is a graduate of Lamar University with a BBA Degree in Accounting, is a CPA, and has extensive experience in the management of the Company’s petrochemical segment.  His employment in the petrochemical business predates the acquisition by the Company in 1987. Mr. Carter was first appointed to the Board on April 27, 2006.  Mr. Carter’s current term expires in 2008;
Mr. Robert E. Kennedy was first appointed to the Board on January 15, 2007 and has extensive experience in the petrochemical industry including serving over 30 years service with Gulf Oil and Chevron Chemical.  In 1989, while helping form the International Business Development Group for Chevron Chemical, he was involved in the development of a major installation in Saudi Arabia which came on stream in 1999.  Mr. Kennedy is a member of the Company’s Audit and Compensation Committees.  Mr. Kennedy’s current term expires in 2009;
Dr. Ibrahim Al-Moneef was appointed to the Board on April 26, 2007.  Dr. Al-Moneef holds a PhD in Business Administration from the University of Indiana.  He currently is owner and chief editor of The Manager Monthly Magazine, a Saudi business journal. He has held key positions with companies doing business in the Kingdom, including the Mawarid Group, the Ace Group, and the Saudi Consolidated Electric Company. Dr. Al-Moneef serves on the Audit, Compensation, and Nominating Committees, and his current term expires in 2009.
Mr. Mohammed A. Al-Omair was appointed to the Board on October 23, 2007.   Mr. Al-Omair resides in Riyadh, Saudi Arabia and is currently serving as Senior Vice President & Deputy Chief Executive Officer for FAL Holdings Arabia Co. Ltd.  He holds a BA Degree in Political Science and a Master of Public Administration from the University of Washington.  Mr. Al-Omair served on the Board of ARSD from 1993 until 2005 when he resigned for personal reasons.  Mr. Al-Omair is a member of the Audit and Compensation Committees.  Mr. Al-Omair’s current term expires in 2008;
Mr. Charles W. Goehringer, Jr. was appointed to the Board on October 23, 2007. Mr. Goehringer is an attorney with the law firm of Germer Gertz, LLP in Beaumont, Texas with more than 12 years experience and currently serves as corporate counsel for ARSD.  He also worked in industry as an engineer for over 15 years.  Mr. Goehringer holds a BS Degree in Mechanical Engineering from Lamar University, a Master of Business Administration from Colorado University, and a Doctor of Jurisprudence from South Texas College of Law.  Mr. Goehringer is a member of the Audit and Compensation Committees, and his current term expires in 2008.

15


Operating Activities
Cash provided by Operating Activities was approximately $9,493,000 in the first nine months of 2007 compared with approximately $9,330,000 in the same period of 2006.  The primary factors in the increase of approximately $163,000 were: an increase in trade receivables of approximately $5,636,000, a decrease in notes receivable of roughly $24,000, a decrease in income tax receivable of approximately $620,000, an increase in other assets of about $247,000, an increase in inventory of $142,000, an increase in prepaid assets of $56,000, a decrease in financial contract deposits of $3,800,000, an increase in accounts payable and accrued liabilities of $2,680,000, and an increase in accrued liabilities in Saudi Arabia of $521,000.  The Company’s net income increased by approximately $1,332,000 but was offset by non-cash charges including an increase in depreciation of about $135,000, an unrealized gain on financial contracts of approximately $3,525,000, a decrease in stock compensation of $490,000, an increase in deferred income taxes of roughly $556,000 and an increase in post-retirement obligations of about $589,000.

Investing Activities
Cash used for investing activities during the first nine months of 2007 was approximately $8,041,000, representing an increase of approximately $5,017,000 over the corresponding period of 2006 all of which was additions to Plant, Pipeline and Equipment.  Approximately $4.0 million of this amount relates to the Penhex Expansion project with another $1.1 million relating to completion of the work on rail and truck handling facilities which were initiated in 2006.

Financing Activities
Cash used for financing activities during the first nine months of 2007 was approximately $2,482,000 versus approximately $4,231,000 used in the corresponding period of 2006.  The reduction in principal payments on long-term debt in the first nine months of 2007 compared to the same period of 2006 was due to the decrease in the amount of long-term debt carried by the Company.  The Company made principal payments on long-term debt during the first nine months of 2007 of $2,000,000 on the Company’s revolving line and approximately $21,000 on the capital lease, and approximately $460,000 toward a vendor payable.  The Company made principal payments on long-term debt during the first nine months of 2006 of $441,000 on the Company’s revolving line, approximately $19,000 on the capital lease, $1,900,000 on a secured note, and approximately $1,857,000 on a note due to a vendor.

RESULTS OF OPERATIONS

SPECIALTY PETROCHEMICALS SEGMENT. In the quarter ended September 30, 2007, total petrochemical product sales increased by $348,000 and toll processing fees increased by $149,000 for a net increase in revenue of $497,000 or 1.8% compared to the quarter ended September 30, 2006.  Sales volume for the same period in 2007 versus 2006 decreased approximately 1.4% indicating steady demand and the maxed out status of the production facilities.  During these comparable quarters, the cost of petrochemical sales and processing (excluding depreciation) increased approximately $833,000 or 3.4% as compared to the third quarter in 2006. Consequently, total gross profit margin on revenue for the third quarter of 2007 decreased approximately $336,000 or 12.1% as compared to the same period in 2006. The change in gross profit margin for the period was primarily due to the change in the fair value of derivatives for feedstock purchases. The derivatives program as operated by the Company is designed to allow for increased predictability of pricing for natural gas and feedstock over time, which may have positive or negative results during the short term when price fluctuations are significant as they were in the third quarter of 2007. The other factor which may affect margins as the petroleum markets fluctuate in price is 20% of the Company’s product which is sold on a formula pricing basis.  Depending on how market prices of unleaded gasoline or benzene relate to natural gasoline prices, the margins on this product line may increase or decrease within a short period of time.

The cost of petrochemical product sales and processing and gross profit margin for the three months ended September 30, 2007 and 2006 includes an unrealized (loss)/

16


gain of approximately ($2,860,000) and $222,000 respectively, on the derivative agreements.

For the nine month period ending September 30, 2007, total petrochemical product sales and processing fees increased approximately $2.9 million or 3.8%, while the cost of petrochemical sales and processing (excluding depreciation) increased approximately $810,000 or 1.3% over the comparable period in 2006. Consequently, the total gross profit margin on petrochemical product sales and processing during the first nine months of 2007 increased approximately $2.1 million as compared to the same period in 2006. The cost of petrochemical product sales and processing and gross profit margin for the nine month period ending September 30, 2007 and 2006, includes an estimated unrealized gain of approximately $1,189,000 and $2,336,000 respectively, on the derivative agreements.

Growth of the North American markets served has generally been 2% to 3% annually over the past ten to fifteen years.  The Company’s growth in volume has generally matched that trend over the same time period, although after the March 2005 expansion, the growth rate in sales exceeded the industry wide growth rate.  The Company bases its marketing philosophy on high quality, consistent, products and services to the customer and believes this is essential to being successful in the specialty product marketplace.  In addition to growth in the North American market, the Company is actively pursuing export opportunities.

Demand remained strong for most products through the first nine months of 2007, and the process ran at 91% of capacity per calendar day, which is close to maximum capacity when time lost for maintenance, weather interruptions, and mechanical failures are considered.

Since 2003, the Company has entered into derivative agreements to dampen sudden price spikes and provide feedstock price protection.  Management believes that if the derivative agreements can moderate rate of change in the overall cost of feedstock, product prices can be adjusted sufficiently as needed.  Generally, approximately 50% of the Company’s monthly feedstock requirements for three to nine months ahead might be covered at any one time.  This ratio cushions price increases and allows the Company to experience partial benefit when the price drops. During the first nine months of 2007, natural gasoline derivative agreements had a realized gain of approximately $2,853,000 and an unrealized gain of approximately $886,000 for a total positive effect of approximately $3,739,000.  The program is designed to be insurance against unforeseen dramatic price swings rather than a speculative profit center.  It operates mostly as a “buy and hold” program.

The price of natural gas (fuel gas), which is the petrochemical operation’s largest single operating expense, continued to be high during the first nine months of 2007 as compared to historical levels.  The Company has option contracts in place for fuel gas through the first quarter of 2008 in order to minimize the impact of price fluctuations in the market.  The Company was also able to pass through price increases as they occurred.  During the first nine months of 2007, natural gas derivative agreements had a realized loss of approximately $333,000 and an unrealized gain of approximately $167,000.  Derivative discounts of $75,600 expired and $60,000 of premiums were paid for additional derivatives during the first nine months of 2007.

Toll processing fee revenue for the third quarter of 2007 of approximately $1,438,000 represents an increase of approximately $149,000 or 11.6% above the fees for the same period in 2006.  The toll processing customers are very active and remain on long-term contracts. While there are some fluctuations in tolling volumes handled, toll processing has developed into a stable business and the Company intends to continue to develop opportunities when available. Toll processing fees are expected to remain steady during the remainder of 2007 and beyond as expanded facilities for a major customer were completed in October 2005.  The revised contract with this customer contains a capital repayment feature. The expanded unit began operations on schedule

17


(considering the hurricane caused delay) and is producing high quality products at volumes requested by the customer.  There are shortages in the markets served by this process, and it is expected the expanded unit will run at high rates for the remainder of 2007.  A project expanding the capacity of a tolling unit for a different customer was operational August 3, 2006, and is expected to further enhance tolling revenues.  Toll processing revenues for the nine months ended September 30, 2007 are 25.1% higher than for the comparable figure of 2006.

While the volume of feedstock purchased is increasing because of expanded capacity, significant price changes in the petroleum markets have also increased the dollar amount of such purchases.  The Company has absorbed most of the increased working capital needs through cash flow, and the line of credit is only partially used.

MINING SEGMENT AND GENERAL CORPORATE EXPENSES.  None of the Company's other operations generate significant operating or other revenues. The minority interest amount represents Pioche minority stockholders’ share of the losses from the Pioche operations. Pioche losses are primarily attributable to the costs of maintaining the Nevada mining properties.

The Al Masane mining project requires approximately $60,000 per month of cash outlay to maintain facilities and advance the development of the project including the lease payment of $117,300 per year.  During the first nine months of 2007, the Company capitalized approximately $280,000 in development expenditures and recorded approximately $198,000 as expense. After the Al Masane lease is transferred to ALAK, ongoing maintenance and operation expense will be paid within ALAK, and it is anticipated that expenses required to oversee the Company’s investment will continue at a reduced rate.

The Company assesses carrying values of its assets on an ongoing basis. Factors which may affect carrying values of the mining properties include, but are not limited to, mineral prices, capital cost estimates, estimated operating costs of any mines and related processing, ore grade and related metallurgical characteristics, design of any mines and the timing of mineral production. Prices currently used to assess the recoverability of the Al Masane project costs for 2007 are $3.70 per pound for copper and $1.40 per pound for zinc for the projected life of the mine.  Copper and zinc comprise in excess of 80% of the expected value of production. Using these price assumptions, there were no asset impairments at September 30, 2007. There are no assurances that, particularly in the event of a prolonged period of depressed mineral prices, the Company will not be required to take a material write-down of its mineral properties in the future.

The Balance Sheet of the Company includes several noteworthy changes from September 30, 2007 as compared to that published in the Company’s Annual Report for December 31, 2006, primarily attributable to the petrochemical segment. Trade receivables increased during the first nine months of 2007 by $3.346 million to $12.240 million. The balance at the end of the 2006 was lower due to decreased sales during the last two weeks of December.  The receivable balance at September 30, 2007 is considered more normal.  The average collection period remains normal for the business.  Inventories decreased from December 31, 2006 due to a decrease in the volume of finished product inventory the Company had on hand at the end of the period.  The decrease of approximately $653,000 fell within the normal ebb and flow of the business and carries no significant meaning in Management’s opinion. As discussed previously, financial contracts moved from a current liability of approximately $765,000 to a current asset of approximately $424,000 due to changes in fair value of contracts on hand at September 30, 2007.  The increase in Plant, Pipeline and Equipment of $7,755,000 is principally due to continued expansion of the truck and rail loading facility in anticipation of the increased process capability, as well as, acquisition of equipment for process capability expansion. The rail facility has not undergone significant improvement for several years and was due to be upgraded for safety and efficiency purposes.  The rail loading facility project was completed

18


during the third quarter of 2007.  The process expansion should be complete during the first half of 2008.

General and Administrative costs for the first nine months of 2007 increased approximately $1,221,000 versus the same period in 2006.  A major contributor to the increase is approximately $589,000 of expense relating to post-retirement agreements signed in January and February of 2007.  The remaining difference is due to generally higher labor costs and increased business activity.  The Company expects to incur increased expense for the remainder of 2007 due to increased training of additional personnel in anticipation of the expanded production activities in early 2008.

Interest expense for the first nine months of 2007 of approximately $116,000 represents a decrease of approximately $517,000 for the same period in 2006. Interest expense decreased in 2007 due to reductions in note payable balances, refinancing at lower interest rates, and the capitalization of interest of approximately $110,500 for construction in progress.

The Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-An Interpretation of FASB Statement No. 109, Accounting for Income Taxes” (“Fin 48”), On January 1, 2007.  As a result of the implementation of FIN 48, the Company recognized no material adjustment in the liability for unrecognized income tax benefits.  At the adoption date of January 1, 2007, and at September 30, 2007, there were no unrecognized tax benefits.  Interest and penalties related to uncertain tax positions will be recognized in income tax expense.  As of September 30, 2007, no interest related to uncertain tax positions had been accrued.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.

There have been no material changes in the Company’s exposure to market risk from the disclosure included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006.

ITEM 4. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Control and Procedures

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report (the “Evaluation Date”). Based on this evaluation, our principal executive officer and principal financial officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective such that the information relating to us, including our consolidated subsidiaries, required to be disclosed in our SEC reports (i)is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii)is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

As reported in Item 9A of our Annual Report on Form 10-K filed April 5, 2007, two control deficiencies  were determined to be material weaknesses (as defined in Public Company Accounting Oversight Board Auditing Standard No.2).  These items related to accounting for income taxes and timely preparation of financial statements in accordance with GAAP.

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In response to the foregoing material weaknesses, the Company has contracted with an independent, outside party to provide additional accounting resources and assist management in preparing accurate and timely financial statements.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

In August 1997, the Executive Director of the Texas Commission on Environmental Quality (TCEQ) filed a preliminary report and petition with 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 Company is currently in negotiations with the TCEQ to resolve the proposed penalty.  The Company had previously revised and/or corrected the administrative and mechanical items in question.  The matter is expected to be resolved by year end.

On August 13, 2007, a lawsuit was filed against the Company and approximately 45 other defendants alleging the plaintiff was exposed to benzene which was the legal cause of his illness.  The Company has no known relationship with the plaintiff and intends to vigorously defend itself in the proceedings.  The Company’s insurance carriers are currently providing legal defense of the suit.  The resolution of this lawsuit is not expected to have a material affect on the Company’s financial condition.

ITEM 1A. RISK FACTORS

There have been no material changes from the risk factors previously disclosed in  the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.

NONE.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

The Company has an $11 million note payable to the Saudi Arabian government that was originally due in ten annual installments beginning in 1984.  The Company has neither made any repayments nor 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 Ministry of Finance and National Economy recommended that the $11 million note be incorporated into a loan from the Saudi Industrial Development Fund 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 has not in recent times approached the Ministry of Finance to explore the options for the handling of this note and does not intend to do so until ALAK is firmly established and operating.  Any continuing guarantees or liability is undetermined at this time.  In the event the Saudi government demands immediate repayment of this obligation, which management considers unlikely, the Company would have to investigate options available for refinancing the debt.

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

On June 13, 2007, the Company held its annual meeting of stockholders in Dallas, Texas. Nicholas N. Carter, Robert E. Kennedy, Ibrahim A. Al-Moneef, Hatem El-Khalidi, and Ghazi Sultan were elected to serve as directors of the Company.  In addition, the stockholders ratified the selection of Moore Stephens TravisWolff, LLP as the Company’s independent registered public accounting firm.  Below is a table containing

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the number of votes cast for, against or withheld, as well as the number of abstentions, as to each such matter.

   
Votes For
   
Votes Against or Withheld
   
Abstentions
 
Nicholas N. Carter
   
15,082,094
     
64,518
     
--
 
Robert E. Kennedy
   
15,098,851
     
47,761
     
--
 
Ibrahim A. Al-Moneef
   
15,098,771
     
47,841
     
--
 
Hatem El-Khalidi
   
15,095,284
     
51,328
     
--
 
Ghazi Sultan
   
15,098,571
     
48,041
     
--
 
Moore Stephens TravisWolff, LLP
   
15,003,184
     
127,028
     
16,400
 

ITEM 5. OTHER INFORMATION.

NONE.

ITEM 6. EXHIBITS.

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

Exhibit
Number
Description
3(i)
 
-  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(ii)
 
-  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)
 
-  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(b)
 
-  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(c)
 
-  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(d)
 
-  Addendum to Equipment Lease Agreement dated August 1, 2004, between Silsbee Trading and Transportation Corp. and South Hampton Refining Company (incorporated by reference to Exhibit 10(q) to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004 (file No. 0-6247)).
 
10(e)
 
-  Partnership Agreement dated August 6, 2006 between Arabian American Development Company, Thamarat Najran Company, Qasr Al-Ma’adin Corporation, and Durrat Al-Masani’ Corporation (incorporated by reference to Exhibit 10(i) to the Company’s Quarterly Report on Form 10-Q/A for the quarter ended September 30, 2006 (file No. 0-6247)).
 
10(f)
 
-  Financial and Legal Service and Advice Agreement dated August 5, 2006 between Arabian American Development Company, Nassir Ali Kadasa, and Dr. Ibrahim AL-Mounif (incorporated by reference to Exhibit 10(j) to the Company’s Quarterly Report on Form 10-Q/A for the quarter ended September 30, 2006 (file No. 0-6247)).
 
10(g)*
 
-  Retirement Awards Program dated January 17, 2007 between Arabian American Development Company and Jack Crichton (incorporated by reference to Exhibit 10(h) to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2007(filed No. 0-6247)).
 
10(h)*
 
-  Retirement Awards Program dated February 16, 2007 between Arabian American Development Company and Hatem El-Khalidi (incorporated by reference to Exhibit 10(i) to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2007(filed No. 0-6247)).
 
10(i)
 
-  Waiver and Second Amendment to Credit Agreement and First Amendment to Borrower Security Agreement dated September 19, 2007 between South Hampton Resources, Inc. and Bank of America, N.A.
 
31.1
 
-  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.
 


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SIGNATURES


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



DATE:  November 9, 2007                       ARABIAN AMERICAN DEVELOPMENT COMPANY
                                                     (Registrant)


                                                     By: /s/ NICHOLAS CARTER
                                                        Nicholas Carter
                                                        Treasurer