NOTE 1 – 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 activity is manufacturing various specialty petrochemical products (also referred to as the "Petrochemical Operations").  At December 31, 2012, the Company also owned 37% of a Saudi Arabian joint stock company, Al Masane Al Kobra ("AMAK") (see Note 9) and approximately 55% of the capital stock of a Nevada mining company, Pioche Ely Valley Mines, Inc. ("PEVM"), which does not conduct any substantial business activity but owns undeveloped properties in the United States.

The Company's petrochemical operations are primarily conducted through a wholly-owned subsidiary, Texas Oil and Chemical Co. II, Inc. ("TOCCO").  TOCCO owns all of the capital stock of South Hampton Resources Inc. ("South Hampton").  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 which manufactures high purity solvents used primarily in polyethylene, packaging, polypropylene, expandable polystyrene, poly-iso/urethane foams, and in the catalyst support industry.  Gulf State owns and operates pipelines that connect the South Hampton facility to a natural gas line, to South Hampton's truck and rail loading terminal and to a major petroleum pipeline owned by an unaffiliated third party.

The Company attributes revenues to countries based upon the origination of the transaction.  All of our revenues for the years ended December 31, 2012, 2011, and 2010, originated in the United States.  In addition, all of our long-lived assets are in the United States.

On November 30, 2010, the Company entered into a Letter of Intent and Agreement and Plan of Reorganization with STTC owned by Nicholas N. Carter, the President and CEO of the Company, pursuant to which South Hampton Transportation, Inc. ("SHTI"), a Delaware corporation and a wholly owned subsidiary of TOCCO, acquired 100% of the common stock of STTC. The acquisition was completed on November 30, 2010, with STTC being the surviving entity.  The Company subsequently merged STTC into South Hampton with South Hampton as the surviving corporation and STTC being dissolved.  Prior to the acquisition of STTC, South Hampton leased transportation related equipment from STTC pursuant to a Master Lease Agreement dated February 3, 2009, which was set to expire in May 2014.  The purpose of the acquisition of STTC was the acquisition of various transportation related assets from STTC that are important to South Hampton's operations and termination of a related-party transaction and lease agreement (see Note 19).

The contractual based intangible asset represented STTC's right under its lease agreement to lease equipment to and receive lease payments from South Hampton through May 2014.  The amount recorded for this asset was based on the discounted net cash flows STTC would have received and represents South Hampton's cost to cancel the lease by acquiring STTC.

The results of STTC's operations and cash flows have been included in the consolidated results of income and cash flows from the date the merger was completed. STTC's only customer was South Hampton and it ceased generating revenues after the acquisition.  Pro forma net income and net income per common share, computed as if the merger had been completed on January 1, 2009, would not have differed materially from the historical amounts.