Annual report pursuant to section 13 and 15(d)

SHARE-BASED COMPENSATION

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SHARE-BASED COMPENSATION
12 Months Ended
Dec. 31, 2012
SHARE-BASED COMPENSATION [Abstract]  
SHARE-BASED COMPENSATION
NOTE 15 – SHARE-BASED COMPENSATION

Common Stock – In September 2012 the Company issued 7,500 shares of restricted common stock to its newly appointed Executive Vice President.  Compensation expense of $72,600 was recognized in connection with this issuance.

In November 2010 the Company issued 232,170 shares of common stock to its President/CEO in connection with the purchase of STTC (see Note 1).

In January 2010 the Company issued 14,000 shares of common stock to non-employee directors for services rendered during 2009.  Compensation expense recognized in connection with this issuance was $30,940.

Stock Options – On April 3, 2012, the Board of Directors of the Company adopted the Arabian American Development Company Stock and Incentive Plan (the "Plan") subject to the approval of Company's shareholders.  Shareholders approved the Plan at the 2012 Annual Meeting of Shareholders on June 6, 2012.

On April 7, 2008, the Board of Directors of the Company adopted the Stock Option Plan for Key Employees, as well as, the Non-Employee Director Stock Option Plan (hereinafter collectively referred to as the "Stock Option Plans"), subject to the approval of Company's shareholders.  Shareholders approved the Stock Option Plans at the 2008 Annual Meeting of Shareholders on July 10, 2008.  The Company filed Form S-8 to register the 1,000,000 shares allocated to the Stock Option Plans on October 23, 2008.

A summary of all 2012 issuances is as follows:

On November 15, 2012, the Company awarded 10 year options to Director Gary Adams for 100,000 shares.  These options have an exercise price equal to the closing price of the stock on November 15, 2012, which was $7.14 and vest in 20% increments over a 5 year period.  Compensation expense recognized during 2012 in connection with this award was approximately $15,000.  The fair value of the options granted was calculated using the Black-Scholes option valuation model with the following assumptions:

Expected volatility
87%
Expected dividends
None
Expected term (in years)
6.5
Risk free interest rate
0.92%

A summary of all 2011 issuances is as follows:

On May 20, 2011, the Company awarded 10 year options to Director Joseph Palm for 19,333 shares with the intent to increase the aggregate grant to 100,000 shares as they become available.  The initial grant of 19,333 options has an exercise price equal to the closing price of the stock on May 20, 2011, which was $3.90 and vest after 1 year. Compensation expense recognized during 2012 and 2011 in connection with this award was approximately $24,000 and $33,000, respectively.  On September 25, 2011, additional shares became available under the plan; therefore, the Company awarded 10 year options to Mr. Palm for 80,000 shares with an exercise price equal to the closing price of the stock on September 23, 2011, (the latest closing date available) which was $3.52.  These options vest over 4.67 years with the first 20,000 vesting on May 19, 2013, and subsequent 20,000 share lots vesting each anniversary of that date subsequent until entirely vested.  No compensation expense was recognized in connection with this award during 2011 due to the unvested nature of the options.  Compensation expense recognized for 2012 was approximately $38,000.

On May 2, 2011, the Company awarded 10 year options to Director John Townsend for 100,000 shares.  These options have an exercise price equal to the closing price of the stock on May 2, 2011, which was $4.09 and vest in 20% increments over a 5 year period.  Compensation expense recognized during 2012 and 2011 in connection with this award was approximately $80,000 and $54,000, respectively.

On January 12, 2011, the Company awarded 10 year options to key employees for 391,000 shares.  These options have an exercise price equal to the closing price of the stock on January 12, 2011, which was $4.86 and vest in 25% increments over a 4 year period.  Compensation expense recognized during 2012 and 2011 in connection with this award was approximately $475,000 each year.

The fair value of the 2011 options granted was calculated using the Black-Scholes option valuation model with the following range of assumptions:

Expected volatility
96% to 413%
Expected dividends
None
Expected term (in years)
5-10
Risk free interest rate
1.26% to 3.34%

A summary of all 2010 issuances is as follows:

In January 2010 the Company awarded fully vested options to its non-employee directors for 32,667 shares in total for their service during 2009.  The exercise price of the options is $2.21 per share based upon the closing price on January 28, 2010.  The options have a remaining life of 7.1 years as of December 31, 2012.  Compensation expense recognized during 2010 in connection with this award was approximately $72,000, respectively.  In January 2010 the Company also awarded 95,000 options to officers and key employees for their service during 2009.  The exercise price of the options was also $2.21.  These options vest over a 2 year period.  Compensation expense recognized during 2012, 2011 and 2010 in connection with this award was approximately $8,000, $97,000 and $96,000, respectively.

In February 2010 the Company awarded 500,000 options to non-employee directors for their service during 2010 subject to attendance and service requirements.  These options vest over a 5 year period.  The exercise price of these options is $2.82 based upon the closing price on February 23, 2010.  Directors' fee expense recognized during 2012, 2011 and 2010 in connection with this award was approximately $113,000, $103,000 and $221,000, respectively.

In June 2010 the Company awarded a 7 year option to purchase 10,000 shares of restricted stock to a key employee with a vesting period of 2 years.  The exercise price of the options is $2.47 per share based upon the closing price on June 22, 2010.  The options have a remaining life of 4.5 years as of December 31, 2012.  Compensation expense recognized in connection with this award during 2012, 2011 and 2010 was approximately $6,000, $12,000 and $6,200, respectively.

The fair value of the 2010 options granted was calculated using the Black-Scholes option valuation model with the following range of assumptions:

Expected volatility
338% to 467%
Expected dividends
None
Expected term (in years)
5-10
Risk free interest rate
2.37% to 3.68%

 A summary of unvested 2009 issuances is as follows:
 
On July 2009 the Company awarded two stock options to Mr. Hatem El Khalidi and his wife, Ingrid El Khalidi, tied to the performance of AMAK as follows: (1) an option to purchase 200,000 shares of the Company's common stock with an exercise price of $3.40 per share, equal to the closing sale price of such a share as reported on the Nasdaq National Market System on July 2, 2009, provided that said option may not be exercised until such time as the first shipment of ore from the Al Masane mining project is transported for commercial sale by AMAK, and further that said option shall terminate and be immediately forfeited if not exercised on or before June 30, 2012; and (2) an option to purchase 200,000 shares of the Company's common stock with an exercise price equal to the closing sale price of such a share as reported on the Nasdaq Stock Market on July 2, 2009, provided that said option may not be exercised until such time as the Company receives its first cash dividend distribution from AMAK, and further that said option shall terminate and be immediately forfeited if not exercised on or before June 30, 2019. Compensation expense of approximately $97,000, $97,000 and $373,000 was recognized during the years ended December 31, 2012, 2011, and 2010, respectively, related to the options awarded to Mr. El Khalidi. Approximately $413,000 was reversed during 2012 due to the performance condition associated with 200,000 shares in options not being met as required by the terms of the award by June 30, 2012. Previously, on May 9, 2010, the Board of Directors determined that Mr. El Khalidi forfeited all options and other retirement benefits when he made various demands against the Company and other AMAK Saudi shareholders which would benefit him personally and were not in the best interests of the Company and its shareholders. As discussed in Note 14 the Company is currently in litigation with Mr. El Khalidi and in connection therewith, the Company is currently reviewing its legal right to withdraw the options and benefits. However, as of December 31, 2012, the options vesting upon a cash dividend distribution from AMAK continues to be shown as outstanding.
 
A summary of the status of the Company's stock option awards is presented below:

 
Stock Options
 
 
Weighted
Average
Exercise
Price
Per Share
 
 
Weighted
Average
Remaining
Contractual
Life
 
 
Intrinsic
Value
(in thousands)
 
Outstanding at December 31, 2011
 
 
1,347,750
 
 
$
3.66
 
 
 
 
 
 
 
Granted
 
 
100,000
 
 
 
7.14
 
 
 
 
 
 
 
Expired
 
 
(200,000
)
 
 
3.40
 
 
 
 
 
 
 
Exercised
 
 
(74,570
)
 
 
3.05
 
 
 
 
 
 
 
Forfeited
 
 
-
 
 
 
-
 
 
 
 
 
 
 
Outstanding at December 31, 2012
 
 
1,173,180
 
 
$
4.04
 
 
 
7.5
 
 
$
5,009
 
Expected to vest
 
 
673,252
 
 
$
4.58
 
 
 
8.3
 
 
$
2,511
 
Exercisable at December 31, 2012
 
 
299,928
 
 
$
3.26
 
 
 
6.5
 
 
$
1,515
 

The aggregate intrinsic value of options was calculated as the difference between the exercise price of the underlying awards and the quoted price of our common stock.  At December 31, 2012, options to purchase approximately 1.2 million shares of common stock were in-the-money.

The weighted average grant-date fair value per share of options granted during the years 2012, 2011, and 2010 was $7.14, $4.43 and $2.69, respectively.  During 2012 the aggregate intrinsic value of options exercised was approximately $445,000 determined as of the date of option exercise.  During 2011 the aggregate intrinsic value of options exercised was approximately $267,000 determined as of the date of option exercise.  No options were exercised during 2010.

The Company received $145,000 in cash from the exercise of options during the year ended December 31, 2012.  The tax benefit realized from the exercise was insignificant.

A summary of the status of the Company's non-vested options is presented below:

 
Shares
 
 
Weighted
Average
Grant-Date
Fair Value
Per Share
 
Non-vested at January 1, 2012
 
 
1,199,083
 
 
$
3.83
 
Granted
 
 
100,000
 
 
 
7.14
 
Expired
 
 
(200,000
)
 
 
3.40
 
Vested
 
 
(225,831
)
 
 
3.78
 
Non-vested at December 31, 2012
 
 
873,252
 
 
$
4.31
 

Total fair value of options that vested during 2012 was approximately $854,000.

As of December 31, 2012, there was approximately $2.6 million of unrecognized compensation costs related to non-vested share-based compensation that is expected to be recognized over a weighted average period of 3.1 years.

The Company expects to issue shares upon exercise of options from its authorized but unissued common stock.