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FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 1997NOTES TO CONSOLIDATED FINANCIAL STATEMENTS6. Stockholders' Equity
Common Stock. In October 1997, the Company declared a 10% stock dividend to shareholders of record. The transaction was valued based on the closing price ($28.8125) of the Company’s common stock on the New York Stock Exchange on October 1, 1997. As a result of the issuance of 1,494,606 shares of the Company’s common stock as a dividend, retained earnings were reduced by $43,063,335, with the common stock and additional paid-in capital accounts increased by the same amount. Basic and diluted income per share was restated for all periods presented to reflect the effect of the stock dividend. In August 1996, the holders of the Company’s Debentures converted such Debentures into 2,343,108 shares of the Company’s common stock, which resulted in a third quarter 1996 increase in the Company’s capital accounts of approximately $27,650,000. Stock-Based Compensation Plans. The Company has two stock option plans, the 1990 stock compensation plan and the 1990 nonqualified plan, as well as an employee stock purchase plan. Under the 1990 compensation plan, incentive stock options and other options and awards may be granted to employees to purchase shares of common stock. Under the 1990 non-qualified plan, non-employee members of the Company’s Board of Directors may be granted options to purchase shares of common stock. Both plans provide that the exercise prices equal 100% of the fair value of the common stock on the date of grant. Options become exercisable for 20% of the shares on the first anniversary of the grant of the option and are exercisable for an additional 20% per year thereafter. Options granted expire 10 years after the date of grant or earlier in the event of the optionee’s separation from employment. At the time the stock options are exercised, the option price is credited to common stock and additional paid-in capital. The Company also granted certain stock options to individuals who were neither employees, officers, nor directors for specific services rendered to the Company. During 1996 all of these remaining options were either exercised (57,555 shares) or canceled (11,195 shares) so that no such options remain outstanding. The employee stock purchase plan provides eligible employees the opportunity to acquire shares of Company common stock at a discount through payroll deductions. This plan was approved at the May 11, 1993, shareholders meeting. The plan year is from June 1 to the following May 31. The first year of the plan commenced June 1, 1993. Employees may authorize payroll deductions of up to 10% of their base salary during the plan year by making an election to participate prior to the start of a plan year. The purchase price for stock acquired under the plan will be 85% of the lower of the closing price of the Company’s common stock as quoted on the New York Stock Exchange at the beginning or end of the plan year or a date during the year chosen by the participant. Under this plan the Company issued 26,551 shares at a price of $15.19 in 1997, 36,387 shares at a price range of $6.59 to $7.97 in 1996, and 37,689 shares at a price range of $6.80 to $7.92 in 1995. The estimated weighted average fair value of shares issued under this plan was $4.39 in 1997, $2.13 in 1996, and $2.59 in 1995. As of December 31, 1997, there remained 458,204 shares available for issuance under this plan. There are no charges or credits to income in connection with this plan. |
The Company accounts for the two stock option plans under APB Opinion No. 25, under which no compensation cost has been recognized. Had compensation cost for these plans been determined consistent with SFAS No. 123, "Accounting for Stock-Based Compensation," the Company’s net income and earnings per share would have been reduced to the following pro forma amounts (1996 and 1995 amounts have been restated to reflect the October 1997 10% stock dividend):
| 1997 | 1996 | 1995 | ||||||
| Net Income: | As Reported | $22,310,189 | $19,025,450 | $4,912,512 | ||||
| Pro Forma | $21,362,722 | $18,750,064 | $4,628,678 | |||||
| Basic EPS: | As Reported | $1.35 | $1.27 | $0.49 | ||||
| Pro Forma | $1.30 | $1.25 | $0.46 | |||||
| Diluted EPS: | As Reported | $1.26 | $1.25 | $0.49 | ||||
| Pro Forma | $1.21 | $1.23 | $0.46 |
Because the SFAS No. 123 method of accounting has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years.
The following is a summary of the Company’s stock options under these plans as of December 31, 1997, 1996, and 1995:
| 1997 | 1996 | 1995 | ||||||
| Wtd. Avg. | Wtd. Avg. | Wtd. Avg. | ||||||
| Shares | Exer. Price | Shares | Exer. Price | Shares | Exer. Price | |||
| Options outstanding, beginning of period | 1,399,769 | $12.09 | 1,308,391 | $8.83 | 1,166,920 | $8.86 | ||
| Options granted | 401,390 | $26.23 | 302,281 | $23.78 | 227,502 | $8.63 | ||
| Options terminated | (31,404) | $12.99 | (11,251) | $8.81 | (80,270) | $8.78 | ||
| Options exercised | (137,155) | $8.54 | (199,652) | $8.65 | (5,761) | $7.59 | ||
| Options adjusted for 10% stock dividend | 128,912 | --- | --- | |||||
| --------------- | --------------- | --------------- | ||||||
| Options outstanding, end of period | 1,761,512 | $14.71 | 1,399,769 | $12.09 | 1,308,391 | $8.83 | ||
| ========== | ========== | ========== | ||||||
| Options exercisable, end of period | 869,484 | $9.05 | 700,271 | $8.82 | 722,627 | $8.81 | ||
| ========== | ========== | ========== | ||||||
| Options available for future grant, end of period | 1,501,622 | 38,546 | 343,344 | |||||
| ========== | ========== | ========== | ||||||
| Estimated weighted average fair | ||||||||
| value of options granted during the year | $13.98 | $15.17 | $4.76 | |||||
| ========== | ========== | ========== | ||||||
The fair value of each option grant, as opposed to its exercise price, is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions in 1997, 1996, and 1995, respectively: no dividend yield, expected volatility factors of 38.7%, 40.4%, and 39.7%, risk-free interest rates of 6.02%, 6.42%, and 6.98%, and expected lives of 7.5, 10.0, and 7.7 years. The following table summarizes information about stock options outstanding at December 31, 1997:
Options Outstanding Options Exercisable
Number Wtd. Avg. Number Range of Outstanding Remaining Wtd. Avg. Exercisable Wtd. Avg. Exercise Prices at 12/31/97 Contractual Life Exercise Price at 12/31/97 Exercise Price ------------ ---------- ------------ ----------- ----------- ------------ $ 4 to $ 9 787,384 4.8 $7.73 606,413 $7.63 $ 9 to $ 18 358,900 6.2 $10.67 220,631 $9.68 $ 18 to $ 27 615,228 9.5 $26.00 42,440 $25.91 ---------- ---------- $ 4 to $ 27 1,761,512 6.7 $14.71 869,484 $9.05 ======= =======
Employee Stock Ownership Plan. In 1996, the Company established an Employee Stock Ownership Plan ("ESOP") effective January 1, 1996. All employees over the age of 21 with one year of service are participants. The Plan has a five year cliff vesting, and service is recognized after the Plan effective date. The ESOP is designed to enable employees of the Company to accumulate stock ownership. While there will be no employee contributions, participants will receive an allocation of stock which has been contributed by the Company. Compensation costs are reported when such shares are released to employees. The Plan may also acquire Swift Energy Company common stock purchased at fair market value. The ESOP can borrow money from the Company to buy Company stock. This was done in September 1996 to purchase 25,000 shares (adjusted to 27,500 shares after the October 1, 1997 10% stock dividend) from the Company’s chairman. Benefits will be paid in a lump sum or installments, and the participants generally have the choice of receiving cash or stock. At December 31, 1997 and 1996, the unearned portion of the ESOP ($150,055) and ($521,354), respectively, was recorded as a contra-equity account entitled "Unearned ESOP Compensation."
Common Stock Repurchase Program. In March 1997, the Company’s Board of Directors approved a common stock repurchase program for up to $20.0 million of the Company’s common stock and subsequently extended this program through June 30, 1998. Purchases of shares are made in the open market. Under the program, through December 31, 1997, 387,800 shares have been acquired at a total cost of $8,519,665 and are included in "Treasury stock held, at cost" on the balance sheet.
Shareholder Rights Plan. In August 1997, the Board of Directors declared a dividend of one preferred share purchase right on each outstanding share of the Company’s common stock. The rights are not currently exercisable, but would become exercisable if certain events occurred relating to any person or group acquiring or attempting to acquire 15% or more of the Company’s outstanding shares of common stock. Thereafter, upon certain triggers, each right not owned by an acquiror allows its holder to purchase Company securities with a market value of two times the $150 exercise price.
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