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FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 2005NOTES TO CONSOLIDATED FINANCIAL STATEMENTS6. Stockholders' Equity
Stock-Based Compensation Plans. We have three stock option plans
that awards are currently granted under, the 2005 Stock Compensation
Plan, which was adopted by our Board of Directors in March 2005 and was
approved by shareholders at the 2005 annual meeting of shareholders, the
2001 Omnibus Stock Compensation Plan, which was adopted by our Board of
Directors in February 2001 and was approved by shareholders at the 2001
annual meeting of shareholders, and the 1990 Non-Qualified Stock Option
Plan solely for our independent directors. No further grants will be
made under the 2001 Omnibus Stock Compensation Plan or the 1990
Non-Qualified Stock Option Plan, both of which were replaced by the 2005
Stock Compensation Plan, although options remain outstanding under both
plans and are accordingly included in the tables below. In addition, we
have an employee stock purchase plan and an employee stock ownership
plan. Under the 2005 plan, incentive stock options and other options and
awards may be granted to employees, directors, and consultants to
purchase shares of common stock. Under the 2001 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 our Board of Directors were automatically
granted options to purchase shares of common stock on a formula basis.
All three plans provide that the exercise prices equal 100% of the fair
value of the common stock on the date of grant. Restricted stock grants
become vested in terms ranging from one-third each anniversary date over
three years to 50% of the shares 18 months after the grant date and 50%
three years after the grant date to one-fifth each anniversary date over
five years, stock 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 typically expire
ten 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 cash received is credited to common stock and additional
paid-in capital. Options issued under these plans also include a reload
feature where additional options are granted at the then current market
price when mature shares of Swift Energy common stock are used to
satisfy the exercise price of an existing stock option grant. When Swift
Energy common stock is used to satisfy the exercise price, the net
shares actually issued are reflected in the accompanying Statement of
Stockholders’ Equity (see note 1 to table below). We view all awards of
stock compensation as a single award with an expected life equal to the
average expected life of component awards and amortize the award on a
straight-line basis over the life of the award. The employee stock purchase plan provides eligible employees the
opportunity to acquire shares of Swift Energy common stock at a discount
through payroll deductions. The plan year is from June 1 to the
following May 31. The first year of the plan commenced June 1, 1993. To
date, employees have been allowed to 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 is 85% of the lower of the closing price
of our 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 for the last three years, we have
issued 32,495 shares at a price range of $15.56 to $18.12 in 2005,
50,418 shares at a price range of $9.98 to $10.83 in 2004, and 56,574
shares at a price range of $6.80 to $11.85 in 2003. As of December 31,
2005, 213,140 shares remained available for issuance under this plan.
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The following is a summary of our stock options granted under these plans as of December 31, 2005, 2004, and 2003:
| 2005 | 2004 | 2003 | ||||||
| Wtd. Avg. | Wtd. Avg. | Wtd. Avg. | ||||||
| Shares | Exer. Price | Shares | Exer. Price | Shares | Exer. Price | |||
| Options outstanding, beginning of period |
2,998,668 |
$18.51 |
3,238,611 | $16.37 | 3,018,505 | $16.64 | ||
| Options granted |
176,262 |
$35.17 |
415,744 | $23.36 | 504,014 | $13.20 | ||
| Options canceled |
(45,142) |
$18.94 |
(64,866) | $21.85 | (110,901) | $21.02 | ||
| Options exercised (1) |
(1,011,609) |
$9.78 |
(590,821) | $9.83 | (173,007) | $8.85 | ||
| ------------ | ------------ | ------------ | ||||||
| Options outstanding, end of period | 2,118,179 | $21.28 | 2,998,668 | $18.51 | 3,238,611 | $16.37 | ||
| ========= | ========= | ========= | ||||||
| Options exercisable, end of period | 1,085,509 | $20.98 | 1,542,571 | $17.78 | 1,714,789 | $15.00 | ||
| ========= | ========= | ========= | ||||||
| Options available for future grant, end of period | 684,368 | 89,278 | 494,925 | |||||
| ========= | ========= | ========= | ||||||
| Estimated weighted average fair value per
share of options granted during the year |
$12.84 | $9.51 | $6.93 | |||||
| ========= | ======== | ======== | ||||||
(1) The plans allow for the use of a “stock swap” in lieu of a cash exercise for options, under certain circumstances. The delivery of Swift Energy common stock, held by the optionee for a minimum of six months, which are considered mature shares, with a fair market value equal to the required purchase price of the shares to which the exercise relates, constitutes a valid “stock swap.” Options issued under a “stock swap” also include a reload feature where additional options are granted at the then current market price when mature shares of Swift stock are used to satisfy the exercise price of an existing stock option grant. The terms of the plans provide that the mature shares delivered, as full or partial payment in a “stock swap”, shall again be available for awards under the plans. The options exercised above include 170,762, 81,716 and 30,200 shares in 2005, 2004 and 2003 respectively, related to “stock swap” shares that were also reloaded.
The following table summarizes information about stock options outstanding at December 31, 2005:
| Options Outstanding | Options Exercisable | ||||||
| Number | Wtd. Avg. | Number | |||||
| Range of | Outstanding | Remaining | Wtd. Avg. | Exercisable | Wtd. Avg. | ||
| Exercise Prices | at 12/31/05 | Contractual Life | Exercise Price | at 12/31/05 | Exercise Price | ||
| ------------ | ---------- | ------------ | ----------- | ----------- | ------------ | ||
| $7.00 to $20.99 |
1,068,842 |
6.0 |
$12.74 |
537,474 |
$12.06 | ||
| $21.00 to $35.99 |
974,548 |
5.6 |
$28.89 |
538,933 |
$29,63 | ||
| $36.00 to $50.01 |
74,789 |
5.1 |
$44.26 |
9,102 |
$36.33 | ||
| ---------- | ---------- | ||||||
| $7.00 to $50.01 | 2,118,179 | 5.8 | $21.28 | 1,085,509 | $20.98 | ||
| ======= | ======= | ||||||
Restricted Stock. In 2005 and 2004, the Company issued 158,500 and 70,900 shares, respectively, of restricted stock to employees and directors. These shares vest over a three-year to five-year period and remain subject to forfeiture if vesting conditions are not met. In accordance with APB Opinion No. 25, we recognize unearned compensation in connection with the grant of restricted shares equal to the fair value of our common stock on the date of grant. The fair value of these shares when issued in 2005 and 2004 was approximately $38 and $25 per share, and resulted in an increase in “Additional paid-in capital” and “Unearned compensation” on the accompanying balance sheet of $6.1 million and $1.8 million, respectively. As restricted shares vest, we reduce unearned compensation and recognize compensation expense. In 2005 and 2004, we recorded expense related to these shares of $1.2 million and less than $0.1 million, respectively, in “General and administrative, net” on the accompanying statements of income.
The following is a summary of our restricted stock issued to employees and directors under these plans as of December 31, 2005 and 2004:
2005
2004
Wtd. Avg. Wtd. Avg.
Shares
Grant Price Shares
Grant Price
Restricted shares outstanding, beginning of period 70,900
$25.18
---
$ ---
Restricted shares granted 158,500
$38.31
70,900
$25.18
Restricted shares canceled (7,450)
$39.03
---
$ ---
Restricted shares vested ---
---
---
$ ---
-------------
-------------
Restricted shares outstanding, end of period 221,950
$34.09
70,900
$25.18
=======
=======
In 2004, we also issued the rights to 30,000 shares of restricted stock to consultants. These shares vest over a two-year period and remain subject to forfeiture if performance conditions are not met within that period. As the performance conditions on 15,000 shares were met in 2005, the vesting conditions were lifted and common stock shares were issued to the non-employees. This issuance is accounted for under FAS No. 123 and as such a measurement date for assessing fair value of the remaining 15,000 shares has not been achieved. We recognized approximately $0.6 million and $0.2 million of compensation cost in 2005 and 2004, and a corresponding increase in “Additional paid-in capital,” related to these shares. The non-employees perform work that is capitalized to unproved properties, and as such the compensation cost recognized in 2005 and 2004 was recorded to “Unproved properties” on the accompanying balance sheets.
Employee Stock Ownership Plan. In 1996, we 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. This plan has a five-year cliff vesting. The ESOP is designed to enable our employees to accumulate stock ownership. While there will be no employee contributions, participants will receive an allocation of stock that has been contributed by Swift Energy. Compensation expense is recognized upon vesting when such shares are released to employees. The plan may also acquire Swift Energy common stock, purchased at fair market value. The ESOP can borrow money from Swift Energy to buy Swift Energy common stock. ESOP payouts will be paid in a lump sum or installments, and the participants generally have the choice of receiving cash or stock. At December 31, 2005, 2004, and 2003, all of the ESOP compensation was earned. Our contribution to the ESOP plan totaled $0.2 million for the years ended December 31, 2005, 2004, and 2003, and were made all in common stock, and are recorded as “General and administrative, net” on the accompanying consolidated statements of income. The shares of common stock contributed to the ESOP plan totaled 4,438, 6,911, and 11,870 shares for the 2005, 2004, and 2003 contributions, respectively.
Employee Savings Plan. We have a savings plan under Section 401(k) of the Internal Revenue Code. Eligible employees may make voluntary contributions into the 401(k) savings plan with Swift contributing on behalf of the eligible employee an amount equal to 100% of the first 2% of compensation and 75% of the next 4% of compensation based on the contributions made by the eligible employees. Our contributions to the 401(k) savings plan were $0.8 million for 2005, $0.7 million for 2004, and $0.6 million for 2003, and are recorded as “General and administrative, net” on the accompanying consolidated statements of income. The contributions in 2005, 2004, and 2003 were made all in common stock. The shares of common stock contributed to the 401(k) savings plan totaled 17,920, 24,513, and 34,280 shares for the 2005, 2004, and 2003 contributions, respectively.
Treasury Shares. In March 1997, our Board of Directors approved a common stock repurchase program that terminated as of June 30, 1999. Under this program, we spent approximately $13.3 million to acquire 927,774 shares in the open market at an average cost of $14.34 per share. At December 31, 2005, 449,444 shares remain in treasury (net of 478,330 shares used to fund the ESOP, 401(k) contributions and acquisitions) with a total cost of $6.4 million and are included in “Treasury stock held, at cost” on the accompanying balance sheet.
Shareholder Rights Plan. In August 1997, our board of directors declared a dividend of one preferred share purchase right on each outstanding share of Swift Energy 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 our outstanding shares of common stock. Thereafter, upon certain triggers, each right not owned by an acquirer allows its holder to purchase Swift securities with a market value of two times the $150 exercise price.
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