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FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 2006NOTES 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, other than stock option reload 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 various terms ranging from
three years to five years, stock options become exercisable in various
terms ranging from one year to five years. 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, which began in
1993, provides eligible employees the opportunity to acquire shares of
Swift Energy common stock at a discount through payroll deductions.
Through May 31, 2006, the prior plan year was from June 1 to the
following May 31. A transition period from June 1 to December 31 was
used during the second half of 2006 and a new plan year, from January 1
to December 31, began being used in 2007. 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 through
the plan year, for plan years ending on or before May 31, 2006). Under
this plan for the last three years, we have issued 22,425 shares at a
price range of $29.84 to $32.80 in 2006, 32,495 shares at a price range
of $15.56 to $18.12 in 2005, and 50,418 shares at a price range of $9.98
to $10.83 in 2004. In January 2007, we issued 17,678 shares at a price
of $35.00 related to the transition period ended December 31, 2006. As
of December 31, 2006, 84,366 shares remained available for issuance
under this plan. As a result of adopting SFAS No. 123R on January 1,
2006, our income before taxes, net income and basic and diluted earnings
per share for the year ended December 31, 2006, were $3.4 million, $2.8
million, $0.09, and $0.09 lower, respectively. Upon adoption of SFAS
123R, we recorded an immaterial cumulative effect of a change in
accounting principle as a result of our change in policy from
recognizing forfeitures as they occur to one recognizing expense based
on our expectation of the amount of awards that will vest over the
requisite service period for our restricted stock awards. This amount
was recorded in “General and Administrative, net” in the accompanying
consolidated statements of income. We receive a tax deduction for certain stock option
exercises during the period the options are exercised, generally for the
excess of the price at which the stock is sold over the exercise price
of the options. In addition, we receive an additional tax deduction when
restricted stock vests at a higher value than the value used to
recognize compensation expense at the date of grant. Prior to adoption
of SFAS No. 123R, we reported all tax benefits resulting from the award
of equity instruments as operating cash flows in our consolidated
statements of cash flows. In accordance with SFAS No. 123R, we are
required to report excess tax benefits from the award of equity
instruments as financing cash flows, these benefits totaled $3.3 million
for the year ended December 31, 2006, respectively. Net cash proceeds from the exercise of stock options
were $11.8 million for the year ended December 31, 2006. The actual
income tax benefit realized from stock option exercises was $4.8 million
for the same period. Stock compensation expense for both stock options and
restricted stock issued to both employees and non-employees is recorded
in “General and Administrative, net” in the accompanying consolidated
statements of income, and was $6.3 million, $1.5 million, and less than
$0.1 million for the years ended December 31, 2006, 2005, and 2004
respectively. We also capitalized $3.4 million, $1.0 million, and $0.1
million of stock compensation in 2006, 2005, and 2004, respectively. Our shares available for future grant under our stock
compensation plans were 959,063 at December 31, 2006. Each stock option
granted reduces the aforementioned total by one share, while each
restricted stock grant reduces the shares available for future grant by
1.44 shares. |
Stock Options. We use the Black-Scholes-Merton option pricing model to estimate the fair value of stock option awards with the following weighted-average assumptions for the indicated periods.
Years Ended
December 31,
2006
2005
Dividend yield 0
% 0
% Expected volatility 39.3
% 41.6
% Risk-free interest rate 4.8
% 3.8
% Expected life of options (in years) 4.8
3.9
Weighted-average grant-date fair value $18.03
$12.84
The expected term has been calculated using the Securities and Exchange Commission Staff’s shortcut approach from Staff Accounting Bulletin No. 107. We have analyzed historical volatility and based on an analysis of all relevant factors use a three-year period to estimate expected volatility of our stock option grants.
At December 31, 2006, $3.6 million of unrecognized compensation cost related to stock options is expected to be recognized over a weighted-average period of 1.5 years.
The following table represents stock option activity for the years ended December 31, 2006, 2005 and 2004:
| 2006 | 2005 | 2004 | ||||||
| Wtd. Avg. | Wtd. Avg. | Wtd. Avg. | ||||||
| Shares | Exer. Price | Shares | Exer. Price | Shares | Exer. Price | |||
| Options outstanding, beginning of period | 2,118,179 |
$ 21.28 |
2,998,668 | $18.51 | 3,238,611 | $16.37 | ||
| Options granted | 234,110 |
$ 45.73 |
176,262 | $35.17 | 415,744 | $23.36 | ||
| Options canceled |
(51,739) |
$ 22.25 |
(45,142) | $18.94 | (64,866) | $21.85 | ||
| Options exercised (1) |
(751,410) |
$ 22.02 |
(1,011,609) | $9.78 | (590,821) | $9.83 | ||
| ------------ | ------------ | ------------ | ||||||
| Options outstanding, end of period | 1,549,140 | $24.59 | 2,118,179 | $21.28 | 2,998,668 | $18.51 | ||
| ========= | ========= | ========= | ||||||
| Options exercisable, end of period | 884,876 | $22.60 | 1,085,509 | $20.98 | 1,542,571 | $17.78 | ||
| ========= | ========= | ========= | ||||||
(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. In 2006, 2005 and 2004 respectively, 98,581, 170,762 and 81,716 mature shares were delivered in “stock swap” transactions, which resulted in the issuance of an equal number of reload option grants.
The aggregate intrinsic value and weighted average remaining contract life of options outstanding and exercisable at December 31, 2006 was $31.9 million and 5.5 years and $19.8 million and 4.5 years, respectively. The total intrinsic value of options exercised during the year ended December 31, 2006 was $18.4 million.
The following table summarizes information about stock options outstanding at December 31, 2006:
| Options Outstanding | Options Exercisable | ||||||
| Number | Wtd. Avg. | Number | |||||
| Range of | Outstanding | Remaining | Wtd. Avg. | Exercisable | Wtd. Avg. | ||
| Exercise Prices | at 12/31/06 | Contractual Life | Exercise Price | at 12/31/06 | Exercise Price | ||
| ------------ | ---------- | ------------ | ----------- | ----------- | ------------ | ||
| $8.00 to $21.99 | 747,779 | 5.4 | $13.56 | 452,555 | $13.40 | ||
| $22.00 to $37.99 | 513,566 |
5.3 |
$28.73 | 374,736 | $30.09 | ||
| $38.00 to $51.84 | 287,795 | 6.2 | $45.84 | 57,585 | $46.21 | ||
| ---------- | ---------- | ||||||
| $8.00 to $51.84 | 1,549,140 | 5.5 | $24.59 | 884,876 | $22.60 | ||
| ======= | ======= | ||||||
Restricted Stock. In 2006, 2005 and 2004, the Company issued 324,640, 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. The fair value of these shares when issued in 2006, 2005 and 2004 was approximately $43, $38 and $25 per share.
The compensation expense for these awards was determined based on the market price of our stock at the date of grant applied to the total number of shares that were anticipated to fully vest. As of December 31, 2006, we have unrecognized compensation expense of approximately $13.9 million associated with these awards which are expected to be recognized over a weighted-average period of 2.2 years. The total fair value of shares vested during the year ended December 31, 2006 was $1.6 million.
The following is a summary of our restricted stock issued to employees and directors under these plans as of December 31, 2006, 2005, and 2004:
2006
2005
2004
Wtd. Avg.
Wtd. Avg.
Wtd. Avg.
Shares
Grant Price
Shares
Grant Price
Shares
Grant Price
Restricted shares outstanding, beginning of period
236,950
$34.79
100,900
$23.92
---
$---
Restricted shares granted 324,640
$43.21
158,500
$38.31
100,900
$23.92
Restricted shares canceled (22,630)
$38.01
(7,450)
$39.03
---
$---
Restricted shares vested (35,776)
$24.57
(15,000)
$---
---
$---
------------ ------------ ------------ Restricted shares outstanding, end of period 503,184
$40.04
236,950
$34.79
100,900
$23.92
======= ======= =======
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, 2006, 2005, and 2004, all of the ESOP compensation was earned. Our contribution to the ESOP plan totaled $0.4 million for the year ended December 31, 2006, and $0.2 million for the years ended December 31, 2005 and 2004, 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 8,927, 4,438, and 6,911 shares for the 2006, 2005, and 2004 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 $1.0 million for 2006, $0.8 million for 2005, and $0.7 million for 2004, and are recorded as “General and administrative, net” on the accompanying consolidated statements of income. The contributions in 2006, 2005, and 2004 were made all in common stock. The shares of common stock contributed to the 401(k) savings plan totaled 23,890, 17,920, and 24,513 shares for the 2006, 2005, and 2004 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, 2006, 427,086 shares remain in treasury (net of 500,688 shares used to fund the ESOP, 401(k) contributions and acquisitions) with a total cost of $6.1 million and are included in “Treasury stock held, at cost” on the accompanying consolidated balance sheet.
Shareholder Rights Plan. Our Rights Agreement was initially adopted by the Board of Directors in 1997 for a ten year term. The Board of Directors renewed and extended the Rights Agreement for an additional ten year term from December 21, 2006. Pursuant to the Rights Agreement as amended, for each share of Swift Energy common stock a holder has the right to purchase one one-thousandth of a share of Swift Energy preferred stock for $250 upon the occurance of certain events triggered when a person or entity purchases 15% or more beneficial ownership of Swift Energy’s outstanding common stock. The rights are not exercisable by such 15% or more beneficial owner.
This page was last updated on Thursday, March 29, 2007 , at 03:19:38 PM .Copyright © 1994-2008 by Swift Energy Company.
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