Share-Based Compensation

Share-Based Compensation Plans. We have three stock option plans that awards are currently outstanding under, the 2005 Share-Based 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 Share-Based 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 Share-Based Compensation Plan or the 1990 Non-Qualified Stock Option Plan, both of which were replaced by the 2005 Share-Based 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, stock options and other equity based awards may be granted to employees, directors, and consultants, with directors only eligible to receive restricted awards. Under the 2001 plan, stock options and other equity based awards may be granted to employees. 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 for stock options equal 100% of the fair value of the common stock on the date of grant. Restricted stock grants become vested over a three year period, and 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 previously included 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. This reload feature was discontinued during 2012. 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 Share-Based 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. To date, employees have been allowed to authorize payroll deductions of up to 10% of their base salary, within IRS limitations and plan rules, 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. Under this plan for the last three years, we have issued 42,624 shares at a price of $25.26 in 2012, 49,089 shares at a price of $20.37 in 2011, 66,564 shares at a price of $14.29 in 2010. The contributions for the years ended December 31, 2012, 2011 and 2010 were all made in common stock. As of December 31, 2012, 477,481 shares remained available for issuance under this plan.

We receive a tax deduction for certain stock option exercises during the period the options are exercised, generally for the excess of the market value on the exercise date over the exercise price of the options. 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. In accordance with guidance contained in FASB ASC 718, we are required to report excess tax benefits from the award of equity instruments as financing cash flows. For the years ended December 31, 2012, 2011 and 2010, we did not recognize any excess tax benefit or shortfall.

Net cash proceeds from the exercise of stock options were $0.6 million, $1.2 million and $2.1 million for the years ended December 31, 2012, 2011 and 2010, respectively. The actual income tax benefit from stock option exercises was $0.3 million, $1.1 million and $0.8 million for the same periods, respectively.

Share-based compensation expense for both stock options and restricted stock issued to both employees and non-employees, which was recorded in “General and administrative, net” in the accompanying consolidated statements of operations, was $12.6 million, $11.9 million and $9.3 million for the years ended December 31, 2012, 2011 and 2010, respectively. Share-based compensation recorded in lease operating cost was $0.3 million for the years ended December 31, 2012, 2011 and 2010, respectively. We also capitalized $5.2 million, $4.2 million and $1.6 million of share-based compensation for the years ended December 31, 2012, 2011 and 2010, respectively.

Our shares available for future grant under our Share-Based Compensation plans were 1,622,049 at December 31, 2012. 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 options issued during the indicated periods:



	Twelve Months Ended December 31,
	2012	2011	2010
Dividend yield	0%	0%	0%
Expected volatility	61.2%	58.8%	62.8%
Risk-free interest rate	0.8%	1.9%	2.1%
Expected life of options (in years)	4.3	3.8	4.3
Weighted-average grant-date fair value	$15.71	$19.17	$12.60

The expected term for grants issued post 2008 has been based on an analysis of historical employee exercise behavior and considered all relevant factors including expected future employee exercise behavior. We have analyzed historical volatility, and based on an analysis of all relevant factors, we have used a 5.5 year look-back period to estimate expected volatility of our 2012, 2011 and 2010 stock option grants.

At December 31, 2012, we had $3.2 million of unrecognized compensation cost related to stock options, which is expected to be recognized over a weighted-average period of 0.8 years. The following table represents stock option activity for the years ended December 31, 2012, 2011 and 2010:



	2012				2011				2010
	Shares		Wtd. Avg. Exer. Price		Shares		Wtd. Avg Exer. Price		Shares		Wtd. Avg Exer. Price

Options outstanding, beginning of period	1,375,281		$	32.46	1,361,779		$	29.67	1,289,194		$	29.72
Options granted	336,092		$	32.39	307,394		$	42.56	273,463		$	25.28
Options canceled	(42,047	)	$	41.20	(67,529	)	$	55.19	(36,983	)	$	44.65
Options exercised (1)	(83,732	)	$	14.70	(226,363	)	$	22.61	(163,895	)	$	18.11
Options outstanding, end of period	1,585,594		$	33.13	1,375,281		$	32.46	1,361,779		$	29.67
Options exercisable, end of period	990,957		$	32.39	734,985		$	31.07	749,447		$	32.04

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 previously included 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. This reload feature was discontinued during 2012. 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. Mature shares that were delivered in “stock swap” transactions which resulted in the issuance of an equal number of reload option were 20,692, 79,194 and 27,463 for the years ended December 31, 2012, 2011 and 2010, respectively, .

The aggregate intrinsic value and weighted average remaining contract life of options outstanding and exercisable at December 31, 2012 was $0.2 million and 6.0 years and $0.2 million and 4.7 years, respectively. The total intrinsic value of options exercised for the years ended December 31, 2012, 2011 and 2010 was $0.9 million, $4.2 million and $2.6 million, respectively.

The following table summarizes information about stock options outstanding at December 31, 2012:



	Options Outstanding				Options Exercisable
Range of Exercise Prices	Number Outstanding at 12/31/12	Wtd. Avg. Remaining Contractual Life	Wtd. Avg. Exercise Price		Number Exercisable at 12/31/12	Wtd. Avg. Exercise Price
$8.00 to $24.99	478,697	5.7	$	19.42	396,690	$	18.36
$25.00 to $44.99	1,074,221	6.3	$	38.76	561,591	$	41.33
$45.00 to $65.00	32,676	0.8	$	49.04	32,676	$	49.04
$8.00 to $65.00	1,585,594	6.0	$	33.13	990,957	$	32.39

Restricted Stock

For the years ended December 31, 2012, 2011 and 2010, the Company issued 543,800, 499,050 and 388,650 shares, respectively, of restricted stock to employees, consultants, and directors. These shares vest over three years and remain subject to forfeiture if vesting conditions are not met. The fair values of these shares when issued, for the years ended December 31, 2012, 2011 and 2010 were $31.12, $40.28 and $25.41 per share, respectively.

The compensation expense for these awards was determined based on the closing 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, 2012, we had unrecognized compensation expense of $15.2 million related to restricted stock awards which is expected to be recognized over a weighted-average period of 0.9 years. The grant date fair values of shares vested for the years ended December 31, 2012, 2011 and 2010 were $10.0 million, $8.7 million and $9.0 million, respectively.

The following table represents restricted stock activity for the years ended December 31, 2012, 2011 and 2010:



	2012				2011				2010
	Shares		Wtd. Avg. Grant Price		Shares		Wtd. Avg. Grant Price		Shares		Wtd. Avg. Grant Price
Restricted shares outstanding, beginning of period	834,703		$	31.89	734,286		$	22.87	703,856		$	24.15
Restricted shares granted	543,800		$	31.12	499,050		$	40.28	388,650		$	25.41
Restricted shares canceled	(107,182	)	$	33.95	(49,661	)	$	32.29	(46,029	)	$	24.45
Restricted shares vested	(375,157	)	$	26.62	(348,972	)	$	24.84	(312,191	)	$	28.75
Restricted shares outstanding, end of period	896,164		$	33.38	834,703		$	31.89	734,286		$	22.87

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 three-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, 2012, 2011 and 2010, all of the ESOP compensation was earned. Our contribution to the ESOP plan totaled $0.2 million for the years ended December 31, 2012, 2011 and 2010, and were all made in common stock, from treasury shares, and are recorded as “General and administrative, net” on the accompanying consolidated statements of operations. The shares of common stock contributed to the ESOP plan, from treasury shares, totaled 12,995, 6,729 and 5,108 for the years ended December 31, 2012, 2011 and 2010, 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 Energy 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 $1.5 million, $1.4 million and $1.3 million for the years ended December 31, 2012, 2011 and 2010, respectively, and are recorded as “General and administrative, net” on the accompanying consolidated statements of operations. The contributions were all made in common stock, from treasury shares. The shares of common stock contributed to the 401(k) savings plan totaled 91,895, 44,258 and 31,960 for the years ended December 31, 2012, 2011 and 2010, respectively.

Shareholder Rights Plan. Our Rights Agreement was initially adopted by the Board of Directors in 1997 for a ten-year term and was renewed and extended for an additional ten-year term on December 21, 2006. Effective March 1, 2012, we entered into an amendment with our transfer agent, American Stock Transfer & Trust Company, to accelerate the final expiration date of the Rights Plan and the rights issued thereunder from December 20, 2016 to the close of business on March 1, 2012.