The 2005 Equity Based Compensation Plan (the “2005 Plan”) authorizes the Compensation Committee of the Board of Directors to grant, among other things, stock options, stock appreciation rights and restricted stock awards to employees and directors. The 2004 Non-Employee Director Stock Option Plan (the “Director Plan”) allows such grants to our non-employee directors of our Board of Directors. The 2005 Plan was approved by stockholders in May 2005 and replaced our 1999 Stock Option Plan. No new grants will be made from the 1999 Stock Option Plan. The number of shares that may be issued under the 2005 Plan is equal to (i) 5.6 million shares (15.0 million less the 2.2 million shares issued under the 1999 Stock Option Plan before May 18, 2005, the effective date of the 2005 Plan and less the 7.2 million shares issuable pursuant to awards under the 1999 Stock Option Plan outstanding as of the effective date of the 2005 Plan) plus (ii) the number of shares subject to 1999 Stock Option Plan awards outstanding at May 18, 2005 that subsequently lapse or terminate without the underlying shares being issued plus (iii) subsequent shares approved by the shareholders. The Director Plan was approved by stockholders in May 2004 and no more than 450,000 shares of common stock may be issued under the Plan.
Stock-based awards under the Plans
Stock options represent the right to purchase shares of stock in the future at the fair value of the stock on the date of grant. Most stock options granted under our stock option plans vest over a three-year period and expire five years from the date they are granted. Beginning in 2005, we began granting stock appreciation rights (“SARs”) to reduce the dilutive impact of our equity plans. Similar to stock options, SARs represents the right to receive a payment equal to the excess of the fair market value of shares of common stock on the date the right is exercised over the value of the stock on the date of grant. All SARs granted
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under the 2005 Plan will be settled in shares of stock, vest over a three-year period and have a maximum term of five years from the date they are granted.
The Compensation Committee grants restricted stock to certain employees and non-employee directors of the Board of Directors as part of their compensation. Compensation expense is recognized over the balance of the vesting period, which is typically three years for employee grants and immediate vesting for non-employee directors. All restricted stock awards are issued at prevailing market prices at the time of the grant and the vesting is based upon an employee’s continued employment with us. Prior to vesting, all restricted stock awards have the right to vote such stock and receive dividends thereon. All restricted shares that are granted are placed in our deferred compensation plan. Restricted stock awards are classified as a liability and are remeasured at fair value each reporting period. This mark-to-market is reported in our statement of operations in deferred compensation plan expense.
As part of the closure of our Houston office, there were eighteen employees whose unvested SARs and restricted stock grants were modified and fully vested effective with the closing of the office on November 1, 2009. The incremental compensation cost of this modification was $2.5 million.
Total Stock-Based Compensation Expense
Stock-based compensation represents amortization of restricted stock grants and stock option/SARs expense. In 2009, stock-based compensation was allocated to operating expense ($2.6 million), exploration expense ($4.8 million), and general administrative expense ($33.5 million) for a total of $41.8 million. In 2008, stock-based compensation was allocated to direct operating expense ($2.8 million), exploration expense ($4.1 million) and general and administrative expense ($23.8 million) for a total of $31.2 million. In 2007, stock-based compensation was allocated to direct operating expense ($1.8 million),
exploration expense ($3.5 million) and general and administrative expense ($18.2 million) for a total of $23.9 million. Unlike the other forms of stock-based compensation mentioned above, the mark-to-market of the vested restricted stock held in our deferred compensation plans is directly tied to the change in our stock price and not directly related to the functional expenses and therefore, is not allocated to the functional categories. For the year ended December 31, 2009, cash received upon exercise of stock option awards was $12.7 million. Due to the net operating loss carryforward for tax purposes, tax benefits realized for deductions that were in excess of the stock-based compensation expense were not recognized.
Stock and Option Plans
We have two active equity-based stock plans. Under these plans, incentive and non-qualified stock options, stock appreciation rights and annual cash incentive awards may be issued to directors and employees pursuant to decisions of the Compensation Committee, which is made up of non-employee, independent directors from the Board of Directors. All awards granted under these plans have been issued at prevailing market prices at the time of the grant. Since the middle of 2005, only SARs have been granted under the plans to limit the dilutive impact of our equity plans. Of the 7.2 million grants outstanding at December 31, 2009, 1.3 million of the grants relate to stock options with the remainder of 5.9 million grants relating to SARs. Information with respect to stock option and SARs activities is summarized below:
Shares Weighted Average Exercise Price Outstanding at December 31, 2006 8,852,126 $ 12.76 Granted 1,680,643 33.78 Exercised (2,461,689) 9.45 Expired/forfeited (298,755) 23.42 Outstanding at December 31, 2007 7,772,325 17.95 Granted 1,159,649 63.18 Exercised (1,590,390) 12.24 Expired/forfeited (92,918) 40.82 Outstanding at December 31, 2008 7,248,666 26.15 Granted 1,714,165 36.90 Exercised (1,717,584) 14.31 Expired/forfeited (90,535) 40.73 Outstanding at December 31, 2009 7,154,712 $ 31.38
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The following table shows information with respect to outstanding stock options and SARs at December 31, 2009:
Stock Appreciation Right Awards
During 2009, 2008 and 2007, we granted SARs to officers, non-officer employees and directors. The weighted average grant date fair value of these SARs, based on our Black-Scholes-Merton assumptions, is shown below:
2009 2008 2007 Weighted average exercise price per share $ 36.90 $ 63.18 $ 33.78
Expected annual dividends per share 0.44% 0.26% 0.36% Expected life in years 3.5 3.5 3.5 Expected volatility 58% 41% 36% Risk-free interest rate 1.5% 2.4% 4.7% Weighted average grant date fair value of SARs granted $ 15.42 $ 20.58 $ 10.67
The dividend yield is based on the current annual dividend at the time of grant. For SARs granted in 2007, we used the “simplified” method to estimate the expected term of the options, which is calculated based on the midpoint between the vesting date and the life of the SAR. For SARs granted in 2008 and 2009, the expected term was based on the historical exercise activity. The volatility factors are based on a combination of both the historical volatilities of the stock and implied volatility of traded options on our common stock. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods commensurate with the expected terms of the options.
The total intrinsic value (the difference in value between exercise and market price) of stock options and SARs exercised during the years ended December 31, 2009 was $50.9 million compared to $67.9 million in 2008 and $67.2 million in 2007. As of December 31, 2009, the aggregate intrinsic value of the awards outstanding was $147.4 million. The aggregate intrinsic value and weighted average remaining contractual life of stock option/SARs awards currently exercisable was $118.7 million and 1.6 years. As of December 31, 2009, the number of fully vested awards and awards expected to vest was 7.1 million. The weighted average exercise price and weighted average remaining contractual life of these awards were $31.23 and 2.4 years and the aggregate intrinsic value was $146.4 million. As of December 31, 2009, unrecognized compensation cost related to the awards was $26.4 million, which is expected to be recognized over a weighted average period of 1.6 years.
Outstanding Exercisable
Range of Exercise Prices Shares
Weighted- Average Remaining Contractual Life Weighted- Average Exercise Price Shares Weighted Average Exercise Price $ 1.29–$ 9.99 909,036 1.97 $ 3.43 909,036 $ 3.43 10.00–19.99 1,058,329 0.46 17.11 1,058,329 17.11 20.00–29.99 1,099,533 1.23 24.31 1,099,533 24.31 30.00–39.99 2,384,613 3.08 34.16 856,974 34.31 40.00–49.99 622,324 4.34 41.74 58,185 41.77 50.00–59.99 708,212 3.14 58.49 255,349 58.58 60.00–69.99 25,927 3.25 65.43 8,829 65.30 70.00–75.00 346,738 3.38 75.00 123,613 75.00 Total 7,154,712 2.40 $ 31.38 4,369,848 $ 23.93
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Restricted Stock Awards
In 2009, we granted 686,000 shares of restricted stock grants as compensation to directors and employees at an average price of $39.99. The restricted stock grants included 22,700 issued to directors, which vest immediately and 663,300 to employees with vesting generally over a three-year period. In 2008, we issued 362,000 shares of restricted stock grants as compensation to directors and employees at an average price of $63.00. The restricted stock grants included 14,400 issued to directors, which vest immediately and 347,600 to employees with vesting generally over a three-year period. In 2007, we issued 435,000 shares of restricted stock grants as compensation to directors and employees, at an average price of $34.85. The restricted grants included 15,900 issued to directors, which vest immediately, and 419,100 to employees with vesting over a three-year period. We recorded compensation expense for restricted stock grants of $19.7 million in the year ended December 31, 2009 compared to $14.7 million in 2008 and $8.7 million in 2007. As of December 31, 2009, there was $25.8 million of unrecognized compensation related to restricted stock awards expected to be recognized over the next three years. All of our restricted stock grants are held in our deferred compensation plan. All restricted stock awards are classified as liability award and are remeasured at fair value each reporting period. This mark-to-market is reported in the deferred compensation expense in our consolidated statement of operations (see additional discussion below). The proceeds received from the sale of stock held in our deferred compensation plan was $7.2 million in 2009.
A summary of the status of our non-vested restricted stock outstanding at December 31, 2009 and changes during the twelve months then ended, is presented below:
401(k) Plan
We maintain a 401(k) benefit plan that allows employees to contribute up to 50% of their salary (subject to Internal Revenue Service limitations) on a pretax basis. Prior to 2008, we made discretionary contributions of our common stock to the 401(k) Plan annually. Beginning in 2008, we began matching up to 6% of salary in cash. All our contributions become fully vested after the individual employee has two years of service with us. In 2009, we contributed $3.2 million to the plan compared to $2.7 million in 2008 and $2.3 million in 2007. We do not require that employees hold any contributed Range stock in their account. Employees have a variety of investment options in the plan. Employees may, at any time, diversify out of our stock, based on their personal investment strategy.
Deferred Compensation Plan
In December 2004, the Board of Directors approved a deferred compensation plan. The deferred compensation plan gives directors, officers and key employees the ability to defer all or a portion of their salaries and bonuses and invest in Range common stock or make other investments at the individual’s discretion. Range provides a matching contribution which vests over three years. The assets of all of the plans are held in a grantor trust, which we refer to as the Rabbi Trust, and are therefore available to satisfy the claims of our creditors in the event of bankruptcy or insolvency. Our stock held in the Rabbi Trust is treated as a liability award as employees are allowed to take withdrawals from the Rabbi Trust either in cash or in Range stock. The liability for the vested portion of the stock held in the Rabbi Trust is reflected in the deferred compensation liability on our balance sheet and is adjusted to fair value each reporting period by a charge or credit to deferred compensation plan expense on our consolidated statement of operations. The assets of the Rabbi Trust, other than our common stock, are invested in
marketable securities and reported at their market value in other assets. The deferred compensation liability on our
consolidated balance sheet reflects the vested market value of the marketable securities and the vested Range stock held in the Rabbi Trust. Changes in the market value of the marketable securities and changes in the fair value of the liability are charged or credited to deferred compensation plan expense each quarter. We recorded a mark-to-market loss of $31.1 million in 2009 compared to mark-to-market income of $24.7 million in 2008 and a mark-to-market loss of $35.4 million in 2007. The Rabbi Trust held 2.7 million shares (2.1 million of vested shares) of Range stock at December 31, 2009 compared to 2.3 million shares (1.9 million of vested shares) at December 31, 2008.
Shares
Weighted Average Grant Date Fair Value Non-vested shares outstanding at December 31, 2008 473,547 $ 48.50 Granted 685,578 39.99 Vested (521,536) 40.91 Forfeited (10,400) 40.83 Non-vested shares outstanding at December 31, 2009 627,189 $ 45.64
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