STOCK-BASED COMPENSATION:

Stock-based Compensation Plans

In 2001, the Company adopted the Forest Oil Corporation 2001 Stock Incentive Plan (the “2001 Plan”) and in 2007, the Company adopted the Forest Oil Corporation 2007 Stock Incentive Plan (the “2007 Plan,” and together with the 2001 Plan, the “Stock-based Compensation Plans”) under which qualified and non-qualified stock options, restricted stock, performance units, phantom stock units, and other awards may be granted to employees, consultants, and non-employee directors. The aggregate number of shares of common stock that the Company may issue under the 2007 Plan may not exceed 8.7 million shares. As of December 31, 2012, the Company had 3.2 million shares available to be issued under the 2007 Plan. The aggregate number of shares of common stock that the Company could issue under the 2001 Plan was 5.0 million, of which there are no remaining shares to be issued at December 31, 2012.

Compensation Costs

The table below sets forth stock-based compensation related to Forest’s continuing operations for the years ended December 31, 2012, 2011, and 2010, and the remaining unamortized amounts and weighted average amortization period as of December 31, 2012.



	Stock Options			Restricted Stock			Performance Units			Phantom Stock Units			Total⁽¹⁾
	(In Thousands)
Year ended December 31, 2012:
Total stock-based compensation costs	$	—		$	14,621		$	6,838		$	859		$	22,318
Less: stock-based compensation costs capitalized	—			(5,219		)	(1,565		)	(569		)	(7,353		)
Stock-based compensation costs expensed	$	—		$	9,402		$	5,273		$	290		$	14,965
Unamortized stock-based compensation costs as of December 31, 2012⁽²⁾	$	—		$	16,588		$	7,723		$	6,795		$	31,106
Weighted average amortization period remaining as of December 31, 2012	—			1.8 years			1.8 years			2.3 years			1.9 years
Year ended December 31, 2011:
Total stock-based compensation costs	$	1,536		$	30,234		$	3,178		$	156		$	35,104
Less: stock-based compensation costs capitalized	(663		)	(13,113		)	(957		)	(134		)	(14,867		)
Stock-based compensation costs expensed	$	873		$	17,121		$	2,221		$	22		$	20,237
Year ended December 31, 2010:
Total stock-based compensation costs	$	563		$	25,377		$	1,907		$	3,129		$	30,976
Less: stock-based compensation costs capitalized	(241		)	(9,492		)	(469		)	(1,010		)	(11,212		)
Stock-based compensation costs expensed	$	322		$	15,885		$	1,438		$	2,119		$	19,764

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(1)	The Company also maintains an employee stock purchase plan (which is not included in the table) under which $.4 million, $.5 million, and $.5 million of compensation costs were recognized for the years ended December 31, 2012, 2011, and 2010, respectively.


(2)	The unamortized stock-based compensation costs of the phantom stock units are based on the closing price of the Company’s common stock on December 31, 2012.

Stock Options

The following table summarizes stock option activity in the Stock-based Compensation Plans for the years ended December 31, 2012, 2011, and 2010.



	Number of Options		Weighted Average Exercise Price		Aggregate Intrinsic Value (In Thousands)⁽¹⁾		Number of Options Exercisable
Outstanding at January 1, 2010	1,818,419		$	21.26	$	7,387	1,722,216
Granted	—		—
Exercised	(457,974	)	18.99		6,027
Cancelled	(32,750	)	36.28
Outstanding at December 31, 2010	1,327,695		21.67		22,531		1,283,232
Granted	—		—
Exercised	(29,711	)	18.55		331
Cancelled	(13,273	)	25.11
Spin-off adjustment⁽²⁾	673,189
Outstanding at September 30, 2011	1,957,900		14.29		187		1,957,900
Granted	—		—
Exercised	(161,834	)	11.32		634
Cancelled	(29,479	)	14.86
Outstanding at December 31, 2011	1,766,587		14.55		2,731		1,766,587
Granted	—		—
Exercised	—		—		—
Cancelled	(895,771	)	11.33
Outstanding at December 31, 2012	870,816		$	17.86	$	—	870,816

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(1)	The intrinsic value of a stock option is the amount by which the market value of the underlying stock, as of the date outstanding or exercised, exceeds the exercise price of the option.


(2)	In conjunction with the spin-off of Lone Pine, both the number of options outstanding and the option exercise prices were adjusted in accordance with antidilution provisions provided for by the Stock-based Compensation Plans.

Stock options are granted at the fair market value of one share of common stock on the date of grant and have a term of ten years. Options granted to non-employee directors vest immediately and options granted to officers and other employees vest in increments of 25% on each of the first four anniversary dates of the grant.

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



	Stock Options Outstanding and Exercisable
Range of Exercise Prices	Number of Options	Weighted Average Remaining Contractual Life (Years)	Weighted Average Exercise Price		Aggregate Intrinsic Value (In Thousands)
$9.70 - 11.09	197,002	0.85	$	10.75	$	—
11.10 - 13.47	38,676	1.57	12.44		—
13.48 - 13.56	244,070	1.86	13.56		—
13.57 - 24.31	167,978	3.05	20.33		—
24.32 - 27.90	223,090	4.42	27.90		—
$9.70 - 27.90	870,816	2.50	$	17.86	$	—

Restricted Stock, Performance Units, and Phantom Stock Units

The following table summarizes the restricted stock, performance unit, and phantom stock unit activity in the Stock-based Compensation Plans for the years ended December 31, 2012, 2011, and 2010.



	Restricted Stock						Performance Units						Phantom Stock Units
	Number of Shares		Weighted Average Grant Date Fair Value		Vest Date Fair Value (In Thousands)		Number of Units		Weighted Average Grant Date Fair Value		Vest Date Fair Value (In Thousands)		Number of Units⁽¹⁾		Weighted Average Grant Date Fair Value		Vest Date Fair Value (In Thousands)
Unvested at January 1, 2010	2,028,683		$	39.44			—		$	—			475,063		$	27.91
Awarded	1,006,163		24.69				264,500		31.63				153,135		25.96
Vested	(645,660	)	40.66		$	19,806	—		—		$	—	(65,140	)	41.88		$	1,910
Forfeited	(116,865	)	36.55				—		—				(52,449	)	35.28
Unvested at December 31, 2010	2,272,321		32.71				264,500		31.63				510,609		24.79
Awarded	1,025,782		27.30				226,000		27.53				500		28.24
Vested	(610,681	)	61.33		18,416		—		—		—		(52,587	)	60.04		1,449
Forfeited	(131,330	)	23.51				(41,000	)	29.98				(25,737	)	19.12
Spin-off adjustment⁽²⁾	—						233,740						225,004
Vested due to spin-off⁽³⁾	—						(19,000	)	20.81		—		(342,765	)	15.15		3,246
Unvested at September 30, 2011	2,556,092		24.18				664,240		19.52				315,024		12.15
Awarded	25,700		15.19				—		—				941,300		15.08
Vested	(48,560	)	28.84		595		—		—		—		(3,505	)	17.07		43
Forfeited	(59,120	)	23.93				(9,120	)	20.81				(14,002	)	16.21
Unvested at December 31, 2011	2,474,112		24.00				655,120		19.50				1,238,817		14.32
Awarded	1,743,757		9.95				789,500		13.40				718,500		6.73
Vested	(956,547	)	19.51		7,667		(323,760	)	18.18		—		(608,543	)	14.15		4,511
Forfeited	(539,685	)	18.65				(181,680	)	17.55				(187,037	)	13.10
Unvested at December 31, 2012	2,721,637		$	17.64			939,180		$	15.20			1,161,737		$	9.91

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(1)

All of the unvested units of phantom stock at December 31, 2012 must be settled in cash. The phantom stock units have been accounted for as a liability within the Consolidated Financial Statements. Of the 608,543 phantom stock units that vested during 2012, 6,080 units were settled in shares of common stock and 602,463 units were settled in cash. Of the 398,857 phantom stock units that vested during 2011, 5,500 units were settled in shares of common stock and 393,357 units were settled in cash. Of the 65,140 phantom stock units that vested in 2010, 63,750 were settled in shares of common stock and 1,390 units were settled in cash.

(2)

In conjunction with the spin-off of Lone Pine, the number of performance units and phantom stock units outstanding was adjusted in accordance with antidilution provisions provided for by the Stock-based Compensation Plans. In addition, the initial stock prices used to measure Forest’s total shareholder returns over the performance periods of the performance units were adjusted in accordance with the antidilution provisions provided for by the Stock-based Compensation Plans. The number of restricted stock awards outstanding was not adjusted as a result of the spin-off since holders of restricted stock awards received Lone Pine common shares in the spin-off.

(3)

In conjunction with the spin-off of Lone Pine, Lone Pine employees were deemed to have been involuntarily terminated under the terms of their phantom stock agreements, and, therefore, all phantom stock units held by Lone Pine employees vested on September 30, 2011 and were settled in cash by Lone Pine. The single Lone Pine employee who held a performance unit award was deemed to have been involuntarily terminated under the terms of his performance unit agreement at the time of the spin-off and, therefore, his performance units vested on September 30, 2011, but with no shares deliverable under his agreement. No Forest restricted stock awards were held by Lone Pine employees at the time of the spin-off.

The grant date fair value of the restricted stock was determined by averaging the high and low stock price of a share of common stock as published by the New York Stock Exchange on the date of grant. The restricted stock generally vests on the third anniversary of the date of the award, but may vest earlier upon a qualifying disability, death, retirement, certain involuntary terminations, or a change in control of the Company in accordance with the term of the underlying agreement.

The grant date fair value of the phantom stock units was determined by averaging the high and low stock price of a share of common stock as published by the New York Stock Exchange on the date of grant. Phantom stock units outstanding prior to the fourth quarter of 2011 generally vest on the third anniversary of the date of the award. In the fourth quarter of 2011, the Company granted 941,300 phantom stock units to employees, which vest in one-third increments on each of the first three anniversaries of the date of grant. In the fourth quarter of 2012, the Company granted 718,500 phantom stock units to certain Company officers. The awards vest over a four-year period in accordance with the following schedule: (i) 10% on the first anniversary of the grant date; (ii) 20% on the second anniversary of the grant date; (iii) 30% on the third anniversary of the grant date; and (iv) 40% on the fourth anniversary of the grant date. Like restricted stock, phantom stock units may vest earlier due to certain circumstances, as discussed above.

Beginning in 2010, Forest has made annual grants of performance units to its officers. Under the terms of the award agreements, each performance unit represents a contractual right to receive one share of Forest’s common stock; provided that the actual number of shares that may be deliverable under an award will range from 0% to 200% of the number of performance units awarded, depending on Forest’s relative total shareholder return in comparison to an identified peer group over a thirty-six month performance period. The grant date fair values of these awards were determined using a process that takes into account probability-weighted shareholder returns assuming a large number of possible stock price paths, which are modeled based on inputs such as volatility and the risk-free interest rate.

Employee Stock Purchase Plan

The Company has a 1999 Employee Stock Purchase Plan (the “ESPP”), under which it is authorized to issue up to .8 million shares of common stock. Employees who are regularly scheduled to work more than 20 hours per week and more than five months in any calendar year may participate in the ESPP. Currently, under the terms of the ESPP, employees may elect each calendar quarter to have up to 15% of their annual base earnings withheld to purchase shares of common stock, up to a limit of $25,000 of common stock per calendar year. The purchase price of a share of common stock purchased under the ESPP is equal to 85% of the lower of the beginning-of-quarter or end-of-quarter market price. ESPP participants are restricted from selling the shares of common stock purchased under the ESPP for a period of six months after purchase. As of December 31, 2012, the Company had .1 million shares available for issuance under the ESPP.

The fair value of each stock purchase right granted under the ESPP during 2012, 2011, and 2010 was estimated using the Black-Scholes option pricing model. The following assumptions were used to compute the weighted average fair market value of purchase rights granted during the periods presented:



	Year Ended December 31,
	2012	2011	2010
Expected option life	3 months	3 months	3 months
Risk free interest rates	.02% - .10%	.02% - .15%	.08% - .17%
Estimated volatility	46%	59%	38%
Dividend yield	0%	0%	0%
Weighted average fair market value of purchase rights granted	$2.43	$5.00	$7.78