def14a
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant þ
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Preliminary Proxy Statement |
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Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) |
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Definitive Proxy Statement |
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Soliciting Material Pursuant to §240.14a-12 |
Approach Resources Inc.
(Name of Registrant as Specified in its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
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One Ridgmar Centre
6500 West Freeway, Suite 800
Fort Worth, Texas 76116
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NOTICE OF ANNUAL MEETING OF
STOCKHOLDERS
To our stockholders:
The 2011 annual meeting of stockholders of Approach Resources
Inc., a Delaware corporation, will be held at the offices of
Approach Resources Inc., located at One Ridgmar Centre,
6500 West Freeway, Suite 800 in Fort Worth,
Texas, on Wednesday, June 1, 2011, at
10:00 a.m. Central Time, for the following purposes:
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To elect three directors, Alan D. Bell, Sheldon B. Lubar and
Christopher J. Whyte, to the class of directors whose term
expires in 2014;
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To hold an advisory vote on our executive compensation;
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To hold an advisory vote on the frequency of future advisory
votes on our executive compensation;
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To reapprove certain material terms of our 2007 Stock Incentive
Plan to comply with Section 162(m) of the Internal Revenue
Code;
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To ratify the appointment of Hein & Associates LLP as
our independent registered public accounting firm for the fiscal
year ending December 31, 2011; and
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To transact such other business as may properly come before the
meeting.
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You may vote if you were a stockholder of record at the close of
business on April 13, 2011. To ensure that your vote is
properly recorded, please vote as soon as possible, even if you
plan to attend the annual meeting. You may still vote in person
if you attend the annual meeting. For further details about
voting, please see General Matters beginning on
page 1 of this proxy statement.
If your shares are held in street name in a stock
brokerage account or by a bank or other nominee, you must
provide your broker with instructions on how to vote your shares
in order for your shares to be voted on important matters
presented at the annual meeting. If you do not instruct your
broker on how to vote in the election of directors and on
compensation matters, your shares will not be voted on these
matters.
This notice and proxy statement are first being sent to
stockholders on or about April 21, 2011. Our 2010 annual
report to stockholders is being sent with this notice and proxy
statement.
BY ORDER OF THE BOARD OF DIRECTORS,
J. Ross Craft, P.E.
President and Chief Executive Officer
April 21, 2011
Fort Worth, Texas
TABLE OF
CONTENTS
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ii
APPROACH
RESOURCES INC.
PROXY STATEMENT
Annual Meeting of
Stockholders
June 1, 2011
These proxy materials are being furnished to you in connection
with the solicitation of proxies by the Board of Directors of
Approach Resources Inc. for use at the 2011 annual meeting of
stockholders and any adjournments or postponements of the
meeting. We refer to our Board of Directors as the
Board and to Approach Resources Inc. as
Approach, the Company, we,
us or our. The annual meeting will be
held at the offices of the Company, One Ridgmar Centre,
6500 West Freeway, Suite 800 in Fort Worth,
Texas, on Wednesday, June 1, 2011, at
10:00 a.m. Central Time.
The items to be considered are summarized in the notice of
annual meeting of stockholders and more fully described in this
proxy statement. The notice of annual meeting, this proxy
statement, the enclosed proxy card and our 2010 annual report to
stockholders are first being mailed on or about April 21,
2011, to all record holders of our common stock as of
April 13, 2011. Shares of our common stock represented by
proxies will be voted as described below or as specified by each
stockholder.
Important
Notice Regarding the Availability of Proxy Materials
for the Annual Meeting of Stockholders to be held on
June 1, 2011
The notice of annual meeting, this proxy statement and our 2010
annual report to stockholders are available at
www.approachresources.com. On this site, you will be able
to access these materials and any amendments or supplements to
these materials that are required to be furnished to
stockholders. Information contained on or connected to our
website is not incorporated by reference into this proxy
statement and should not be considered a part of this proxy
statement or any other filing that we make with the Securities
and Exchange Commission (the SEC).
GENERAL
MATTERS
Record date. The record date for the annual
meeting is April 13, 2011. On the record date, there were
28,460,473 shares of our common stock outstanding and there
were no outstanding shares of any other class of stock.
Quorum. In order for us to hold our annual
meeting, holders of a majority of our outstanding shares of
common stock as of April 13, 2011, must be present in
person or by proxy at the meeting. Proxy cards or voting
instruction forms that reflect abstentions and broker non-votes
will be counted as shares present to determine whether a quorum
exists to hold the 2011 annual meeting.
Voting Your Proxy. Our stockholders are
entitled to one vote for each share of common stock that is
owned on the record date, April 13, 2011, on all matters
considered at the annual meeting. You may vote your shares
either in person or by proxy. To vote by proxy, you may vote by
telephone by using the toll-free number listed on the proxy
card, by the Internet at the website for Internet voting listed
on the proxy card or you may mark, date, sign and mail the
enclosed proxy card in the prepaid envelope. If you plan to vote
in person at the annual meeting, please bring proof of
identification. Even if you currently plan to attend the annual
meeting, we recommend that you also submit your proxy as
described above so that your vote will be counted if you later
decide not to attend the annual meeting.
Shares Held of Record. If your shares are
held in your name and you vote by granting a proxy, the proxy
holders will vote the shares in accordance with your
instructions. If you submit a proxy without giving specific
voting instructions, the proxy holders will vote those shares as
recommended by our Board.
1
Shares Held in Street Name. If your
shares are held in street name by your broker, bank
or other nominee, you will receive a voting instruction form
with this proxy statement. Like shares held of record, you may
vote your shares held in street name in person at the annual
meeting if you have obtained a legal proxy from the holder of
record for your shares or you may sign and date the enclosed
voting instruction form and return it in the enclosed,
postage-paid envelope. If your shares are held in street name in
a brokerage account or by a bank or other nominee, you must
provide your broker with instructions on how to vote your shares
in order for your shares to be voted on Proposals 1, 2 and
3. If you do not instruct your broker on how to vote these
proposals, your shares will not be voted on these matters.
Revoking Your Proxy. Even after you have
returned your proxy card, you may revoke your proxy at any time
before it is exercised by (i) submitting a written a notice
of revocation to our Corporate Secretary by mail to Approach
Resources Inc., One Ridgmar Centre, 6500 West Freeway,
Suite 800, Fort Worth, Texas 76116 or by facsimile at
(817) 989-9001,
(ii) mailing in a new proxy card with a later date or
(iii) attending the annual meeting and voting in person,
which suspends the powers of the proxy holder.
Vote Required. For Proposal 1, the
election of three directors, you may vote FOR ALL
NOMINEES, WITHHOLD AUTHORITY FOR ALL NOMINEES
or FOR ALL EXCEPT. A plurality of the
votes of the shares present in person or represented by proxy at
the meeting and entitled to vote on the election of directors is
required for the election of directors. This means that the
three director nominees receiving the highest number of
affirmative votes of the shares present in person or represented
by proxy at the annual meeting and entitled to vote on the
election of directors will be elected to our Board. Broker
non-votes and votes marked WITHHOLD AUTHORITY FOR ALL
NOMINEES will have no legal effect on the outcome of the
election of directors. With respect to votes marked FOR
ALL EXCEPT, votes for director nominees that are withheld
will have no legal effect on the outcome of the election of
directors, while votes for all other director nominees will
count toward a plurality.
For each of the Proposals 2, 4 and 5, you may vote
FOR, AGAINST or
ABSTAIN. For Proposal 3, you may vote to
hold an advisory vote on the frequency of future advisory votes
on our executive compensation every 1 YEAR,
2 YEARS or 3 YEARS, or you
may ABSTAIN.
The affirmative vote of a majority of the shares present in
person or represented by proxy and entitled to vote is required
to approve Proposals 2, 4 and 5. As such, abstentions will
have the effect of a vote against the matters to be voted on in
Proposals 2, 4 and 5. Brokers will not have discretionary
authority to vote on Proposals 2 and 4, and broker
non-votes will have no effect on the outcome of such votes.
Brokers will have discretionary authority to vote on
Proposal 5. With respect to Proposal 3, while approval
of matters presented to the Companys stockholders
generally requires the affirmative vote of a majority of the
shares present in person or represented by proxy and entitled to
vote, because this proposal is advisory and non-binding and
there are four options from which a stockholder may choose to
vote, the option receiving the greatest number of votes will be
considered the frequency recommended by the Companys
stockholders. Abstentions and broker non-votes will, therefore,
have no legal effect on the outcome of the matter to be voted on
in Proposal 3.
If you have any questions about this proxy statement or the
annual meeting, please contact our Corporate Secretary at
Approach Resources Inc., One Ridgmar Centre, 6500 West
Freeway, Suite 800, Fort Worth, Texas 76116, or
by telephone at
(817) 989-9000.
PROPOSAL 1
-
ELECTION
OF DIRECTORS
Nomination
and Election of Directors
Under our certificate of incorporation, the members of our Board
are divided into three classes with staggered, three-year terms.
The terms of three Class I directors expire at the 2011
annual meeting.
2
The Board has nominated Alan D. Bell for election as a director
and Sheldon B. Lubar and Christopher J. Whyte for re-election as
directors. Upon election, Mr. Bell, Mr. Lubar and
Mr. Whyte will serve for terms expiring at the 2014 annual
meeting of stockholders or, in each case, until their successors
are elected and qualified.
Each of the nominees has agreed to serve if elected. If any of
them becomes unavailable to serve as a director, the Board may
designate a substitute nominee. In that case, the persons named
as proxies will vote for the substitute nominee designated by
the Board. The Board does not presently expect that any of the
nominees will become unavailable for election.
In making these nominations, the Compensation and Nominating
Committee (Compensation Committee) reviewed the
background of the nominees and recommended nomination to the
full Board consistent with the Compensation Committees
guidelines for identifying and evaluating nominees for
directors. Please see Corporate Governance
Identifying and Evaluating Nominees for Directors for more
information on the Compensation Committees guidelines for
identifying and nominating director nominees. In addition,
information on each nominee is set forth below.
Directors
The Board believes that each nominee and director has valuable
individual skills and experiences that, taken together, provide
us with the knowledge, judgment and strategic vision necessary
to provide effective oversight of the Company. The biographies
below reflect the particular experience, qualifications,
attributes and skills that led the Board to conclude that each
nominee and director should serve on the Board, including:
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Experience in executive management and operations in exploration
and production (E&P), or oilfield service
companies (Mr. Bell, Mr. Craft, Mr. Crain,
Mr. Lubar and Mr. Whyte);
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Detailed, technical understanding of the Companys
operations, reserves, drilling and completion techniques
(Mr. Craft);
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Deep history and knowledge of asset acquisitions, divestitures
and evaluations in the E&P and broader energy sectors
(Mr. Bell, Mr. Brandi, Mr. Craft, Mr. Crain,
Mr. Lawrence, Mr. Lubar and Mr. Whyte);
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Expertise in public and private capital markets in the E&P
and broader energy sectors (Mr. Bell, Mr. Brandi,
Mr. Lawrence and Mr. Lubar);
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Oversight of E&P, midstream, oilfield services and other
energy companies through other public boards of directors
(Mr. Bell, Mr. Brandi, Mr. Crain,
Mr. Lawrence, Mr. Lubar and Mr. Whyte);
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An advanced degree or license in public accounting
(Mr. Bell and Mr. Crain);
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An advanced degree in law or the practice of oil and gas law
(Mr. Crain and Mr. Lubar);
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Government service in the executive branch
(Mr. Lubar); and
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Board independence (Mr. Bell, Mr. Brandi,
Mr. Crain, Mr. Lubar and Mr. Whyte).
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The Board believes that these skills and experiences qualify the
nominees and directors to serve on the Board of the Company.
3
The principal occupation and other information about our
directors are set forth below. All of our directors are members
of the National Association of Corporate Directors.
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Director
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Term
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Name
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Age
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Since
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Expires
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Class
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Alan D. Bell
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65
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2010
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2011
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Class I
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James H. Brandi
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2007
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2012
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Class II
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J. Ross Craft
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2002
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2010
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Class III
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James C. Crain
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2007
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2012
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Class II
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Bryan H. Lawrence
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2002
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2010
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Class III
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Sheldon B. Lubar
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2007
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2011
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Class I
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Christopher J. Whyte
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2007
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2011
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Class I
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Alan D. Bell was appointed to our Board in August 2010
and is Chairman of our Audit Committee. Mr. Bells
prior experience includes 33 years in various capacities at
Ernst & Young LLP from 1973 until his retirement in
2006, when he was Director of Ernst & Youngs
Energy Practice in the Southwest United States. Before joining
Ernst & Young, Mr. Bell was a production engineer
with Chevron Oil Company in the Gulf of Mexico. In 2009,
Mr. Bell served as the Chief Restructuring Officer of
Energy Partners Ltd., a New Orleans-based exploration and
development company that emerged from Chapter 11 in
September 2009. Mr. Bell currently serves on the Board of
Directors of Dune Energy Inc., an independent energy company
based in Houston, where he is
non-executive
Chairman of the Board of Directors. During the past five years,
Mr. Bell has also been a director of Toreador Resources
Corporation, an independent energy company with interests in
developed and undeveloped oil properties in France.
Mr. Bell earned a degree in Petroleum Engineering from the
Colorado School of Mines and an M.B.A. from Tulane University.
He is a current member of the American Institute of Certified
Public Accountants, the Texas Society of Certified Public
Accountants and is a licensed Certified Public Accountant in
Texas. Mr. Bell is also a member of the Institute of
Certified Management Accountants, Association of Certified Fraud
Examiners and the Society of Petroleum Engineers. Mr. Bell
is also an Eagle Scout.
James H. Brandi joined us as a director in June 2007 and
is Chairman of our Compensation Committee and a member of our
Audit Committee. Mr. Brandi has been a Managing Director in
investment banking at BNP Paribas, a global bank and financial
services company, since May 2010, when BNP Paribas acquired Hill
Street Capital. From November 2005 to May 2010, Mr. Brandi
was a partner at Hill Street Capital, a financial advisory and
private investment firm. From 2000 until November 2005,
Mr. Brandi was a Managing Director at UBS Securities, LLC,
where he was the Deputy Global Head of the Energy and Power
Groups. Before 2000, Mr. Brandi was a Managing Director at
Dillon, Read & Co. Inc. and later its successor firm,
UBS Warburg, concentrating on transactions in the energy and
consumer goods areas. Mr. Brandi is a director of OGE
Energy Corp., an energy and energy services provider that
delivers electricity in Oklahoma and Arkansas and gathers,
processes and transports natural gas in the North Central United
States through its subsidiary, Enogex LLC. During the past five
years, Mr. Brandi also has been a director of Energy East
Corp., a utility holding company, and Armstrong Land, LLC, a
coal holding company. Mr. Brandi is a trustee of The Kenyon
Review and a former trustee of Kenyon College. Mr. Brandi
holds a B.A. in History from Yale University and an M.B.A. from
Harvard Business School and attended Columbia Law School as a
Harlan Fiske Stone Scholar.
J. Ross Craft has been our President and Chief
Executive Officer and a member of our Board since our inception
in September 2002. Before Approach, Mr. Craft co-founded
Athanor Resources Inc., an international exploration and
production company with operations in the United States and
Tunisia, in 1998 and was its Executive Vice President from 1998
until its merger with Nuevo Energy Company in September 2002.
From 1988 to 1997, Mr. Craft served in various positions
with American Cometra Inc., an independent exploration and
production company with operations in the United States,
including as Vice President Operations from 1995 to
1997. American Cometra was sold in two parts, to Range Resources
in 1995 and Pioneer Natural Resources in 1997. Mr. Craft
has over 30 years of experience in the oil and gas
industry. Mr. Craft holds a B.S. in Petroleum Engineering
from Texas A&M University and is a registered Professional
Engineer licensed in Texas. Mr. Craft is a member of the
Society of Petroleum Engineers, the Texas Oil & Gas
Association, the Permian Basin Petroleum
4
Association and the Independent Petroleum Association of
America. Mr. Craft has served on the Board of the
Fort Worth Chapter of the Society of Petroleum Engineers
and on the Board of the Fort Worth Petroleum Engineers
Club, where his last position was President. Mr. Craft is
also an Eagle Scout. Mr. Craft is the
brother-in-law
of J. Curtis Henderson, our Executive Vice President and General
Counsel.
James C. Crain joined us as a director in June 2007 and
is a member of our Audit Committee and our Compensation
Committee. Mr. Crain has been in the energy industry for
over 30 years, both as an attorney and as an executive
officer. Since 1984, Mr. Crain has been an officer of Marsh
Operating Company, an investment management company focusing on
energy investing, including his current position as President,
which he has held since 1989. Mr. Crain has served as
general partner of Valmora Partners, L.P., a private investment
partnership that invests in the oil and gas sector, among
others, since 1997. Before joining Marsh in 1984, Mr. Crain
was a partner in the law firm of Jenkens & Gilchrist,
where he headed the firms energy section. Mr. Crain
is a director of Crosstex Energy, Inc., a midstream natural gas
company, and GeoMet, Inc., a natural gas exploration and
production company. During the past five years, Mr. Crain
has also been a director of Crosstex Energy GP, LLC, the general
partner of a midstream natural gas company, and Crusader Energy
Group Inc., an oil and gas exploration and production company.
Mr. Crain holds a B.B.A., M.P.A. and J.D. from the
University of Texas at Austin.
Bryan H. Lawrence has been a member of our Board since
2002 and is the Chairman of our Board. Mr. Lawrence is a
founder and Senior Manager of Yorktown Partners LLC, the manager
of the Yorktown group of investment partnerships, which make
investments in companies in the energy industry. The Yorktown
group of investment partnerships was formerly affiliated with
the investment firm of Dillon, Read & Co. Inc., where
Mr. Lawrence had been employed since 1966, serving as a
Managing Director until the merger of Dillon Read with SBC
Warburg in 1997. Mr. Lawrence is a director of Crosstex
Energy, Inc. and Crosstex Energy GP, LLC, midstream natural gas
companies, Hallador Energy Company, an independent company
engaged in the production of coal and the exploration and
production of oil and gas, the general partner of Star Gas
Partners, L.P., a home heating oil distributor and services
provider, Winstar Resources Ltd. and Compass Petroleum Ltd.,
Canadian oil and gas companies, and certain non-public companies
in the energy industry in which the Yorktown group of investment
partnerships holds equity interests. During the past five years,
Mr. Lawrence has also been a director of TransMontaigne
Inc., a refined petroleum products company. Mr. Lawrence is
a graduate of Hamilton College and holds an M.B.A. from Columbia
University.
Sheldon B. Lubar joined us as a director in June 2007 and
is a member of our Compensation Committee. Mr. Lubar has
been Chairman of the Board of Lubar & Co.
Incorporated, a private investment and venture capital firm he
founded, since 1977. He was Chairman of the Board of Christiana
Companies, Inc., a logistics and manufacturing company, from
1987 until its merger with Weatherford International in 1995.
Mr. Lubar is a director of Crosstex Energy, Inc. and
Crosstex Energy GP, LLC, midstream natural gas companies,
Hallador Energy Company, an independent company engaged in the
production of coal and the exploration and production of oil and
gas, and the general partner of Star Gas Partners, L.P., a home
heating oil distributor and services provider. During the past
five years, Mr. Lubar has also been a director of
Weatherford International, Inc., a global provider of oilfield
products and services, and Grant Prideco, a provider of drill
pipe and drill bits. Mr. Lubar previously held governmental
appointments under three United States Presidents, including
Commissioner of the White House Conference on Small Business
from 1979 to 1980 under President Carter, Assistant Secretary,
Housing Production and Mortgage Credit, Department of Housing
and Urban Development, Commissioner of the Federal Housing
Administration and Director of the Federal National Mortgage
Association from 1973 to 1974 under Presidents Nixon and Ford.
Mr. Lubar is a past president of the Board of Regents of
the University of Wisconsin System. Mr. Lubar holds a
B.B.A., J.D. and an honorary Doctor of Humanities degree
from the University of Wisconsin Madison, was
awarded an honorary Doctor of Commercial Science degree from the
University of Wisconsin Milwaukee, and an Honorary
Doctors degree from the Medical College of Wisconsin.
Christopher J. Whyte joined our Board in June 2007 and is
a member of our Audit Committee. Mr. Whyte has been
President, Chief Executive Officer and a director of
PetroSantander Inc., which owns and operates oil and gas
producing properties in the United States, Colombia and Brazil,
since 1995. Mr. Whyte is a director of Winstar Resources
Ltd. and Compass Petroleum Ltd., public Canadian oil and gas
companies.
5
Mr. Whyte holds a B.A. from the University of Pittsburgh.
Mr. Whyte has over 25 years of experience in various
operating, executive and finance positions, including as a Chief
Executive and Chief Financial Officer, in the E&P and
energy businesses.
Vote
Required
The affirmative vote of a plurality of the votes of the shares
present in person or represented by proxy at the annual meeting
and entitled to vote is required for the election of directors.
A properly-executed proxy marked WITHHOLD AUTHORITY FOR
ALL NOMINEES or FOR ALL EXCEPT with respect to
the election of one or more directors will not be voted with
respect to the director or directors indicated, although it will
be counted for purposes of determining whether a quorum is
present.
Board
Recommendation
The Board recommends a vote FOR the
election of each of the nominees.
PROPOSAL 2
-
ADVISORY
VOTE ON EXECUTIVE COMPENSATION
The Dodd-Frank Wall Street Reform and Consumer Protection Act
(the Dodd-Frank Act), enacted in July 2010, requires
that we provide our stockholders with the opportunity to vote to
approve, on a non-binding, advisory basis, the compensation of
our named executives officers as disclosed in this proxy
statement in accordance with the compensation disclosure rules
of the SEC.
As described in detail below in this proxy statement under
Compensation Discussion and Analysis, we seek to
(i) pay our named executive officers for performance,
(ii) closely align the interests of our named executive
officers with the interests of our stockholders and
(iii) attract, retain and motivate top talent. Below is a
summary of how we have structured our executive compensation
program to achieve these goals:
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How Our Current Executive Compensation Program
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Objective
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Achieves This Objective
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Pay for Performance
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In 2010, 75% of total compensation for
our Chief Executive Officer was tied to performance, and over
70% of total compensation for three out of our remaining four
named executive officers was tied to performance.
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Our 2010 and 2011 annual incentive plans
are tied to financial and operational performance measures (75%
of total opportunity) as well as individual performance (25% of
total opportunity).
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Our 2010 and 2011 long-term incentive
equity awards are 100% tied to an initial performance trigger
requiring achievement of financial and operational performance
measures in the award year.
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Align Executive Interests with Stockholder Interests
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Our compensation program provides our
executives with meaningful equity ownership to give them the
opportunity to acquire or increase a direct, proprietary
interest in our operations and future success.
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Our 2010 and 2011 annual incentive plans
and 2010 and 2011 long-term equity awards combine performance
measures of both growth and cost control to encourage growth but
avoid excessive risk-taking.
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We believe the performance measures in
both our annual incentive plans and our long-term equity awards
are strongly correlated to building stockholder value and
increasing total stockholder returns.
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Attract, Retain and Motivate Top Talent
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After a challenging year for the oil and
gas industry in 2009, we generally held base salaries flat in
2010.
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After total stockholder returns of 199%
in 2010 and a review of oil and gas industry salary information,
we raised base salaries for 2011.
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Our 2010 and 2011 long-term incentive
equity awards include vesting requirements over four years to
retain top executives over the long term.
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The vote on this resolution is not intended to address any
specific element of compensation; rather, the vote relates to
the overall compensation of our named executive officers as
described in this proxy statement in accordance with the
compensation disclosure rules of the SEC. The vote is advisory,
which means that the vote is not binding on the Company, our
Board or the Compensation Committee. If there are significant
votes against our named executive officer compensation as
disclosed in this proxy statement, the Compensation Committee
will evaluate whether any actions are necessary to address the
concerns of stockholders.
Vote
Required
The affirmative vote of a majority of the shares present in
person or represented by proxy and entitled to vote is required
to approve this Proposal 2.
The text of the resolution to be voted on is as follows:
RESOLVED, that the Companys stockholders approve, on
an advisory basis, the compensation of the named executive
officers as disclosed in the Companys proxy statement for
the 2011 Annual Meeting of Stockholders pursuant to the
compensation disclosure rules of the Securities and Exchange
Commission, including the Compensation Discussion and Analysis,
the 2010 Summary Compensation Table and other related tables and
disclosure.
Board
Recommendation
The Board recommends a vote FOR the
approval of the compensation of our named executive officers as
disclosed in this proxy statement.
PROPOSAL 3
-
ADVISORY
VOTE ON THE FREQUENCY OF FUTURE ADVISORY VOTES
ON
EXECUTIVE COMPENSATION
The Dodd-Frank Act also provides that stockholders must be given
the opportunity to vote, on a non-binding, advisory basis, for
their preference on how frequently we should seek future
advisory votes on the compensation of our named executive
officers as disclosed in accordance with the compensation
disclosure rules of the SEC. By voting on this Proposal 3,
stockholders may indicate whether they prefer that we conduct
future advisory votes on executive compensation every one, two
or three years. Stockholders also may, if they wish, abstain
from casting a vote on this proposal.
After careful consideration, our Board of Directors has
determined that an advisory vote on executive compensation that
occurs every year is the most appropriate alternative for the
Company and, therefore, our Board recommends that you vote for
an annual advisory vote on executive compensation. Although the
Companys compensation policies and practices are designed
to incentivize our named executive officers to build long-term
stockholder value, the Board recognizes that executive
compensation disclosures are made annually. Therefore, providing
for an annual advisory vote on executive compensation may
provide the Company with more direct and immediate feedback on
our annual compensation disclosure.
This vote is advisory and not binding on the Company or our
Board. However, the Board and the Compensation Committee will
take into account the outcome of the vote in determining the
frequency of future advisory votes on executive compensation.
The Board may decide that it is in the best interests of our
stockholders and the Company to hold an advisory vote on
executive compensation more or less frequently than the
frequency receiving the most votes cast by our stockholders.
Vote
Required
Because this Proposal 3 seeks the input of our stockholders
and provides our stockholders with the option to vote to hold an
advisory vote on executive compensation once every one, two or
three years (or to abstain from voting), the option receiving
the greatest number of votes will be considered the frequency
recommended by the Companys stockholders. Although our
Board recommends holding this vote every year, you have the
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option to specify one of four choices for this proposal on the
proxy card: 1 YEAR, 2 YEARS, 3
YEARS or ABSTAIN. You are not voting to
approve or disapprove of the Boards recommendation.
The text of the resolution to be voted on is as follows:
RESOLVED, that the option of every one, two or three years
that receives the highest number of votes properly cast for this
resolution will be determined to be the preferred frequency
recommended by the stockholders of the Company with which the
Company is to hold a non-binding, advisory vote to approve the
compensation of the Companys named executive officers in
accordance with the compensation disclosure rules of the
Securities and Exchange Commission.
Board
Recommendation
The Board recommends that you vote to conduct a non-binding,
advisory vote on executive compensation every 1
YEAR.
PROPOSAL 4
-
REAPPROVAL
OF MATERIAL TERMS OF OUR 2007 STOCK INCENTIVE PLAN TO COMPLY
WITH SECTION 162(M) OF THE INTERNAL REVENUE CODE
Background
and Purpose of the Proposal
Our Board originally adopted the Approach Resources Inc. 2007
Stock Incentive Plan (the 2007 Plan) on
June 26, 2007, and our stockholders originally approved the
2007 Plan on that same date. At this annual meeting,
stockholders will be asked to reapprove the material terms of
the 2007 Plan so that awards granted under the 2007 Plan that
are intended to qualify as performance-based
compensation within the meaning of Section 162(m) of
the Internal Revenue Code (the Code) will be fully
deductible by us and our subsidiaries.
The use of stock-based awards under the 2007 Plan continues to
be a key element of our compensation program. Of the
2,822,689 shares currently authorized for issuance under
the 2007 Plan, a total of 1,612,281 shares have been issued
as of March 31, 2011, after the lapse of restrictions on
grants of restricted stock or upon the exercise of stock
options. As of March 31, 2011, under the 2007 Plan, a total
of 313,566 shares remained subject to outstanding stock
options and 898,696 shares remained subject to awards of
restricted stock still subject to forfeiture. The 2007 Plan is a
broad-based plan under which we grant awards to our employees,
officers, directors and consultants. We continue to believe that
our long-term interests are best served by aligning the
interests of our outside directors and key employees with the
interests of our stockholders. While the Board and Compensation
Committee recognize the potential dilutive effect of
compensatory stock awards, they also recognize the significant
motivational and performance benefits that can be achieved from
making such awards.
Reapproval of the material terms of the 2007 Plan will permit us
to use stock-based compensation to align stockholder and
employee interests in a manner that qualifies certain designated
awards for exemption from the deduction limitations of
Section 162(m) of the Code. Under Section 162(m), the
federal income tax deductibility of compensation paid to our
Chief Executive Officer and three other most highly compensated
officers (other than our Chief Executive Officer and Chief
Financial Officer) (Covered Employees) determined
pursuant to the executive compensation disclosure rules under
the Securities Exchange Act of 1934, as amended (the
Exchange Act) may be limited to the extent such
compensation exceeds $1,000,000 in any taxable year. However, we
may deduct compensation paid to our Covered Employees in excess
of that amount if it qualifies as performance-based
compensation as defined in Section 162(m). In
addition to certain other requirements, in order for awards
under the 2007 Plan to constitute performance-based
compensation, the material terms of the 2007 Plan must be
disclosed to and reapproved by our stockholders no later than
the first meeting of our stockholders occurring after the close
of the third calendar year following the calendar year in which
our initial public offering occurred and, subsequently, every
five years. Based on transition relief provided to newly public
companies under the Section 162(m) regulations, we were not
previously subject to the deduction limitations of
Section 162(m).
8
Material
Terms of the Plan to be Reapproved
Under the Section 162(m) regulations, the material terms of
the 2007 Plan are (i) the maximum amount of compensation
that may be paid to a participant under the 2007 Plan in any
fiscal year, (ii) the employees eligible to receive
compensation under the 2007 Plan and (iii) the business
criteria on which the performance goals are based. We intend
that certain awards under the 2007 Plan qualify for exemption
from the deduction limitations of Section 162(m).
Accordingly, we are asking our stockholders to reapprove the
material terms of the 2007 Plan for Section 162(m) purposes
so that awards under the 2007 Plan will be fully deductible by
us. The material terms of the 2007 Plan are disclosed below as
follows: (i) the maximum amount of compensation that may be
paid to a participant is described in the section entitled
Summary of the 2007 Plan Maximum Amount of
Compensation that May be Paid to a Participant,
(ii) the eligible employees are described in the section
entitled Summary of the 2007 Plan Persons Who
May Participate and (iii) the business criteria are
described in the section entitled Summary of the 2007
Plan Awards under the 2007 Plan
Performance Awards.
Assuming the presence of a quorum, the affirmative vote of a
majority of the shares present, in person or by proxy, at the
annual meeting is necessary for reapproval of the material terms
of the 2007 Plan for Section 162(m) purposes.
Consequences
of Failing to Approve the Proposal
Failure of our stockholders to approve this Proposal will not
affect the rights of existing award holders under the 2007 Plan
or under any previously granted awards under the 2007 Plan.
However, if this proposal is not approved, the deductibility of
awards granted to Covered Employees after the annual meeting
will potentially be limited. In that event, we will be required
to re-evaluate our executive compensation structure.
Summary
of the 2007 Plan
The following summary of the 2007 Plan does not purport to be a
complete description of all provisions of the 2007 Plan and
should be read in conjunction with, and is qualified in its
entirety by reference to, the complete text of (i) the 2007
Plan, which was filed as Exhibit 10.6 to our Registration
Statement on
Form S-1
on July 12, 2007, and (ii) the First Amendment to the
2007 Plan, which was filed as Exhibit 10.1 to our Current
Report on
Form 8-K
on December 31, 2008. The 2007 Plan gives the Compensation
Committee the ability to award stock options, stock appreciation
rights, restricted stock, restricted stock units, performance
awards, unrestricted stock awards and other incentive awards,
with vesting and other award provisions that provide effective
incentives to our employees and outside directors and alignment
of stockholder, management and outside director interests.
Unless earlier terminated by action of our Board, the 2007 Plan
will terminate on June 26, 2017. Awards granted before the
termination date of the 2007 Plan will continue to be effective
in accordance with their terms and conditions.
Persons Who May Participate. Awards may be
made under the 2007 Plan to our employees, outside directors and
consultants, including any employee who is an officer, and to
any other service provider who, in the opinion of the
Compensation Committee, is in a position to make a significant
contribution to our success. Only individuals who are our
employees or who are employees of one of our corporate
subsidiaries are eligible to receive incentive stock options.
The Compensation Committee determines in its discretion which
eligible persons will receive awards under the 2007 Plan. As of
April 13, 2011, approximately 58 employees, five
outside directors and one consultant were eligible to
participate in the 2007 Plan.
Shares Subject to the 2007 Plan. The
total aggregate number of shares of our common stock that may be
subject to awards under the 2007 Plan is equal to 10% of our
outstanding shares of common stock (which is adjusted at the
beginning of each year to remain at 10% of the outstanding
shares of our common stock), plus all shares of common stock
that remain available for the grant of awards under our 2003
Stock Option Plan (Prior Plan), plus shares of
common stock subject to outstanding awards under the Prior Plan
that later cease to be subject to those awards for any reason
other than those awards having been exercised. Although the
maximum number of shares of common stock available for grant of
awards under the 2007 Plan adjusts on the first day of each year
to 10% of our outstanding shares of common stock, we exclude
shares of common stock subject to previously-granted awards
under the 2007 Plan from our calculation of shares available for
9
grant. The maximum number of shares of common stock available
for grant of awards under the 2007 Plan is also subject to
adjustment for corporate events such as recapitalizations, stock
splits, stock dividends and other corporate events. See
Awards Under the 2007 Plan Corporate
Events, below.
Our common stock issued or to be issued under the 2007 Plan
consists of authorized but unissued shares. If an award granted
under the 2007 Plan expires, is forfeited or becomes
unexercisable for any reason without having been exercised in
full, the undelivered shares of common stock that were subject
to the award become available for future awards under the 2007
Plan.
Maximum Amount of Compensation that May be Paid to a
Participant. The maximum shares of common stock
that may be subject to incentive stock options granted under the
2007 Plan is 1,100,000. The maximum number of shares of common
stock that may be subject to all awards granted to any one
participant in each fiscal year is 330,000 shares. The
maximum number of shares of common stock that may be subject to
nonqualified stock options and stock appreciation rights granted
to any one participant during a fiscal year is
330,000 shares. The amount that may be paid in cash
pursuant to performance awards granted to a Covered Employee
that are intended to qualify as performance-based
compensation under Section 162(m) of the Code is
$5,000,000 for each fiscal year during the applicable
performance period.
Administration. The 2007 Plan provides for
administration by the Board or the Compensation Committee, or
another committee of the Board designated by the Board. Subject
to the terms of the 2007 Plan, the Board or the Compensation
Committee has broad authority to, among other things, select
participants to receive awards, determine the types of awards
and terms and conditions of awards and interpret provisions of
the 2007 Plan. Currently, the 2007 Plan is administered by the
Compensation Committee. Under NASDAQ rules, members of the
Compensation Committee are required to satisfy the NASDAQs
standards for independence, subject to certain narrow
exceptions. The Compensation Committee may delegate various
functions to subcommittees or certain officers.
Awards
Under the 2007 Plan
Stock Options. The 2007 Plan permits the
granting of options to purchase shares of common stock intended
to qualify as incentive stock options under the Code and stock
options that do not qualify as incentive stock options (i.e.,
nonqualified stock options). The exercise price of each stock
option may not be less than 100% of the fair market value of the
common stock on the date of grant. In the case of certain 10%
stockholders who receive incentive stock options, the exercise
price may not be less than 110% of the fair market value of the
common stock on the date of grant. An exception to these
requirements is made for options that we grant in substitution
for options held by employees of companies that we acquire. In
such a case, the exercise price is adjusted to preserve the
economic value of the employees stock option from his or
her former employer.
The term of each stock option is fixed at the time of grant and
may not exceed 10 years from the date of grant. The
Compensation Committee determines when each option may be
exercised and the period of time, if any, after retirement,
death, disability or other termination of employment during
which options may exercised. Options may be exercisable in
installments. The exercisability of options may be accelerated
by the Compensation Committee. In general, a participant may pay
the exercise price of an option in cash or in cash equivalents,
by tendering shares of common stock having an aggregate fair
market value at the time of exercise equal to the total exercise
price, by surrendering a sufficient portion of the shares with
respect to which the option is exercised having an aggregate
fair market value at the time of exercise equal to the total
exercise price, by a sale through a broker-dealer or in a
combination of these forms, as permitted by the Compensation
Committee. The 2007 Plan prohibits the repricing of stock
options without stockholder approval.
Stock Appreciation Rights. A stock
appreciation right provides the right to receive a number of
shares or, in the discretion of the Compensation Committee, an
amount in cash or a combination of shares and cash, based on the
increase in the fair market value of the shares underlying the
rights during a specified period of time. The Compensation
Committee may grant stock appreciation rights subject to such
terms and conditions and exercisable at such times as determined
by the Compensation Committee and specified in the applicable
award agreement. The price at which stock appreciation rights
may be exercised will not be less than 100% of
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the fair market value of our common stock on the date of grant,
unless the award is granted in substitution of an award held by
an employee of a company we acquire. The term of a stock
appreciation right will not exceed 10 years. Stock
appreciation rights may not be repriced without stockholder
approval.
Restricted Stock. A restricted stock award is
an award of shares that is subject to one or more restrictions,
including, without limitation, a restriction that constitutes a
substantial risk of forfeiture within the meaning of
Section 83 of the Code and prohibitions regarding the
transferability of the shares, for a period to be determined by
the Compensation Committee. The Compensation Committee has the
discretion to determine the terms of any restricted stock award
including the number of shares subject to the award, the price
(if any) paid for shares subject to the award and the minimum
period over which a restricted stock award may be vested. Unless
otherwise determined by the Compensation Committee, participants
holding shares subject to restricted stock awards may exercise
full voting rights with respect to the shares during the
restriction period and will be entitled to receive all dividend
and other distributions with respect to the shares.
Restricted Stock Units. A restricted stock
unit is an award of units denominated in shares and payable in
shares or cash, which is subject to such performance
and/or other
conditions as are specified by the Compensation Committee. The
Compensation Committee has the discretion to determine the terms
of any restricted stock unit award, including the number of
shares subject to such award and the minimum period over which
the award may vest and be settled. Holders of restricted stock
units will be entitled to receive dividend equivalents only to
the extent provided by the Compensation Committee.
Performance Awards. The 2007 Plan provides for
the grant of performance awards, ultimately payable in common
stock or cash (or a combination thereof), as determined by the
Compensation Committee. Performance awards are conditioned upon
the level of achievement of one or more stated performance goals
over a specified performance period that is not shorter than one
year. The applicable award agreement will specify the amount, or
the formula for determining the amount, that may be earned under
the performance award, the performance criteria and level of
achievement versus the performance criteria that will determine
the amount payable under the performance award, the performance
period over which performance is measured, and such other terms
and conditions as the Compensation Committee may determine.
Performance awards to Covered Employees or to individuals who
are likely to be Covered Employees may be designed to qualify as
performance-based compensation under
Section 162(m) of the Code to the extent the Compensation
Committee so designates. Notwithstanding satisfaction of any
applicable performance goals, the number of shares issued under
or the amount paid under an award may, to the extent specified
in the award agreement, be reduced by the Compensation Committee
on the basis of such further considerations as the Compensation
Committee in its sole discretion shall determine.
Performance goals set by the Compensation Committee may relate
to one or more of the following objective performance criteria
(on an absolute basis or relative to the performance of other
business entities) that the Compensation Committee determines is
appropriate: (i) earnings or earnings per share (whether on
a pre-tax, after-tax, operational or other basis),
(ii) return on equity, (iii) return on assets or net
assets, (iv) return on capital or invested capital and
other related financial measures, (v) cash flow or EBITDA
or EBITDAX, (vi) revenues, (vii) income or operating
income, (viii) expenses or costs or expense levels or cost
levels (absolute or per unit), (ix) one or more operating
ratios, (x) stock price, (xi) total stockholder
return, (xii) operating profit, (xiii) profit margin,
(xiv) capital expenditures, (xv) net borrowing, debt
leverage levels, credit quality or debt ratings, (xvi) the
accomplishment of mergers, acquisitions, dispositions, public
offerings or similar extraordinary business transactions,
(xvii) net asset value per share, (xviii) economic
value added, (xix) individual business objectives,
(xx) growth in production, (xxi) growth in reserves,
(xxii) reserve replacement ratio
and/or
(xxiii) finding and development costs per unit. The
performance goals based on these performance measures may be
made relative to the performance of other business entities.
Other Awards. In addition to the award types
described above, the 2007 Plan permits the granting of the
following types of awards:
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Shares of unrestricted stock, which are shares of common stock
issued at no cost or for a purchase price and that are free from
any transferability and forfeiture restrictions.
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Other incentive awards, which may be payable in common stock,
cash or other property as determined by the Compensation
Committee. The terms and conditions of such awards will be
specified by the Compensation Committee in the applicable award
agreement.
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Transferability. Unless otherwise provided by
the Compensation Committee, awards under the 2007 Plan are
generally only transferable (i) by the recipients
last will and testament and by the applicable laws of descent
and distribution, (ii) pursuant to a domestic relations
order or (iii) to immediate family members or trusts or
partnerships solely for the benefit of the participants
immediate family members. Incentive stock options are
transferable only as provided in clause (i) above.
Tax Withholding. A participant must satisfy
any applicable federal, state, local or foreign tax withholding
obligations that arise due to an award made under the 2007 Plan,
and the Compensation Committee will not be required to issue any
shares or make any payment until the participant satisfies those
obligations in a manner satisfactory to us. The Compensation
Committee may permit tax withholding obligations to be satisfied
by having the Company withhold a portion of the shares that
would otherwise be issued to the participant under an award or
by allowing the participant to surrender previously acquired
shares.
Amendment and Termination. Our Board may
amend, suspend or terminate the 2007 Plan at any time and for
any reason. Amendments to the 2007 Plan will be submitted for
stockholder approval if an amendment increases the maximum
number of shares available under the 2007 Plan (except as
otherwise allowable under the 2007 Plan), changes the
designation or class of persons eligible to receive awards under
the 2007 Plan or if required by applicable law or by applicable
stock exchange listing requirements. Amendments to limit the
scope of the 2007 Plan do not require stockholder approval. No
amendment to the 2007 Plan or awards may adversely affect in any
material way any outstanding award without the consent of the
holder of such award.
Corporate Events. We may make appropriate
adjustments in outstanding awards and the number of shares
available for issuance under the 2007 Plan, including the
individual limitations on awards, to reflect recapitalizations,
reclassifications, stock splits, reverse stock splits, stock
dividends and other similar events. Unless provided otherwise in
an applicable award agreement, in the event of a change in
control (as defined in the 2007 Plan), the vesting of all
awards will be accelerated and any performance criteria will be
deemed to be achieved to the maximum extent possible. If there
is a change in control and we are not the surviving corporation
(or if we survive only as a subsidiary of another corporation),
unless the Compensation Committee determines otherwise, awards
will be replaced with similar awards of the surviving
corporation (or parent of the surviving corporation). The
Compensation Committee may require the surrender to us by
selected participants of some or all of the outstanding awards
held by such participants, at which time we will cancel those
awards and cause to be paid to each affected participant a
certain amount of cash per share, as specified in the 2007 Plan.
Federal
Income Tax Consequences
The following discussion is for general information only and is
intended to summarize briefly the U.S. federal tax
consequences to participants arising from participation in the
2007 Plan. This description is based on current law, which is
subject to change (possibly retroactively). The tax treatment of
participants in the 2007 Plan may vary depending on the
particular situation and therefore may be subject to special
rules not discussed below. No attempt has been made to discuss
any potential foreign, state or local tax consequences.
Incentive Options; Nonqualified Options; Stock Appreciation
Rights. Participants will not realize taxable
income upon the grant of a nonqualified stock option or a stock
appreciation right. Upon the exercise of a nonqualified stock
option or a stock appreciation right, a participant will
recognize ordinary compensation income (subject to withholding)
in an amount equal to the excess of (i) the amount of cash
and the fair market value of the common stock received, over
(ii) the exercise price (if any) paid. A participant will
generally have a tax basis in any shares of common stock
received pursuant to the exercise of a stock appreciation right,
or pursuant to the cash exercise of a nonqualified stock option,
that equals the fair market value of such shares on the date of
exercise. Subject to the discussion under Federal Income
Tax Consequences Tax Code Limitations on
Deductibility below, we or one of our subsidiaries (as
applicable) will be entitled to a
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deduction for federal income tax purposes that corresponds as to
timing and amount with the compensation income recognized by a
participant under the rules described above.
Participants eligible to receive an incentive stock option will
not recognize taxable income on the grant of an incentive stock
option. Upon the exercise of an incentive stock option, a
participant will not recognize taxable income, although the
excess of the fair market value of the shares of common stock
received upon exercise of the incentive stock option (ISO
Stock) over the exercise price will increase the
alternative minimum taxable income of the participant, which may
cause such participant to incur alternative minimum tax. The
payment of any alternative minimum tax attributable to the
exercise of an incentive stock option would be allowed as a
credit against the participants regular tax liability in a
later year to the extent the participants regular tax
liability is in excess of the alternative minimum tax for that
year.
Upon the disposition of ISO Stock that has been held for the
requisite holding period (generally, at least two years from the
date of grant and one year from the date of exercise of the
incentive stock option), a participant will generally recognize
capital gain (or loss) equal to the excess (or shortfall) of the
amount received in the disposition over the exercise price paid
by the participant for the ISO Stock. However, if a participant
disposes of ISO Stock that has not been held for the requisite
holding period (a Disqualifying Disposition), the
participant will recognize ordinary compensation income in the
year of the Disqualifying Disposition in an amount equal to the
amount by which the fair market value of the ISO Stock at the
time of exercise of the incentive stock option (or, if less, the
amount realized in the case of an arms-length disposition
to an unrelated party) exceeds the exercise price paid by the
participant for such ISO Stock. A participant would also
recognize capital gain to the extent the amount realized in the
Disqualifying Disposition exceeds the fair market value of the
ISO Stock on the exercise date. If the exercise price paid for
the ISO Stock exceeds the amount realized (in the case of an
arms-length disposition to an unrelated party), such
excess would ordinarily constitute a capital loss.
Generally, we will not be entitled to any federal income tax
deduction upon the grant or exercise of an incentive stock
option, unless a participant makes a Disqualifying Disposition
of the ISO Stock. If a participant makes a Disqualifying
Disposition, we will then, subject to the discussion below under
Federal Income Tax Consequences Tax Code
Limitations on Deductibility, be entitled to a tax
deduction that corresponds as to timing and amount with the
compensation income recognized by a participant under the rules
described in the preceding paragraph.
Under current rulings, if a participant transfers previously
held shares of common stock (other than ISO Stock that has not
been held for the requisite holding period) in satisfaction of
part or all of the exercise price of a nonqualified stock option
or incentive stock option, no additional gain will be recognized
on the transfer of such previously held shares in satisfaction
of the nonqualified stock option or incentive stock option
exercise price (although a participant would still recognize
ordinary compensation income upon exercise of a nonqualified
stock option in the manner described above). Moreover, that
number of shares of common stock received upon exercise that
equals the number of shares of previously held common stock
surrendered in satisfaction of the nonqualified stock option or
incentive stock option exercise price will have a tax basis that
equals, and a capital gains holding period that includes, the
tax basis and capital gains holding period of the previously
held shares of common stock surrendered in satisfaction of the
nonqualified stock option or incentive stock option exercise
price. Any additional shares of common stock received upon
exercise will have a tax basis that equals the amount of cash
(if any) paid by the participant, plus the amount of
compensation income recognized by the participant under the
rules described above. If a reload option is issued in
connection with a participants transfer of previously held
common stock in full or partial satisfaction of the exercise
price of an nonqualified stock option or incentive stock option,
the tax consequences of the reload option will be as provided
above for a nonqualified stock option or incentive stock option,
depending on whether the reload option itself is a nonqualified
stock option or incentive stock option.
The 2007 Plan allows the Compensation Committee to permit the
transfer of awards in limited circumstances. See Summary
of the 2007 Plan Transferability. For income
and gift tax purposes, certain transfers of nonqualified stock
options and stock appreciation rights generally should be
treated as completed gifts, subject to gift taxation.
13
The Internal Revenue Service (IRS) has not provided
formal guidance on the income tax consequences of a transfer of
nonqualified stock options (other than in the context of
divorce) or stock appreciation rights. However, the IRS has
informally indicated that after a transfer of stock options
(other than in the context of divorce pursuant to a domestic
relations order), the transferor will recognize income, which
will be subject to withholding, and FICA/FUTA taxes will be
collectible at the time the transferee exercises the stock
options.
In addition, if a participant transfers a vested nonqualified
stock option to another person and retains no interest in or
power over it, the transfer is treated as a completed gift. The
amount of the transferors gift (or generation-skipping
transfer, if the gift is to a grandchild or later generation)
equals the value of the nonqualified stock option at the time of
the gift. The value of the nonqualified stock option may be
affected by several factors, including the difference between
the exercise price and the fair market value of the stock, the
potential for future appreciation or depreciation of the stock,
the time period of the nonqualified stock option and the
illiquidity of the nonqualified stock option. The transferor
will be subject to a federal gift tax, which will be limited by
(i) the annual exclusion of $13,000 (for 2011) per
donee, (ii) the transferors lifetime unified credit
or (iii) the marital or charitable deduction rules. The
gifted nonqualified stock option will not be included in the
participants gross estate for purposes of the federal
estate tax or the generation-skipping transfer tax.
This favorable tax treatment for vested nonqualified stock
options has not been extended to unvested nonqualified stock
options. Whether such consequences apply to unvested
nonqualified stock options is uncertain, and the gift tax
implications of such a transfer are a risk the transferor will
bear upon such a disposition. The IRS has not specifically
addressed the tax consequences of a transfer of stock
appreciation rights.
Restricted Stock Awards; Restricted Stock Units; Cash
Awards. A participant will recognize ordinary
compensation income upon receipt of cash pursuant to a cash
award or, if earlier, at the time the cash is otherwise made
available for the participant to draw upon. A participant will
not have taxable income at the time of grant of a stock award in
the form of restricted stock units denominated in common stock,
but rather, will generally recognize ordinary compensation
income at the time he receives cash or common stock in
settlement of the restricted stock units in an amount equal to
the cash or the fair market value of the common stock received.
In general, a participant will recognize ordinary compensation
income as a result of the receipt of common stock pursuant to a
restricted stock award in an amount equal to the fair market
value of the common stock when such stock is received; provided
that, if the stock is not transferable and is subject to a
substantial risk of forfeiture when received, a participant will
recognize ordinary compensation income in an amount equal to the
fair market value of the common stock (i) when the common
stock first becomes transferable or is no longer subject to a
substantial risk of forfeiture, in cases where a participant
does not make an valid election under section 83(b) of the
Code, or (ii) when the common stock is received, in cases
where a participant makes a valid election under
section 83(b) of the Code.
A participant will be subject to withholding for federal, and
generally for state and local, income taxes at the time he
recognizes income under the rules described above for common
stock or cash received. Dividends that are received by a
participant before the common stock is taxed to the participant
under the rules described in the preceding paragraph are taxed
as additional compensation, not as dividend income. The tax
basis in the common stock received by a participant will equal
the amount recognized by him as compensation income under the
rules described in the preceding paragraph, and the
participants capital gains holding period in those shares
will commence on the later of the date the shares are received
or the restrictions lapse.
Subject to the discussion immediately below, we or one of our
subsidiaries (as applicable) will be entitled to a deduction for
federal income tax purposes that corresponds as to timing and
amount with the compensation income recognized by a participant
under the rules described above.
Tax Code Limitations on Deductibility. In
order for the amounts described above to be deductible, such
amounts must constitute reasonable compensation for services
rendered or to be rendered and must be ordinary and necessary
business expenses.
14
Our ability (or the ability of one of our subsidiaries, as
applicable) to obtain a deduction for future payments under the
2007 Plan could also be limited by the golden parachute payment
rules of Section 280G of the Code, which prevent the
deductibility of certain excess parachute payments made in
connection with a change in control of an employer-corporation.
Finally, our ability (or the ability of one of our subsidiaries,
as applicable) to obtain a deduction for amounts paid under the
2007 Plan could be limited by Section 162(m) of the Code,
which limits the deductibility, for federal income tax purposes,
of compensation paid to covered employees of a
publicly traded corporation to $1,000,000 for any such officer
during any taxable year of the corporation. However, an
exception applies to this limitation in the case of certain
performance-based compensation. In order to exempt
performance-based compensation from the $1,000,000
deductibility limitation, the grant or vesting of the award
relating to the compensation must be based on the satisfaction
of one or more performance goals as selected by the Compensation
Committee. Performance-based awards intended to comply with
Section 162(m) may not be granted in a given period if such
awards relate to shares of common stock that exceed a specified
limitation or, alternatively, the performance-based awards may
not result in compensation, for a participant, in a given period
that exceeds a specified limitation. If the material terms of
the 2007 Plan are reapproved at the annual meeting, a
participant who receives an award or awards intended to satisfy
the performance-based compensation exception to the
$1,000,000 deductibility limitation may not receive
performance-based awards relating to more than
330,000 shares of common stock or, with respect to awards
not related to shares of common stock, $5,000,000, in any given
fiscal year. Although the 2007 Plan has been drafted to satisfy
the requirements for the performance-based
compensation exception, we may determine that it is in our
best interests not to satisfy the requirements for the
exception. See Summary of the 2007 Plan Awards
under the 2007 Plan Performance Awards.
Requirements Regarding Deferred
Compensation. Certain of the benefits under the
2007 Plan may constitute deferred compensation
within the meaning of Section 409A of the Code. Failure to
comply with the requirements of Section 409A regarding the
timing of payment distributions could result in the affected
participants being required to recognize ordinary income for
federal tax purposes earlier than expected, and being subject to
substantial penalties.
New Plan
Benefits and Previously Awarded Options
The awards, if any, that will be made to eligible persons under
the 2007 Plan are subject to the discretion of the Compensation
Committee and, therefore, we cannot currently determine the
benefits or number of shares subject to awards that may be
granted in the future to our executive officers, employees and
directors under the 2007 Plan. Therefore, a New Plan Benefits
Table is not provided.
We made annual equity awards under the 2007 Plan in 2010 to the
named executive officers, outside directors and to other
eligible employees. The 2010 grants to the named executive
officers are reflected in the Grants of Plan-Based Awards
for Year Ended December 31, 2010 table on
page 42 of this proxy statement. The 2010 grants to outside
directors are reflected in the Director Compensation Table on
page 50 of this proxy statement. On April 13, 2011,
the closing price of our common stock was $27.73 per share.
15
The following table sets forth, for the named executive officers
and certain other groups, all shares underlying outstanding
stock options awarded before December 31, 2010, under the
2007 Plan and the Prior Plan. No associate of any of the
directors, named executive officers or nominees set forth below
holds or has held options to purchase our common stock.
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Number of Shares
|
|
|
Issued or Underlying
|
Name and Principal Position
|
|
Options
|
|
J. Ross Craft
|
|
|
|
|
President and Chief Executive Officer
|
|
|
152,892
|
|
Steven P. Smart
|
|
|
|
|
Executive Vice President and Chief Financial Officer
|
|
|
28,845
|
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J. Curtis Henderson
|
|
|
|
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Executive Vice President and General Counsel
|
|
|
|
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Qingming Yang
|
|
|
|
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Executive Vice President Business
Development & Geosciences
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|
|
|
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Ralph P. Manoushagian
|
|
|
|
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Executive Vice President Land
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|
|
28,845
|
|
|
|
|
|
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All executives as a group
|
|
|
210,582
|
|
|
|
|
|
|
Non-executive director group(1)
|
|
|
|
|
Non-executive officer employee group
|
|
|
123,756
|
|
|
|
|
|
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Total
|
|
|
334,338
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|
|
|
|
|
|
|
|
|
(1) |
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Consists of all members of the Board who are not also our
executive officers. |
Vote
Required
The reapproval of the material terms of the 2007 Plan to comply
with the performance-based compensation exception of
Section 162(m) of the Code requires the affirmative vote of
the holders of a majority of the shares of common stock present
in person or by proxy and entitled to vote on the matter.
Board
Recommendation
The Board believes that the reapproval of the material terms of
the 2007 Plan for purposes of Section 162(m) is essential
to our continued success. For the reasons stated above, the
stockholders are being asked to approve this proposal.
The Board recommends a vote FOR the
reapproval of the material terms of the 2007 Plan to comply with
Section 162(m) of the Code.
PROPOSAL 5
-
RATIFICATION
OF THE APPOINTMENT OF THE
INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
The Audit Committee of the Board has appointed Hein &
Associates LLP (Hein) as the independent registered
public accounting firm to audit our consolidated financial
statements as of and for the fiscal year ending
December 31, 2011, and our internal controls over financial
reporting as of December 31, 2011. Hein has served as our
independent registered public accounting firm since 2005 and has
provided us certain audit-related services during that time.
Hein also provided us certain tax services through 2008.
Representatives of Hein are expected to be present at the annual
meeting to respond to appropriate questions from stockholders
and will be given the opportunity to make a statement if they
desire to do so.
16
The submission of this matter for approval by stockholders is
not legally required; however, the Board and Audit Committee
believe that such submission is consistent with best practices
in corporate governance and is an opportunity for stockholders
to provide direct feedback to the Board and Audit Committee on
an important issue of corporate governance. If the appointment
is not ratified, the Audit Committee will consider whether it
should select another independent registered public accounting
firm.
Vote
Required
The affirmative vote of a majority of the shares of our common
stock present in person or by proxy and entitled to vote on the
matter is required for the ratification of the appointment of
Hein & Associates LLP as our independent registered
public accounting firm for fiscal year 2011.
Board
Recommendation
The Board recommends a vote FOR the
ratification of the appointment of Hein & Associates
LLP as our independent registered public accounting firm for the
fiscal year 2011.
BOARD OF
DIRECTORS, BOARD MEETINGS AND COMMITTEES
Board
Structure
As of the date of this proxy statement, our Board has seven
directors and two committees, the Audit Committee and the
Compensation and Nominating Committee. Our Board is classified
into three classes of directors, each serving staggered,
three-year terms. As a result, stockholders will elect a portion
of our Board each year. The current terms of Class I,
Class II and Class III directors expire at the annual
meeting of stockholders in 2011, 2012 and 2013, respectively.
Our bylaws provide that the Board will consist of at least three
but not more than nine directors, and the exact number of
directors that make up the Board will be fixed from time to time
by resolution of the Board. No decrease in the number of
directors may shorten the term of any incumbent director.
Board
Meetings
During 2010, our Board held 10 meetings. The independent
directors met two times in executive session during 2010. Each
director attended at least 75% of the meetings of the Board.
Board
Leadership Structure
Our Board currently separates the roles of Chairman of the Board
and Chief Executive Officer (CEO). The Board
believes that the functions of the Chairman of the Board are
distinct from those of the CEO. The Board believes that,
although these functions may be fulfilled by a single
individual, separation of the positions currently serves to
enhance the Boards oversight of, and independence from,
management. Our Board does not have a written policy regarding
the separation of the positions of Chairman and CEO, and may
modify this structure in the future to best address
circumstances as appropriate.
The
Boards Role in Risk Oversight
Assessing and managing risk is the responsibility of the
management of the Company. However, the Board has an active
role, as a whole, and also at the committee level, in overseeing
management of the Companys risks. The Board regularly
reviews information regarding the Companys credit,
liquidity and operations, as well as the risks associated with
each.
Under its charter, the Audit Committee reviews and discusses
with management the Companys major financial risk
exposures and the steps management has taken to monitor and
control such exposures, including the Companys risk
assessment and risk management policies. In addition, the Audit
Committee oversees risks related to the Companys financial
statements, the financial reporting process, accounting, tax and
legal matters as well as liquidity risks and guidelines,
policies and procedures for monitoring and mitigating risks.
17
The Audit Committee meets regularly in executive session without
the Companys independent registered public accounting firm
and without management. Members of the Audit Committee routinely
attend meetings of the Companys Disclosure Committee,
which meets before the Company files quarterly and annual
financial reports with the SEC. In addition, the Audit Committee
reviews and discusses with management and the Companys
independent registered public accounting firm any major issues
as to the adequacy of the Companys internal controls, any
special steps adopted in light of material control deficiencies
and the adequacy of disclosures about changes in internal
control over financial reporting. The Audit Committee also meets
with our internal controls, Sarbanes-Oxley compliance and
enterprise risk management consultants, and, if applicable,
reviews related-party transactions for potential conflicts of
interest. Specifically relating to enterprise risk management
during
2010-2011,
the Company performed an enterprise risk assessment to identify
key risks and assess procedures for managing, monitoring and
mitigating risks. The Audit Committee met with management and
the Companys enterprise risk management consultant
regarding this process.
The Compensation and Nominating Committee manages risks
associated with executive compensation and the independence of
the Board, and meets regularly in executive session without
management. While each committee is responsible for evaluating
certain risks and overseeing the management of such risks, the
entire Board is regularly informed through committee reports
about such risks.
Committee
Composition and Meetings
Committee membership during the last fiscal year, number of
meetings and the function of each of the committees are
described below. Each of the committees operates under a written
charter adopted and approved by our Board. Each of the committee
charters is available under the Corporate Governance section of
our website at www.approachresources.com and is available
in printed form upon request by any stockholder.
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Compensation
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Board of
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Name of Director
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Audit
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and Nominating
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Directors
|
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Alan D. Bell
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Member(1)
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|
|
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Member
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James H. Brandi
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Member
|
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Member(2)
|
|
Member
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J. Ross Craft
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|
|
|
|
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Member
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James C. Crain
|
|
Chair(1)
|
|
Member
|
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Member
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Bryan H. Lawrence
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|
|
|
|
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Chair
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Sheldon B. Lubar
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|
|
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Chair(2)
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Member
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Christopher J. Whyte
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Member
|
|
|
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Member
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Number of meetings in 2010
|
|
6
|
|
6
|
|
10
|
|
|
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(1) |
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Mr. Bell was appointed Chair of the Audit Committee
effective March 7, 2011. |
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(2) |
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Mr. Brandi was appointed Chair of the Compensation and
Nominating Committee effective March 7, 2011. |
Each committee member attended at least 75% of the meetings of
each committee on which such member served.
Audit
Committee
We have an Audit Committee established in accordance with
Section 10A-3
of the Exchange Act. Our Audit Committee is composed of Alan D.
Bell, Chairman, James H. Brandi, James C. Crain and Christopher
J. Whyte. Our Board has determined that all members of the Audit
Committee satisfy the independence criteria applicable to Audit
Committee members under NASDAQ and SEC rules and regulations.
Additionally, the Board has determined that each member of the
Audit Committee has accounting and related financial management
expertise under NASDAQ rules. The Board has determined that Alan
D. Bell, James C. Crain and Christopher J. Whyte are each
audit committee financial experts as described in
Item 407(d)(5) of
Regulation S-K.
18
The Audit Committee oversees the annual audit and recommends to
our Board the independent public accountants who audit our
financial statements. The Audit Committee also approves any
other services provided by public accounting firms. The Audit
Committee assists our Board in fulfilling the Boards
oversight responsibility to the stockholders, the investment
community and others relating to the integrity of our financial
statements, our compliance with legal and regulatory
requirements and the independent registered public accounting
firms qualifications and independence. The Audit Committee
oversees our system of disclosure controls and procedures and
system of internal controls regarding financial, accounting,
legal compliance and ethics that management and our Board have
established. In doing so, it is the responsibility of the Audit
Committee to maintain free and open communication between the
Audit Committee, our independent registered public accounting
firm and our management. For ease of reference in this proxy
statement we may refer to the independent registered public
accounting firm as our accounting firm.
Principal responsibilities of the Audit Committee under its
charter include the following:
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appoint, determine funding for and oversee our accounting firm;
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pre-approve all auditing services, internal control-related
services and permitted non-audit services (including fees and
terms) to be performed for us by our accounting firm;
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review and discuss with management and our accounting firm our
quarterly and annual financial statements;
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review and discuss quarterly reports from our accounting firm on
critical accounting policies to be used, any alternative
treatments of financial information within U.S. generally
accepted accounting principles (GAAP) that have been
discussed with management and other material written
communications between the accounting firm and management;
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discuss with management our earnings press releases, including
the use of pro forma or adjusted
non-GAAP information, as well as financial information and
earnings guidance provided to analysts;
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discuss with management our major financial risk exposures and
the steps management has taken to monitor and control such
exposures;
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review and discuss with management and our accounting firm our
internal controls report and our accounting firms
attestation of the report before the filing of the
Companys annual report on
Form 10-K;
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review and evaluate the lead partner of our accounting firm
team; and
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establish policies and procedures for the receipt, retention and
treatment of complaints received by us regarding accounting,
internal accounting controls or auditing matters, and the
confidential, anonymous submission by employees of concerns
regarding questionable accounting or auditing matters or alleged
breaches of our Code of Conduct.
|
Compensation
and Nominating Committee
The Compensation and Nominating Committee (Compensation
Committee) oversees our executive and director
compensation and the Board nominees for election by
stockholders. Our Compensation Committee is composed of James H.
Brandi, Chairman, James C. Crain and Sheldon B. Lubar. Our Board
has determined that all members of the Compensation Committee
satisfy the independence criteria applicable to compensation
committee members under applicable SEC and NASDAQ rules and
regulations.
Principal responsibilities of the Compensation Committee under
its charter include the following:
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review and approve corporate goals and objectives relating to
compensation for our CEO, evaluate the CEOs performance in
light of these goals and objectives and recommend to the Board
the CEOs annual compensation;
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19
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review and approve the evaluation process and compensation
structure for our executive officers and key employees and, in
consultation with the CEO, recommend to the Board the annual
compensation for such officers and key employees;
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review and administer our incentive compensation and stock-based
plans;
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review director compensation and recommend to the Board the form
and amount of director compensation;
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meet with management to review and discuss the Compensation
Discussion and Analysis required by the SECs rules and
regulations;
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establish procedures for evaluating the suitability of potential
director nominees;
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recommend to the Board the director nominees for election by the
stockholders or appointment by the Board, as applicable;
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review the suitability for continued service as a director of
each Board member; and
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review periodically the size and composition of the Board and
recommend to the Board any appropriate changes, subject to our
bylaws.
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CORPORATE
GOVERNANCE
We are committed to sound corporate governance principles.
Following such principles is essential to running our business
efficiently and maintaining our integrity in the marketplace.
Our corporate governance documents are available under the
Corporate Governance section of our website at
www.approachresources.com, and are available in print
upon request by any stockholder to our Corporate Secretary,
Approach Resources Inc., One Ridgmar Centre, 6500 West
Freeway, Suite 800, Fort Worth, Texas 76116. The
information on our website is not part of this proxy statement.
Code of
Conduct
We have adopted a Code of Conduct that applies to all of our
directors, officers and employees. The Code of Conduct is
available under the Corporate Governance section of our website
at www.approachresources.com. Any change to or waiver
from our Code of Conduct may be made only by the Board or, in
the case of any change in or waiver for any of our officers, by
our independent directors. All changes and waivers will be
disclosed as required by applicable SEC and NASDAQ rules and
regulations.
Board
Independence
The Board has determined that Mr. Brandi, Mr. Bell,
Mr. Crain, Mr. Lubar and Mr. Whyte are
independent within the meaning of applicable SEC and NASDAQ
rules and regulations. Furthermore, the Board has determined
that each of the current members of both the Audit Committee and
the Compensation Committee is independent within the meaning of
applicable SEC and NASDAQ rules and regulations.
In determining the independence of Board and committee members
under applicable SEC and NASDAQ rules and regulations, the Board
specifically considered Mr. Brandis position as a
Managing Director of BNP Paribas (Paribas).
Mr. Brandi became a Managing Director of Paribas in May
2010, after the acquisition by Paribas of Hill Street Capital, a
financial advisory and private investment firm where
Mr. Brandi was formerly a partner. In an unrelated
transaction, Paribas became a party to our Credit Agreement in
May 2010, after acquiring Fortis Capital Corp., a former member
of our bank group. As a member of our bank group and party to
our Credit Agreement, Paribas has committed to loan us 23.33% of
our total borrowing base of $150 million and indirectly
receives a proportionate share of the interest and fees that we
pay to the bank group for maintaining our revolving credit
facility. Mr. Brandi has no direct or indirect material
interest in this transaction. After reviewing all of the
relevant facts and circumstances of Mr. Brandis
employment by Paribas and Paribass relationship with the
Company, the Board determined Mr. Brandi to be independent
under applicable SEC and NASDAQ rules and regulations regarding
independence. The Board also determined that
20
Mr. Brandi would continue to qualify as an outside
director under Section 162(m) of the Code and
applicable regulations.
Identifying
and Evaluating Nominees for Directors
The policy of the Compensation Committee is to consider properly
submitted nominations for candidates for membership on the
Board. The Compensation Committee and Board seek individuals who
are of high ethical character and who share our values.
The Compensation Committee and the Board also seek individuals
with a diversity of professional experiences, including chief
executive officers and other operating executives, investment
and finance professionals, attorneys and individuals with
experience or advanced degrees in public accounting. Other
criteria that the committee will use to evaluate director
nominees are:
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a candidates strength of character, independence of
opinion and sound business judgment;
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the proportion of Board members who meet the criteria for
independence required by NASDAQ;
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a candidates broad understanding of business, financial
affairs and the complexities of a business organization;
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a candidates ability to work with our other directors and
executives in accomplishing our objectives and representing
stockholders;
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a candidates ability to devote sufficient time to
effectively administer our affairs; and
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a candidates educational background and expertise in areas
significant to our operations.
|
The Compensation Committee has no specific policy on diversity.
However, the committee does not discriminate on the basis of
race, gender, age or cultural background in identifying and
nominating nominees for director. For purposes of consideration
of diversity, the Compensation Committee and the Board include
members with differences of viewpoint, professional experience,
education, skills and other individual qualities and attributes.
The Compensation Committee may consider suggestions from many
sources regarding possible candidates for nomination to the
Board, including suggestions from management, directors and
stockholders. For the deadlines for stockholder suggestions to
the Compensation Committee of individuals to be considered for
nomination as candidates to be elected at the 2011 annual
meeting of stockholders, see Submission of Stockholder
Proposals and Other Deadlines for the 2011 Annual Meeting of
Stockholders. Any such suggestion should be sent to the
Compensation Committee,
c/o our
Corporate Secretary, Approach Resources Inc., One Ridgmar
Centre, 6500 West Freeway, Suite 800, Fort Worth,
Texas 76116, together with the same information as that
described in our bylaws for stockholder nominations made by the
Board or management. The information should also include the
name and address of the stockholder recommending the individual,
the number of shares owned beneficially and of record by the
stockholder, the suggested individuals name and address, a
description of all arrangements or understandings (if any)
between the stockholder and the individual being suggested for
the committees consideration, the information about the
individual being suggested that would be required to be included
in a proxy statement filed with the SEC and an indication of the
individuals willingness to be named as a nominee and to
serve as a director if nominated by the committee and the Board.
Possible candidates who have been suggested by stockholders are
evaluated by the committee in the same manner as are other
possible candidates. The committee has not retained a
third-party search firm to identify candidates at this time but
may do so in the future in its discretion.
Mr. Bell is our only nominee for director who is not a
previously-elected director standing for re-election.
Mr. Bell was introduced to the Company through the
Companys independent accounting firm. The Compensation and
Nominating Committee evaluated Mr. Bells
qualification to serve on the Companys Board pursuant to
its director nomination guidelines. In August 2010,
Mr. Bell was recommended by the independent directors of
our Compensation and Nominating Committee, and subsequently was
unanimously appointed by the Board, to serve as a director of
the Company.
21
Communications
with the Board
Stockholders may send written communications to the Board,
c/o our
Corporate Secretary, Approach Resources Inc., One Ridgmar
Centre, 6500 West Freeway, Suite 800, Fort Worth,
Texas 76116. These communications will be compiled by the
Corporate Secretary and promptly forwarded to the Board.
Director
Attendance at Annual Meetings of Stockholders
Our Board expects directors to attend the annual meetings of our
stockholders. We have formalized this expectation in a written
policy that has been approved by the Compensation Committee and
the Board. All directors attended the last annual meeting of
stockholders either in person or by telephone.
STOCK
OWNERSHIP MATTERS
Section 16(a)
Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our directors,
officers and persons who beneficially own more than 10% of our
common stock to file initial reports of ownership on Form 3
and reports of changes of ownership on Forms 4 and 5 with
the SEC. These officers, directors and 10% beneficial owners are
also required to furnish us with copies of all
Section 16(a) forms that they file. Specific due dates for
these reports have been established by regulation, and we are
required to report in this proxy statement any failure to file
by these dates in 2010.
We are aware that a Form 4 was not timely filed on behalf
of each of James H. Brandi, James C. Crain, Sheldon B. Lubar and
Christopher J. Whyte for grants of restricted shares that they
elected to receive as of April 1, 2010, as part of their
respective annual director compensation. A Form 4 for each
of these directors was filed on April 30, 2010. Based
solely on our review of reports and written representations that
we have received during the year ended December 31, 2010,
we believe that all other required reports were timely filed.
22
Security
Ownership of Management and Certain Beneficial Owners
The following table sets forth, as of April 13, 2011,
beneficial ownership of our common stock by our directors, the
executive officers named in the Summary Compensation Table in
this proxy statement, all directors and executive officers as a
group and all persons who were known to us to be the beneficial
owners of more than 5% of our outstanding shares:
|
|
|
|
|
|
|
|
|
|
|
Number of Shares of
|
|
|
Name
|
|
Common Stock Owned(1)
|
|
Percent(2)
|
|
Directors and Executive Officers:*
|
|
|
|
|
|
|
|
|
J. Ross Craft(3)(4)
|
|
|
924,552
|
|
|
|
3.25
|
%
|
Steven P. Smart(3)(4)
|
|
|
324,967
|
|
|
|
1.14
|
%
|
J. Curtis Henderson(3)
|
|
|
283,435
|
|
|
|
*
|
|
Ralph P. Manoushagian(3)(4)
|
|
|
253,754
|
|
|
|
*
|
|
Qingming Yang(3)
|
|
|
160,700
|
|
|
|
*
|
|
Bryan H. Lawrence(5)(6)
|
|
|
3,189,687
|
|
|
|
11.21
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%
|
Alan D. Bell(3)
|
|
|
6,798
|
|
|
|
*
|
|
James H. Brandi(3)
|
|
|
32,924
|
|
|
|
*
|
|
James C. Crain(3)
|
|
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30,250
|
|
|
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*
|
|
Sheldon B. Lubar(3)(7)
|
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|
989,201
|
|
|
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3.48
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%
|
Christopher J. Whyte(3)
|
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33,266
|
|
|
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*
|
|
All executive officers and directors as a group
(12 persons)(4)
|
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6,233,688
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|
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21.90
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%
|
Other Beneficial Owners:
|
|
|
|
|
|
|
|
|
Yorktown Energy Partners V, L.P.(5)(8)
|
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1,082,567
|
|
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3.80
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%
|
Janus Capital Management LLC(9)
|
|
|
1,492,470
|
|
|
|
5.24
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%
|
|
|
|
* |
|
Less than one percent. |
|
(1) |
|
Unless otherwise indicated, all shares of stock are held
directly with sole voting and investment power. |
|
(2) |
|
Based on 28,460,473 shares of our common stock outstanding
at April 13, 2011. |
|
(3) |
|
C/o Approach Resources Inc., One Ridgmar Centre, 6500 West
Freeway, Suite 800, Fort Worth, Texas 76116. |
|
(4) |
|
The number of shares beneficially owned includes the following
shares that are subject to options that are currently
exercisable or will become exercisable within 60 days of
the date of this proxy statement: |
|
|
|
|
|
Name of Beneficial Owners
|
|
Shares Subject to Options
|
|
|
J. Ross Craft
|
|
|
152,892
|
|
Steven P. Smart
|
|
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28,845
|
|
Ralph P. Manoushagian
|
|
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28,845
|
|
|
|
|
|
|
Total
|
|
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210,582
|
|
|
|
|
|
|
The number of shares beneficially owned also includes
4,154 restricted shares issued to William S.
Buckler, III, in connection with his employment as Vice
President Engineering on April 5, 2011.
|
|
|
(5) |
|
Has a principal business address of 410 Park Avenue, 19th Floor,
New York, New York 10022. |
|
(6) |
|
Includes attribution of shares held by Yorktown Energy
Partners V, L.P. and its affiliates. Mr. Lawrence
disclaims beneficial ownership of these securities except to the
extent of his pecuniary interest therein. |
|
(7) |
|
Includes attribution of shares held by Lubar Equity Fund, LLC
and Lubar Nominees. Mr. Lubar disclaims beneficial
ownership of these securities except to the extent of his
pecuniary interest therein. |
|
(8) |
|
Based on Form 4 filed March 16, 2011, reporting
ownership as of March 14, 2011. Yorktown V Company LLC is
the sole general partner of Yorktown Energy Partners V,
L.P. As a result, Yorktown V Company LLC may be deemed to have
the power to vote or direct the vote or to dispose or direct the
disposition of the shares owned by Yorktown Energy
Partners V, L.P. |
23
|
|
|
(9) |
|
Based on Schedule 13G filed February 14, 2011,
reporting ownership as of December 31, 2010. Janus Capital
Management LLC (Janus), as an investment adviser,
has the sole and shared power to vote 1,492,470 and
0 shares, respectively, and the sole and shared power to
dispose of 1,492,470 and 0 shares, respectively.
Januss principal business address is 151 Detroit Street,
Denver, Colorado 80206. |
EXECUTIVE
OFFICERS
The following table sets forth the names, ages and positions of
our executive officers.
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Name
|
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Age
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Position
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J. Ross Craft
|
|
|
54
|
|
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President, Chief Executive Officer and Class III Director
|
Steven P. Smart
|
|
|
56
|
|
|
Executive Vice President and Chief Financial Officer
|
J. Curtis Henderson
|
|
|
48
|
|
|
Executive Vice President, General Counsel and Secretary
|
Qingming Yang
|
|
|
48
|
|
|
Executive Vice President Business Development and
Geosciences
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Ralph P. Manoushagian
|
|
|
59
|
|
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Executive Vice President Land
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William S. Buckler, III
|
|
|
49
|
|
|
Vice President Engineering
|
J. Ross Craft has been our President and Chief
Executive Officer and a member of our Board since our inception
in September 2002. For Mr. Crafts biographical
information, please see Proposal One
Election of Directors Directors.
Steven P. Smart joined us as Treasurer at our inception
in September 2002. Mr. Smart was named Vice
President Finance in August 2005, and promoted to
Executive Vice President and Chief Financial Officer in June
2007. From 2000 to 2002, Mr. Smart was Controller and
Treasurer of Prize Energy Corp., a public exploration and
production company. From 1998 to 2000, Mr. Smart was a
Senior Manager in the Energy Industry group at Arthur Andersen
LLP. Prior to 1998, Mr. Smart served in senior executive
financial positions with several public and private oil and gas
companies, including Magnum Hunter Resources Inc. and Saxon Oil
Co. Mr. Smart began his career in public accounting with
Deloitte & Touche (formerly Touche Ross).
Mr. Smart has over 30 years of experience with both
public and private companies in the oil and gas industry.
Mr. Smart holds a B.B.A. in Accounting from Angelo State
University and is a licensed Certified Public Accountant in the
State of Texas.
J. Curtis Henderson joined us in February 2007 as
Executive Vice President, General Counsel and Secretary. From
2005 to 2007, Mr. Henderson served as President and Chief
Executive Officer of Coterie Capital Partners, Ltd., a private
equity partnership in Dallas, Texas. From 1996 to 2005,
Mr. Henderson served as General Counsel of Nucentrix
Broadband Networks, Inc., a public, broadband wireless
telecommunications company based in Dallas. While he was at
Nucentrix, Mr. Henderson oversaw its sale to an affiliate
of Nextel Communications Inc. under Section 363 of the
United States Bankruptcy Code in 2004. Mr. Henderson began
his career as a lawyer in the corporate and securities section
of Locke Lord Bissell & Liddell (formerly Locke
Purnell Rain Harrell). Mr. Henderson has over 23 years
of experience in public and private securities, mergers and
acquisitions, corporate finance and regulatory affairs.
Mr. Henderson holds a B.A. in Political Science from Austin
College and a J.D. from Washington and Lee University School of
Law, where he served as Articles Editor of the Washington
and Lee Law Review. Mr. Henderson is the
brother-in-law
of J. Ross Craft, our CEO and President.
Qingming Yang joined us in July 2009 as Vice
President Exploration. In November 2010,
Dr. Yang was named Executive Vice President
Business Development and Geosciences. Dr. Yang has over
25 years of domestic and international exploration,
technical and operating experience in the oil and gas industry.
Before joining Approach, Dr. Yang was employed by Pioneer
Natural Resources for 12 years in a variety of positions,
including Exploration Manager for Worldwide Exploration and
Business Development, Geosciences Advisor and Technical Lead for
Pioneers Eagle Ford Shale team. Dr. Yang is a member
of American Association of Petroleum Geologists (AAPG) and
served as an Associate Editor for the AAPG Bulletin from
2003-2009.
In addition, Dr. Yang was Chairman of Dallas Geological
Society International Committee in 2002. Dr. Yang earned
his B.S. in Petroleum Geology from Chengdu University of
Technology in the Peoples
24
Republic of China, his M.A. in Geology from George Washington
University and his Ph.D. in Structural Geology from the
University of Texas at Dallas.
Ralph P. Manoushagian joined us in February 2004 as Land
Manager. Mr. Manoushagian was named Senior Vice
President Land in June 2007 and Executive Vice
President Land in June 2008. In 2003,
Mr. Manoushagian worked as an independent landman. From
2001 to 2003, Mr. Manoushagian was the President of Hudco
Fuels, a privately-owned fuel distributorship.
Mr. Manoushagian has been an active landman and oil and gas
operator for over 30 years. Mr. Manoushagian holds a
B.B.A. in Finance from the University of North Texas and has
been a Certified Professional Landman since 1988.
Mr. Manoushagian is a director of the First Financial Bank
of Southlake, Texas. He previously served as a director and Vice
President of the Texas Independent Producers and Royalty Owners
and as a director of the Texas Alliance of Energy Producers.
William S. Buckler, III joined us in April 2011 as
Vice President Engineering. Mr. Buckler has
over 26 years of operating and engineering experience in
the oil and gas industry. Before joining Approach,
Mr. Buckler was employed by Chief Oil & Gas LLC
as Senior Vice President Operations and Engineering
from 2008 to 2011. While at Chief, Mr. Buckler managed the
engineering, operations and procurement departments for
Chiefs Barnett Shale and Marcellus Shale operations. From
2003 to 2008, Mr. Buckler was employed by Quicksilver
Resources Inc. as Vice President
U.S. Operations. Prior to Quicksilver, Mr. Buckler
served as Fort Worth Basin Operations and Engineering
Supervisor for Mitchell Energy from 1997 to 2003.
Mr. Buckler holds a B.S. in Petroleum Engineering from
Texas A&M University and is a registered Professional
Engineer licensed in Texas. Mr. Buckler is a member of the
Society of Petroleum Engineers and of the Board of Directors of
the Fort Worth Petroleum Club.
COMPENSATION
DISCUSSION AND ANALYSIS
The following compensation discussion and analysis contains
statements regarding future Company performance goals and
measures. These goals and measures are disclosed in the limited
context of the Companys incentive compensation program and
are not statements of managements expectations or
estimates of results or other guidance. The Company specifically
cautions investors not to apply these statements to other
contexts. Throughout this proxy statement, the individuals who
serve as our CEO and Chief Financial Officer (CFO)
as well as the other three most highly compensated individuals
included in the Summary Compensation Table in this proxy
statement, are referred to as our named executive
officers or executive officers.
Introduction
and Overview
The following discussion and analysis is intended to assist you
in understanding our compensation program. It is intended to
cover all the elements of compensation paid to our named
executive officers and the reasoning used by the Compensation
Committee in structuring our executive compensation program,
which is designed primarily to incentivize our named executive
officers to build long-term stockholder value.
We believe our success depends on the continued contributions of
our named executive officers. Our executive compensation
programs are designed with the philosophy of attracting,
motivating and retaining experienced and qualified executive
officers and directors with compensation that is competitive
with comparable public companies and that recognizes both
overall business and individual performance. Our policies are
also intended to support the achievement of our strategic
objectives by aligning the interests of our executive officers
with those of our stockholders through operational and financial
performance goals and equity-based compensation.
The three principal elements of our current executive
compensation programs are annual base salary, annual incentive
bonuses and long-term equity incentives in the form of
stock-based awards under our 2007 Plan. Base salary is annual
salary that pays for skill and experience and is required for
market competitiveness. Annual incentive bonuses are annual,
cash performance awards for achievement of then-current business
goals. Long-term equity incentives are stock-based awards that
provide a competitive, long-
25
term incentive to employees and named executive officers in
direct alignment with stockholder interests. We also have
employment agreements with our executive officers that contain
employment terms, severance and change in control provisions. We
believe these agreements are important to retain qualified
executives in a competitive market for executive talent.
Executive
Summary 2010 Executive Compensation
Program
We seek to pay our executive officers for performance, closely
align the interests of our executive officers with the interests
of our stockholders and attract, retain and motivate top
executive talent. Below is a summary of our key performance
results, achievements and compensation decisions in 2010. In
reporting our financial and operating results, natural gas is
converted at a rate of six thousand cubic feet (Mcf)
of natural gas to one barrel of oil equivalent
(BOE), natural gas liquids (NGLs) are
converted at a rate of one barrel of NGLs to one BOE and oil and
NGLs are converted at a rate of one barrel to six Mcf of gas
equivalent (Mcfe). Amounts in $ per Boe are
converted to amounts in $ per Mcfe at a rate of six to one
($0.06 per Boe equals $0.01 per Mcfe).
Our Performance in 2010. We achieved strong
operational and financial results and stockholder returns during
2010. Our executive officers were instrumental in helping us
achieve these results. Key 2010 financial and operational
results and stockholder returns that were instrumental in our
compensation decisions are included below. Comparisons are to
the prior year 2009.
|
|
|
|
|
We increased our total estimated proved reserves by
14.3 million BOE (MMBoe), or 39.3%, at a
finding and development (F&D) (non-GAAP) cost
of $5.70 per BOE;
|
|
|
|
We increased production 6% to 1.6 MMBoe;
|
|
|
|
We grew net income 243% to $0.34 per share;
|
|
|
|
We increased EBITDAX (non-GAAP) 17% to $1.94 per share;
|
|
|
|
We completed a detailed engineering, geological and
petrophysical study of the Wolffork oil shale across our
operating area in the Permian Basin;
|
|
|
|
We acquired approximately 34,800 net acres in and around
our core operating area that we believe will be prospective for
multiple formations, increasing our net acreage position in the
Permian Basin by approximately 51%;
|
|
|
|
We closed a $101.8 million equity offering and used the
proceeds to pay all outstanding long-term debt and help fund
development of our Wolffork oil shale resource play;
|
|
|
|
We ended 2010 with a long-term debt to EBITDAX ratio of zero;
|
|
|
|
We began a pilot drilling program in the Wolffork oil shale
resource play; and
|
|
|
|
Total stockholder returns in 2010 were 199%.
|
F&D cost and EBITDAX are non-GAAP financial measures.
Reconciliation to our audited financial statements and other
information on non-GAAP financial measures used in this proxy
statement can be found following our annual report on
Form 10-K
that is being sent with this proxy statement. In addition, we
describe how we calculate EBITDAX, F&D costs and drill-bit
F&D costs from our audited financial statements and related
notes on pages 33, 36 and 33, respectively, of this proxy
statement.
Three-Year Stockholder Returns. Our
compensation policies are designed to focus our executive
officers on the creation of long-term growth in stockholder
value. The following graph compares the cumulative return on a
$100 investment in our common stock from December 31, 2007,
through December 31, 2010, to that of the cumulative,
average return on a $100 investment in the Standard &
Poors 500 (S&P 500) index, the Dow Jones
U.S. Exploration & Production Total Stock Market
(E&P) index and a group of our peer companies
for the same period. We discuss our peer group below under
Use of Peer Group Comparisons. In
addition to the peer group discussed below under
Use of Peer Group Comparisons, and for
purposes of comparing stockholder returns in the graph below, we
also include the following peers based on their emphasis
26
on oil and NGL production: Berry Petroleum Company, Concho
Resources Inc., Kodiak Oil & Gas Corp., Northern
Oil & Gas, Inc., Oasis Petroleum Inc., Petroleum
Development Corporation and Sandridge Energy, Inc. In
calculating the cumulative return, reinvestment of dividends, if
any, is assumed. This graph is not soliciting
material, is not deemed filed with the SEC and is not to
be incorporated by reference in any of our filings under the
Securities Act of 1933 as amended (the Securities
Act) or the Exchange Act, whether made before or after the
date hereof and irrespective of any general incorporation
language in any such filing. This historic stock performance is
not indicative of future stock performance.
Annual Base Salaries. Since we became a public
company in 2007, we have attempted to provide our executive
officers with annual base salaries that are competitive with
industry peers, particularly in the Dallas
Fort Worth, Texas area, and that are at levels that we
believe will allow us to retain our executive officers, with the
goal of growing stockholder value. After challenging economic
and industry conditions in 2008 and 2009, we did not materially
increase salaries for the majority of our executive officers in
2009 and 2010. Annual base salaries for our named executive
officers in 2010 ranged from $187,000 for Mr. Manoushagian
to $312,500 for Mr. Craft. After strong operating and
financial results and stockholder returns in 2010, we increased
the range of annual base salaries for our executive officers to
$200,000 for Mr. Manoushagian to $400,000 for
Mr. Craft for 2011. More detailed information is provided
below under Elements of the Companys
Executive Officer Compensation Program Annual Base
Salary.
Performance-Based Annual Cash Incentive
Plan. Since 2008, we have provided our executive
officers with annual cash incentive bonus opportunities under
which we make payments based on the Companys achievement
of annual financial and operating measures that we believe are
essential measurements of Company performance and cost control,
and on each executive officers individual performance. For
2010, Company performance measures of production, reserves and
EBITDAX per share growth, lease operating/general and
administrative expense and drill-bit F&D costs represented
75% of each executive officers total bonus opportunity.
Individual performance represented 25% of total bonus
opportunity. Threshold and maximum bonus targets ranged from
35% 75% of annual salary for Mr. Manoushagian
and Dr. Yang to 50% 150% of annual salary for
Mr. Craft. Final incentive awards for 2010 ranged from
$56,100 for Mr. Manoushagian to $187,500 for
Mr. Craft. Consistent with our past practice, we have
provided our executive officers with a cash incentive bonus
opportunity based on substantially the same performance measures
and target levels for 2011. More detailed information is
provided below under Elements of the
Companys Executive Officer Compensation
Program Performance-Based Annual Incentive
Awards.
Long-Term Equity Incentives. In 2010, we
changed the long-term equity incentive component of our
compensation program to further link our executives pay to
performance and align their interests with those
27
of our stockholders. In 2010, we granted our executive officers
performance-based, long-term incentive restricted stock
(LTI) awards, totaling 400,000 shares of
restricted stock, or 1.8% of our weighted average shares of
common stock outstanding in 2010. The LTI awards must first be
earned based on the Companys achievement of annual
performance measures that we believe are strongly correlated to
building stockholder value. The awards are then subject to
multi-year, time-based vesting to encourage retention of our key
executive officers. The applicable annual performance measures
are reserves growth, F&D cost and
debt-to-EBITDAX
ratio in the performance year of 2010. If all performance
measures are met, then the earned LTI awards will vest ratably
over four years following the performance year 2010. LTI awards
in 2010 ranged from 60,000 shares each for
Mr. Manoushagian and Dr. Yang, to 120,000 shares
for Mr. Craft. Because of Dr. Yangs role in
undertaking our study of the Wolffork oil shale under our
Permian Basin acreage and beginning a pilot drilling program, as
well as our goal of retaining Dr. Yang in a competitive
market for executive and technical talent, we also granted
Dr. Yang an additional award of 35,000 shares of
time-vesting, restricted stock in 2010. After strong operating
and financial results and stockholder returns in 2010, in 2011
we granted our executive officers LTI awards totaling
204,000 shares of restricted stock, or 0.9% of our weighted
average shares of common stock outstanding in 2010, tied to
substantially the same performance measures and vesting dates as
the 2010 LTI awards. More detailed information is provided below
under Elements of the Companys Executive
Officer Compensation Program Long-Term Incentive
Stock Compensation.
Compensation
Program Objectives and Methodology
As discussed above, the primary objectives of our executive
compensation programs are as follows:
|
|
|
|
|
Pay for performance, whereby Company and individual performance
substantially influence an executive officers total
compensation opportunity;
|
|
|
|
Align the interests of our executive officers and stockholders
by motivating executive officers to increase stockholder value
and rewarding executive officers when stockholder value
increases; and
|
|
|
|
Attract, retain and motivate talented and experienced executives
in the highly competitive oil and gas industry, particularly in
the Dallas Fort Worth, Texas area.
|
To accomplish these objectives, we intend to provide a
competitive total compensation package. Base salaries and total
compensation are intended to be competitive with our industry
peers, considering individual performance and experience, to
ensure that each executive officer is appropriately compensated.
Setting
Executive Officer Compensation
Role
of the Compensation Committee
Our Compensation Committee is responsible for the approval,
evaluation and oversight of all of our executive officer,
director and stock incentive compensation plans, policies and
programs. The Compensation Committee also reviews annual base
salaries and bonuses for non-executive employees. For ease of
reference in this Compensation Discussion and Analysis section
of the proxy statement, we may sometimes refer to this committee
simply as our Compensation Committee or the committee. The
members of our Compensation Committee are James H. Brandi
(Chairman), James C. Crain and Sheldon B. Lubar, each of whom is
an independent director under applicable SEC and NASDAQ rules
and regulations. The committee held six meetings in 2010. In
addition, committee members speak frequently with each other
concerning compensation matters outside of regularly-scheduled
meetings. As Chairman of the committee, Mr. Brandi
regularly reports to the full Board regarding compensation
matters.
The committee meets outside the presence of all of our named
executive officers to consider the appropriate compensation for
our CEO. The committee analyzes the performance of our CEO and
determines his base salary, individual performance portions of
our annual incentive program and any grant of LTI or other
equity-based awards. For all other executive officers, the
committee meets outside the presence of all executive officers,
except our CEO. Our CEO annually reviews the performance of each
executive officer with the committee and makes recommendations
to the committee on the appropriate base salary, payments to be
28
made under any individual performance portion of our annual
incentive program and any grant of LTI or other equity-based
awards. Our CEO has no role in determining his own compensation.
Based in part on these recommendations from our CEO for non-CEO
executive officers, and the other considerations discussed in
this Compensation Discussion and Analysis, the committee
recommends to the Board the annual compensation package of each
of our named executive officers, including our CEO. Input or
suggestions applicable to group or individual compensation from
other executive officers may be solicited by the committee.
The function of the Compensation Committee is more fully
described in its charter, which is available under the Corporate
Governance section of our website at
www.approachresources.com. The information on our website
is not part of this proxy statement. The committees duties
and purpose also are discussed under Board of Directors,
Board Meetings and Committees Compensation and
Nominating Committee in this proxy statement.
Use of
Oil and Gas E&P Compensation Survey
In considering executive compensation matters for 2010 and 2011,
the Compensation Committee consulted the Oil and Gas E&P
2009 and 2010 Compensation Surveys, respectively, prepared by
Effective Compensation, Inc. (ECI). The 2009 ECI
survey contains compensation information from 119 public and
private E&P companies in the United States from 2008 and
2009. The 2010 ECI survey contains compensation information from
121 public and private E&P companies in the United States
from 2009 and 2010. The 2009 and 2010 ECI surveys provide
specific data on an aggregated basis within subcategories based
on whether companies are public or private, revenues,
exploration and production budget and geographic location, among
others. In addition to the individual experience and performance
of our executive officers, the committee considered compensation
information in the 2009 and 2010 ECI surveys from public,
independent oil and gas companies and public and private oil and
gas companies that are headquartered in Texas, in making
decisions regarding 2010 and 2011 compensation for our named
executive officers. The committee considers ECI survey data
relevant to, but not determinative of, the committees
consideration of overall executive compensation matters.
Use of
Peer Group Comparisons
For 2010 executive compensation matters, the Committee also
considered compensation data from the following peer group of
companies:
|
|
|
Abraxas Petroleum Corporation
|
|
Brigham Exploration Company
|
Carrizo Oil & Gas, Inc.
|
|
GeoMet, Inc.
|
GMX Resources Inc.
|
|
Goodrich Petroleum Corporation
|
Gulfport Energy Corporation
|
|
NGAS Resources, Inc.
|
Panhandle Oil & Gas Inc.
|
|
PetroQuest Energy, Inc.
|
Rex Energy Corporation
|
|
Rosetta Resources Inc.
|
The Compensation Committee reviews the peer group annually. For
2010, the committee added peer group data provided by management
from Carrizo Oil & Gas, NGAS Resources, Rex Energy and
Rosetta Resources. These companies were added to the 2010 peer
group for consideration by the committee based on the
companies positions in the upstream E&P sector of the
oil and gas business, reserve base, year-end reserves, capital
budgets and market capitalizations. For 2010, the committee did
not consider compensation data from previous peers Parallel
Petroleum Corporation and TXCO Resources, Inc., as Parallel
terminated its public filings and was sold in 2009, and TXCO
filed for relief under Chapter 11 of the
U.S. Bankruptcy Code in 2009 and agreed to sell a
substantial portion of its assets in 2010. The committee
considers peer group data relevant to, but not determinative of,
the committees consideration of overall executive
compensation matters.
Role
of Compensation Consultant
In February 2009, the Compensation Committee retained
Longnecker & Associates (L&A) as an
independent compensation consultant to review the Companys
executive and director compensation programs
29
and the Companys compensation peer group. In January 2010,
at managements request, L&A provided the committee
with supplemental information on the then-current E&P
compensation market and employment agreement trends. The
committee considered the information provided by L&A
relevant, but not determinative, in the committees
evaluation and oversight of the compensation programs.
Elements
of the Companys Executive Officer Compensation
Program
Annual
Base Salary
We provide our named executive officers with an annual base
salary to compensate them for their services during the year.
Although we have no written policies or guidelines for setting
the base salaries of our executive officers within a specified
range of the compensation levels of our industry peers, our
executive officer salaries are intended to be competitive with
our industry peers. Our Compensation Committee recognizes that a
substantial amount of competition exists in the oil and gas
industry for attracting and retaining qualified management
teams, particularly in the Dallas Fort Worth,
Texas area. Our philosophy is to set our executive
officers base salaries at levels that we believe will
enable us to retain them, with the goal of growing stockholder
value going forward.
We review salary ranges and individual salaries for our
executive officers annually. We establish the base salary for
each executive officer based on consideration of pay levels of
our industry peers and business requirements for certain skills,
individual experience and contributions, the roles and
responsibilities of the executive and other factors. We believe
competitive base salaries are necessary to attract and retain an
executive management team with the appropriate abilities and
experience required to lead us.
2010
Annual Base Salaries
For 2010, the committee did not establish benchmarks. Rather,
the committee reviewed comparable base salary levels and
incentive bonus targets from both the ECI 2009 survey and peer
company data to determine the relative competitiveness of the
Companys compensation structure. As there was no material
change in the annual base salaries from January 2008 through
December 2009, effective January 1, 2010, the committee
approved a 3% increase in annual base salaries for the named
executive officers for 2010, except for Mr. Manoushagian,
who received an increase of 10%, and Dr. Yang, whose salary
was held flat. Mr. Manoushagians increase in annual
base salary for 2010 was based on individual performance and the
CEOs recommendation and committees decision to make
his salary more competitive with annual salaries of industry
peers based on the 2009 ECI survey. Dr. Yangs 2010
annual base salary was unchanged, as his salary had been
recently set in July 2009 when he was initially hired. The
Committee believed that a 3% increase in annual base salary for
Mr. Craft, Mr. Smart and Mr. Henderson was
appropriate as such an increase was slightly more than the
cumulative rate of inflation of 2.3% from January 2008 through
December 2009, based on the U.S. Department of Labors
Bureau of Labor Statistics Consumer Price Index. Annual base
salaries for 2010 are set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 Base
|
|
Salary
|
Name
|
|
Title
|
|
Salary
|
|
Increase
|
|
J. Ross Craft
|
|
President and CEO
|
|
$
|
312,500
|
|
|
|
3
|
%
|
Steven P. Smart
|
|
Executive Vice President and CFO
|
|
$
|
263,500
|
|
|
|
3
|
%
|
J. Curtis Henderson
|
|
Executive Vice President and General Counsel
|
|
$
|
257,500
|
|
|
|
3
|
%
|
Qingming Yang
|
|
Executive Vice President Business Development and
Geosciences
|
|
$
|
220,000
|
|
|
|
0
|
%
|
Ralph P. Manoushagian
|
|
Executive Vice President Land
|
|
$
|
187,000
|
|
|
|
10
|
%
|
2011
Annual Base Salaries
For 2011 annual salaries, the committee considered peer data
from the 2010 ECI survey and determined that an overall increase
in the base salaries of our named executive officers was
appropriate to achieve the committees objective of
retaining top executive talent in a competitive industry and
geographic region. The
30
committee also considered past salary adjustments for the
executive officers since 2008, stockholder returns in 2010, the
Companys 2010 financial and operational results noted
above in Our Performance in 2010, the contributions
of individual executive officers to those results and the
recommendations of the CEO for non-CEO named executive officers.
The committee determined that the salaries of Mr. Craft and
Dr. Yang required the largest percentage increases to move
their salary levels to more competitive industry levels and as a
result of their specific contributions to the Companys
2010 operating results.
Accordingly, the committee recommended, and the Board approved,
increases in 2011 annual base salaries for the Companys
named executive officers as follows effective January 1,
2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 Base
|
|
Salary
|
Name
|
|
Title
|
|
Salary
|
|
Increase
|
|
J. Ross Craft
|
|
President and CEO
|
|
$
|
400,000
|
|
|
|
28
|
%
|
Steven P. Smart
|
|
Executive Vice President and CFO
|
|
$
|
275,000
|
|
|
|
4
|
%
|
J. Curtis Henderson
|
|
Executive Vice President and General Counsel
|
|
$
|
275,000
|
|
|
|
7
|
%
|
Qingming Yang
|
|
Executive Vice President Business Development and
Geosciences
|
|
$
|
275,000
|
|
|
|
25
|
%
|
Ralph P. Manoushagian
|
|
Executive Vice President Land
|
|
$
|
200,000
|
|
|
|
7
|
%
|
Performance-Based
Annual Incentive Awards
A core component of our executive compensation philosophy is
that pay should be linked directly to performance and that a
significant portion of total annual compensation should be
placed at risk. In 2008, we began providing the opportunity for
our executive officers to earn an annual, performance-based,
cash incentive award. We plan to continue to provide this
opportunity to attract and retain an appropriate caliber of
talent for these positions and to motivate executives to achieve
our annual business goals. We review annual incentive awards for
our named executive officers annually in the first 90 days
of our fiscal year to determine award payments for the most
recently completed fiscal year, and to establish award
opportunities for the then-current fiscal year.
2010
Annual Incentive Plan Overview
Consistent with our philosophy of linking pay directly to
performance, our Compensation Committee adopted, and our Board
ratified, a performance-based incentive award program for 2010
pursuant to which cash performance awards were made under our
2007 Plan. We refer to these cash performance awards as annual
incentive awards.
The Compensation Committee developed performance categories,
relative weighting among the performance categories and targets
to be used for the 2010 annual incentive plan, and reviewed them
with our CEO, CFO and General Counsel, except for incentive
targets for our CEO, which the committee determines independent
from the CEO and other executive officers. The committee adopted
the applicable metrics in January 2010. The 2010 annual
incentive awards were expressed as a percentage of an executive
officers annual base salary and were paid to the executive
officer upon the achievement of certain performance targets,
plus an amount that, in the committees discretion, was
awarded to named executive officers based on individual
performance, including overall duties, responsibilities and
expertise.
The committee established a minimum, or threshold,
and maximum, or excellent, performance target for
each performance category. The Company is required to reach the
threshold target in a performance category before a participant
receives any credit for such category in the calculation of his
annual incentive award. If the Company exceeds the threshold
level for a performance category, the amount of the annual
incentive award attributable to that category is capped at the
excellent level. If actual results fall between the threshold
and excellent performance levels, the percentile performance
used to determine the payout percentage is proportionally
adjusted in accordance with a predetermined formula that
measures performance on a linear, pro-rata basis between the
threshold and excellent levels.
31
The committee cannot increase payout amounts under performance
categories that depend on the achievement of specific targets,
as payments related to performance categories that are tied to
the achievement of specific targets are capped once the highest
target level is achieved. The committee can, in its reasonable
discretion, reduce the payout amounts for these performance
categories after taking into account special or unusual factors
that may have contributed to the achievement of target
performance measures such as acquisitions, commodity prices or
other factors considered appropriate by the committee.
In addition to the performance categories tied to specific
company targets, the committee approved an individual
performance category for 2010 that allows the committee, in its
discretion, to allocate a portion of an officers annual
incentive award based on the officers individual
performance, including overall duties, responsibilities and
expertise.
2010
Annual Incentive Plan Targets and Performance
Categories
For 2010, the committee approved, after consultation with our
CEO, a 2010 annual incentive plan with annual incentive targets
(expressed as a percentage of an executives annual salary)
for each of our named executive officers except for our CEO, for
whom the committee determined incentive targets without
consultation with the CEO. As in 2009, the committee attempted
to ensure that the payouts provided meaningful incentive to each
of our executive officers. For 2010, the annual incentive
targets for our named executive officers are as set forth in the
following table. These incentive targets assume that the
threshold or excellent targets, as
applicable, are met for each of the six performance categories
discussed below:
|
|
|
|
|
|
|
|
|
|
|
2010 Annual Incentive Award
|
|
|
as a Percent of Annual Salary
|
Position
|
|
Threshold
|
|
Excellent
|
|
President and CEO
|
|
|
50
|
%
|
|
|
150
|
%
|
Executive Vice Presidents I
|
|
|
50
|
%
|
|
|
100
|
%
|
Executive Vice Presidents II and Vice Presidents
|
|
|
35
|
%
|
|
|
75
|
%
|
The six performance categories for the 2010 annual incentive
plan are shown in the table below, together with the target
levels of achievement, weight given to each category and actual
results achieved in 2010 in each category. Five of the
performance categories are Company-wide performance measures and
the sixth performance category, individual performance, is
personal to each executive officer and is determined in the
committees discretion.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 Performance Targets
|
|
|
Performance Category
|
|
Weight
|
|
Threshold
|
|
Excellent
|
|
2010 Actual Results
|
|
1. Production growth
|
|
|
15.00
|
%
|
|
|
10.00%
|
|
|
|
20.00%
|
|
|
|
5.99%
|
|
2. Reserve volume growth
|
|
|
15.00
|
%
|
|
|
10.00%
|
|
|
|
20.00%
|
|
|
|
38.99%
|
|
3. EBITDAX per share growth
|
|
|
15.00
|
%
|
|
|
15.00%
|
|
|
|
25.00%
|
|
|
|
10.86%
|
|
4. LOE and G&A per Mcfe
|
|
|
15.00
|
%
|
|
$
|
1.75
|
|
|
$
|
1.50
|
|
|
$
|
2.14
|
|
5. Drill-bit F&D per Mcfe
|
|
|
15.00
|
%
|
|
$
|
2.10
|
|
|
$
|
1.85
|
|
|
$
|
2.64
|
|
6. Individual performance(1)
|
|
|
25.00
|
%
|
|
|
8.75% - 12.50%
|
|
|
|
18.75% - 37.50%
|
|
|
|
18.75% - 37.50%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Threshold and excellent percentiles for individual performance
are expressed as a percentage of annual base salary. The
threshold target for individual performance ranged from 8.75%
for Dr. Yang and Mr. Manoushagian, to 12.5% for
Mr. Craft, Mr. Smart and Mr. Henderson. The
excellent target for individual performance ranged from 18.75%
for Dr. Yang and Mr. Manoushagian, to 25% for
Mr. Smart and Mr. Henderson and 37.5% for
Mr. Craft. |
Seventy-five percent of the amount of potential 2010 annual
incentive bonuses continued to be determined by objective,
Company performance results. However, growth and cost
performance targets are based on forecasts that are subject to
ongoing change depending on external factors such as commodity
prices
32
and oilfield service costs. Therefore, the committee believes it
was appropriate to also include a discretionary, individual
performance measure representing 25% of the executive
officers bonus opportunity. Each of the five Company-wide
performance measures is described in greater detail below.
Production and reserve volume growth are essential measurements
of our performance. Production and reserves used in the
calculation of these criteria are based on results we report in
our annual report on
Form 10-K.
We define EBITDAX per share as net (loss) income plus
(i) exploration expense, (ii) impairment of unproved
properties, (iii) depletion, depreciation and amortization
expense, (iv) share-based compensation expense,
(v) impairment of investment, (vi) unrealized (gain)
loss on derivatives, (vii) interest expense and
(viii) income taxes, divided by the weighted average number
of shares of common stock outstanding for the applicable year,
each as set forth in the audited financial statements of our
annual report on
Form 10-K.
The committee has determined that EBITDAX per share is
appropriate because it is widely accepted by the investment
community as a financial indicator of a companys ability
to internally fund development and exploration activities and it
reflects a companys ability to adapt to the impact of
changing commodity prices as well as oilfield service costs.
LOE and G&A per Mcfe is the sum of our annual lease
operating expense (LOE), plus general and
administrative expense (G&A), divided by our
annual production as measured in Mcfe. LOE and G&A are two
financial measures under GAAP from our audited financial
statements. Our committee believes that, in addition to
performance measures for growth, it is critical to incentivize
management to control costs.
Drill-bit F&D costs are calculated by dividing the sum of
annual exploration and development costs by the total of reserve
extensions and discoveries for the applicable year end, each as
set forth in the notes to the audited financial statements of
our annual report on
Form 10-K.
The committee believes this measure is important to evaluate how
efficiently we can add proved reserves through our own drilling
program.
The committee believes that these performance categories and
targets, taken together, are objective indicators of our overall
performance.
The individual performance category is discretionary and allows
the committee to recognize performance that is more difficult to
quantify, such as successful supervision of significant company
projects, cost reductions, demonstrated departmental leadership
and other contributions to our Company. The committee is in
regular contact with our CEO, is knowledgeable about Company
operations and believes that it is in a position to accurately
and fairly judge individual performance, with the specific
recommendations of the CEO for the named executive officers
other than the CEO, after year end.
2010
Annual Incentive Plan Awards
For 2010, the actual annual incentive award amount paid to each
executive officer was based upon the Companys performance
in the five, Company-wide performance categories and the
individual performance of each executive officer. As set forth
above in the 2010 Actual Results column of the table
entitled 2010 Performance Targets, the Company
achieved the excellent target of the reserve volume growth
performance category. No other threshold or excellent targets of
Company performance categories were met and, as a result, no
payments were made with respect to such categories. For
individual performance, the committee determined to award the
excellent targets of 18.75% to 37.5% of annual base salaries to
the executive officers. In making this determination, the
committee considered each of the named executive officers
overall duties, responsibilities, expertise and individual
contributions to the Companys achievements in 2010
discussed on page 26 of this proxy statement.
After reviewing the above considerations, the Companys
2010 results, performance of the CEO and the CEOs
recommendations on the performance of the other executive
officers, the committee awarded the 2010 award percentages as
set forth in the table below. The 2010 award percentage is the
sum of the percentage performance results calculated for each
performance category plus individual performance. The 2010
award
33
payments are also included in the Summary Compensation Table
below under the Non-Equity Incentive Plan
Compensation column for 2010.
|
|
|
|
|
|
|
|
|
|
|
2010 Award
|
|
2010 Award
|
Name and Position
|
|
Percent(1)
|
|
Payment($)
|
|
President and CEO
|
|
|
|
|
|
|
|
|
J. Ross Craft
|
|
|
60.00
|
%
|
|
$
|
187,500
|
|
Executive Vice Presidents I
|
|
|
|
|
|
|
|
|
Steven P. Smart
|
|
|
40.00
|
%
|
|
$
|
105,400
|
|
J. Curtis Henderson
|
|
|
40.00
|
%
|
|
$
|
103,000
|
|
Executive Vice Presidents II and Vice Presidents
|
|
|
|
|
|
|
|
|
Qingming Yang
|
|
|
30.00
|
%
|
|
$
|
66,000
|
|
Ralph P. Manoushagian
|
|
|
30.00
|
%
|
|
$
|
56,100
|
|
|
|
|
(1) |
|
As a percent of annual base salary. |
2011
Annual Incentive Plan
For 2011, the Compensation Committee has established an annual
incentive plan with annual incentive targets and performance
measures that are substantially similar to the 2010 annual
incentive plan. Threshold and excellent annual incentive targets
(as a percentage of annual base salary) for 2011 are 50% and
150%, respectively, for Mr. Craft, and 50% and 100%,
respectively, for each of our other named executive officers. As
in the 2010 annual incentive plan, the committee established a
minimum, or threshold, and maximum, or
excellent, performance target for each performance
category. The Company is required to reach the threshold target
in a performance category before a participant receives any
credit for such category in the calculation of his annual
incentive award. If the Company exceeds the threshold level for
a performance category, the amount of the annual incentive award
attributable to that category is capped at the excellent level.
If actual results fall between the threshold and excellent
performance levels, the percentile performance used to determine
the payout percentage is proportionally adjusted in accordance
with a predetermined formula that measures performance on a
linear, pro-rata basis between the threshold and excellent
levels.
For 2011, the distinction between Executive Vice Presidents I
and II and Vice Presidents was eliminated for our named
executive officers in setting threshold and excellent levels for
performance. In making this decision, the committee considered
the promotion of Dr. Yang from Vice President to Executive
Vice President Business Development and Geosciences,
the individual contributions of Dr. Yang and
Mr. Manoushagian to Company achievements in 2010 discussed
at page 26 of this proxy statement and issues of internal
pay equity.
The six performance categories and relative weighting among the
categories for 2011 are substantially the same as 2010, with
adjustments for then-current business projections and our
current reporting in BOE rather than Mcfe due to the increasing
percentage of oil and NGLs in our production and reserve base.
Compared to the 2010 incentive plan, the committee adjusted the
2011 plan performance measures by:
|
|
|
|
|
revising the performance category EBITDAX per share growth from
15% 25% in 2010, to 12.5% 22.5% in 2011;
|
|
|
|
revising the performance category LOE and G&A from
$1.50 $1.75 per Mcfe in 2010, to $9.75
$13.00 per Boe in 2011; and
|
|
|
|
revising the performance category Drill-Bit F&D from
$1.85 $2.10 per Mcfe in 2010, to
$12.00 $15.00 per Boe in 2011.
|
These adjustments reflect the Companys focus on balancing
cost control with growing oil and NGLs reserves and production
during a time of escalating service costs and competition in the
Permian Basin. The
34
six performance categories selected for the 2011 annual
incentive plan are shown in the table below, together with the
target levels of achievement and weight given to each category.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 Performance Targets
|
|
Performance Category
|
|
Weight
|
|
|
Threshold
|
|
|
Excellent
|
|
|
1. Production growth
|
|
|
15.00%
|
|
|
|
10.00
|
%
|
|
|
20.00
|
%
|
2. Reserve volume growth
|
|
|
15.00%
|
|
|
|
10.00
|
%
|
|
|
20.00
|
%
|
3. EBITDAX per share growth
|
|
|
15.00%
|
|
|
|
12.50
|
%
|
|
|
22.50
|
%
|
4. LOE and G&A per Boe
|
|
|
15.00%
|
|
|
$
|
13.00
|
|
|
$
|
9.75
|
|
5. Drill-bit F&D per Boe
|
|
|
15.00%
|
|
|
$
|
15.00
|
|
|
$
|
12.00
|
|
6. Individual performance(1)
|
|
|
25.00%
|
|
|
|
12.50
|
%
|
|
|
25.00% - 37.50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.00%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Threshold and excellent percentiles for individual performance
are expressed as a percentage of annual base salary. The
threshold target for individual performance is 12.5% for all
named executive officers. The excellent target for individual
performance for named executive officers ranges from 25% for
Executive Vice Presidents to 37.5% for our CEO. |
The committees general policy is to determine any payout
amounts for annual incentive awards before March 15 of the
following year based upon our performance against the
performance measures established by the committee and the
committees determinations with respect to the individual
performance component of the awards, subject to the
committees discretion to reduce the payout amounts after
taking into account special or unusual factors that may have
contributed to the achievement of target performance measures
such as acquisitions, commodity prices or other factors
considered appropriate by the committee.
Long-Term
Incentive Stock Compensation
We use LTI equity grants to attract, retain and motivate our
executive officers as part of our total compensation package.
Stock incentive awards are granted under our 2007 Plan. The 2007
Plan allows for the grant of restricted stock, stock options,
stock appreciation rights, restricted stock units, stock awards
and other incentive awards. The primary purpose of the 2007 Plan
is to attract and retain highly qualified officers, directors,
key employees and other persons, and to motivate these persons
to improve our business results by providing an opportunity to
acquire or increase a direct, proprietary interest in our
operations and future success. We expense stock awards under
FASB ASC Topic 718, formerly Statement of Financial Accounting
Standards No. 123(R), Share-Based Payments.
Since our IPO in 2007, the committee has generally used
restricted stock that vests over three to four years to align
the compensation of our executive officers with an increase in
long-term stockholder value. We believe awards of restricted
stock can effectively balance our objective of focusing the
recipient of the award on delivering long-term value to our
stockholders with our objective of providing value to the
recipient with the equity awards. Restricted stock awards offer
recipients the opportunity to receive shares of our common stock
that are subject to a risk of forfeiture and other restrictions
until certain specified service or performance requirements are
satisfied. In this regard, we believe that restricted stock
serves both to reward and retain the recipients. Restricted
stock awards also allow the Company to budget for charges to
earnings under FASB ASC Topic 718 with greater certainty than
other types of awards such as stock options. Recipients of
restricted stock awards are entitled to receive and retain all
cash dividends that may be paid with respect to the shares. The
committee does not make, nor has the committee in the past made,
incentive stock grants in coordination with the release of
material, non-public information. Instead, the committee will
grant equity awards at the time or times dictated by our normal
compensation process as that process is developed by the
committee.
35
2010 LTI
Performance-Based Stock Awards
In February 2010, in keeping with its philosophy of linking pay
to performance, the committee began meeting to consider an
annual, performance-based, time-vesting LTI stock award program.
The committee met several times through July 2010 to discuss
appropriate performance measures and vesting requirements for
these awards.
In determining whether, and in what amounts, to grant a 2010
award, the committee considered stock ownership and award data
from the 2010 ECI survey, committee members own experience
and knowledge of executive compensation matters at other public
E&P companies (including such experience and knowledge with
respect to grant date fair value of stock awards as a multiple
of base salary), the potential dilutive effect of stock awards,
the charge to Company earnings under FASB ASC Topic 718,
internal pay equity among our executives and the then-current
economic and market environment. The committee also considered
existing stock ownership of our executive officers and the
importance of retention and alignment of objectives with
stockholders interests as goals of any effective long-term
incentive stock award grant. The committee also reviewed the
number of shares available for grant under the 2007 Plan and the
Companys prior annual burn rate, or percentage
of weighted average shares outstanding granted under the Plan in
each of the Plans prior years. At the time of the 2010
grant in August 2010, there were approximately
1,135,842 shares available for grant under the 2007 Plan,
or 54.2% of the total shares available for grant under the 2007
Plan, and the Companys average three-year annual burn rate
was 2.23%. The committee also considered the individual
performance of the CEO and the recommendations of the CEO
regarding the individual performance of the executive officers
other than the CEO. In determining the amounts of the 2010 LTI
awards, the committee did not establish benchmarks. Rather, the
committee took into consideration all of the above factors to
determine the appropriate levels of LTI stock awards.
In determining performance and vesting measures appropriate for
the award, the committee considered a number of potential
measures and vesting schedules, including the proportion of any
award that should be tied to performance compared to time
vesting. In determining performance measures, the committee
sought to achieve a balance of measures that would encourage
growth, cost control and financial stability.
After considering all of the factors discussed above, the
committee decided on a total 2010 LTI stock award of
400,000 shares of restricted stock to our executive
officers, subject to the following performance measures and time
vesting restrictions.
First trigger: Satisfaction of the following
performance measures during the applicable performance period
(fiscal year 2010):
|
|
|
|
|
Company proved reserves increase a minimum of 10% from the prior
year period;
|
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|
|
F&D costs for 2010 must not exceed $2.50 per Mcfe; and
|
|
|
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Long-term debt must not exceed 2.75 x EBITDAX.
|
Second trigger: If all of the
performance measures in the first trigger are met during the
performance period (fiscal year 2010), then
1/3
of each individuals restricted shares will ratably vest on
December 31, 2012, 2013, and 2014, provided the executive
officer is employed by the Company on the applicable vesting
dates.
Performance measures defined. Proved reserves
are estimated proved reserves as determined by the
Companys independent reserve engineering firm. F&D
costs are calculated by dividing the sum of property
acquisition, exploration and development costs by extensions,
discoveries, acquisitions and revisions (excluding price
revisions), each as set forth in the notes to the audited
financial statements of our annual report on
Form 10-K.
The committee determined to exclude price revisions from
F&D cost to mitigate the risk of volatile commodity price
swings, which are outside the executives control.
Long-term debt is calculated under GAAP and included in the
Companys balance sheet. EBITDAX is described on
page 33 of this proxy statement. The committee may also
include other non-recurring items that the committee in its sole
discretion deems appropriate to be added back to GAAP net income.
36
The LTI stock awards will vest in full upon a Change in Control,
Disability (each as defined in the 2007 Plan) or death of the
executive, and all performance criteria and other conditions
will be deemed to be achieved to the maximum extent.
The Committee believes that the performance metrics and target
values for the 2010 LTI stock awards strongly correlate with our
long-term business objectives and, specifically, with increasing
stockholder value. If one of the performance measures is not
satisfied, the entire award is forfeited and the award shares
are returned to the 2007 Plan. The committee also decided that
the award should be subject to a time-based vesting period
longer than three years, which the committee previously had
adopted as a practice for time vesting for prior restricted
share grants under the 2007 Plan, to strengthen the retention
component of the 2010 award.
The table below summarizes the number of restricted shares
subject to LTI stock awards made to each of our named executive
officers for 2010. The aggregate grant date fair value of the
awards under FASB ASC Topic 718 is set forth in the Summary
Compensation Table on page 41 of this proxy statement under
the column Stock Awards.
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Number of
|
Executive Officer
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Title
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Restricted Shares
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J. Ross Craft
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President, CEO and Class III Director
|
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120,000
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Steven P. Smart
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Executive Vice President and CFO
|
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80,000
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J. Curtis Henderson
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Executive Vice President and General Counsel
|
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80,000
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Qingming Yang
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Executive Vice President Business Development and
Geosciences
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60,000
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Ralph P. Manoushagian
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Executive Vice President Land
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|
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60,000
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|
The table below summarizes the performance measures required to
be achieved for the 2010 LTI award and actual 2010 results.
|
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2010 LTI Stock Awards
|
|
2010 Actual
|
Performance Measures
|
|
Results
|
|
Company proved reserves increase a minimum of 10%
|
|
38.99% Increase
|
F&D costs must not exceed $2.50 per Mcfe
|
|
$1.02 per Mcfe
|
Long-term debt must not exceed 2.75x EBITDAX
|
|
0x EBITDAX
|
Based on these results, all of the performance measures
applicable to the 2010 awards were satisfied and the awards are
eligible for time-based vesting based on the schedule described
above under 2010 LTI Performance-Based Stock
Awards.
2011 LTI
Stock Program
For 2011, the committee recommended, and the Board approved in
March 2011, an LTI stock award with a combination of performance
measures and time vesting restrictions substantially similar to
the 2010 LTI award. In determining the number of shares to be
awarded, the committee considered all of the factors described
above under 2010 LTI Performance-Based Stock
Awards for the 2010 awards. At the time of the 2011 grant
in March 2011, there were approximately 1,412,911 shares
available for grant under the 2007 Plan, or 50.1% of the total
shares available for grant under the 2007 Plan, and the
Companys three-year average annual burn rate was 1.51%.
The committee also gave significant weight to the individual
contributions of each of the executive officers to strong total
stockholder returns in 2010 in making its decisions on 2011 LTI
awards.
After considering all of the factors noted above, the committee
decided on a total 2011 LTI stock award of 204,000 shares
of restricted stock to our named executive officers, subject to
the performance measures and time vesting restrictions set forth
below. The primary reason for the decrease in the number of
shares from the 2010 LTI award was the increase in value of the
Companys common stock and, therefore, the increase in
value of the 2011 award and charge to earnings under FASB ASC
Topic 718, compared to 2010.
37
First trigger: Satisfaction of the following
performance measures during the applicable performance period
(fiscal year 2011):
|
|
|
|
|
Company proved reserves increase a minimum of 10% from the prior
year period;
|
|
|
|
Finding and development costs for 2011 must not exceed $15.00
per Boe; and
|
|
|
|
Long-term debt must not exceed 2.75 x EBITDAX.
|
Second trigger: If all of the
performance measures in the first trigger are met during the
performance period (fiscal year 2011), then 1/3 of each
individuals restricted shares will ratably vest on
December 31, 2012, 2013, and 2014, provided the executive
officer is employed by the Company on the applicable vesting
dates.
The table below summarizes the number of restricted shares
subject to LTI stock awards made to each of our named executive
officers for 2011:
|
|
|
|
|
|
|
|
|
|
|
Number of
|
Executive Officer
|
|
Title
|
|
Restricted Shares
|
|
J. Ross Craft
|
|
President, CEO and Class III Director
|
|
|
61,200
|
|
Steven P. Smart
|
|
Executive Vice President and CFO
|
|
|
35,700
|
|
J. Curtis Henderson
|
|
Executive Vice President and General Counsel
|
|
|
35,700
|
|
Qingming Yang
|
|
Executive Vice President Business Development and
Geosciences
|
|
|
35,700
|
|
Ralph P. Manoushagian
|
|
Executive Vice President Land
|
|
|
35,700
|
|
Other
Named Executive Officer Grants 2010
In May 2010, our Compensation Committee authorized the grant of
a restricted stock award under the 2007 Plan covering
35,000 shares of restricted stock to Dr. Yang. This
stock award reflects (i) the importance of
Dr. Yangs role in helping lead our study of the
Wolffork oil shale under our Permian Basin acreage,
(ii) beginning a pilot Wolffork drilling program,
(iii) our goal of retaining Dr. Yang in a competitive
market for executive and technical talent and (iv) our goal
of a more internally-balanced level of equity ownership among
our executive officers. This additional restricted stock award
to Dr. Yang is subject to time-based vesting conditions and
will vest in three equal annual installments beginning on the
first anniversary of the date of grant of the award, as long as
Dr. Yang remains employed by the Company through the
applicable vesting dates.
Stock
Ownership Guidelines
The committee has not established minimum stock ownership
requirements for our named executive officers or directors.
However, the committee believes that meaningful stock ownership
by our officers and directors is critical in aligning
managements interests with the interests of our
stockholders. For 2010, the Board changed the $85,000 annual
retainer under our director compensation plan from cash, stock
or a combination of both, to $50,000 in mandatory common stock
and $35,000 in cash, common stock or a combination of both. The
committee will continue to consider whether minimum stock
ownership requirements may be necessary to achieve our goal of
aligning managements interests with those of our
stockholders.
In general, prior compensation, such as gains from prior stock
options or stock awards, is not taken into account in setting
other elements of compensation, such as base pay or annual
incentive bonuses. However, the committee will generally
consider prior stock purchases by, and prior stock and stock
option awards to, our named executive officers when considering
additional stock award grants. For new executive officers, we
expect to take into account their prior base salary, annual cash
incentives, the value of any equity compensation or other
benefits that the new officer would forfeit to accept employment
with us, as well as the contributions expected to be made by the
new officer, our business needs and the role of the officer with
us.
38
Employment
Agreements
In January 2011, the Company entered into amended and restated
employment agreements with Mr. Craft and Mr. Smart and
new employment agreements with Mr. Henderson, Dr. Yang
and Mr. Manoushagian. The agreements provide for potential
severance payments upon the termination of the officers
employment in certain situations. The agreements were designed
so that the officers would all have employment agreements with
the same employment term and similar severance and change in
control provisions.
After the initial term of the agreements through January 1,
2013, the agreements are automatically renewed for additional
one year terms unless either party elects not to renew an
agreement or an agreement is otherwise terminated in accordance
with its terms. The agreements provide for annual base salaries
beginning in 2011 as described on page 31 of this proxy
statement, subject to annual review and adjustment by the Board;
provided, that for Mr. Craft, once established at an
increased amount, his base salary will not be reduced below that
increased amount during the term.
The severance and change in control provisions contained in the
employment agreements are described in greater detail below
under Potential Payments Upon a Termination or
Change in Control. The Company believes that these
severance and change in control arrangements mitigate some of
the risk that exists for executives working in a publicly-owned
company. The amended and restated agreements for Mr. Craft
and Mr. Smart, as well as the new agreements for
Mr. Henderson, Mr. Yang and Mr. Manoushagian, are
intended to retain qualified executives in a competitive market
for executive talent. The committee believes that the severance
and change in control arrangements in these agreements provide
important protection to the Companys executive officers,
are consistent with the practices of peer companies and are
appropriate for the retention of executive talent.
Benefits
and Perquisites
Named executive officers receive the same health and welfare
benefits, including medical, prescription drug, dental and
vision, that are offered to all employees. The same contribution
amounts and plan design provisions apply to all employees. The
named executive officers also participate in the same qualified
401(k) plan as other employees. Under the plan, the Company
currently matches 100% of an employees elective deferrals
up to 3% of annual base salary, plus an additional 50% of
elective deferrals on the next 2% of annual base salary. All
matching contributions are subject to applicable federal
limitations under the Internal Revenue Code and
U.S. Treasury regulations. These benefits are part of our
overall pay program and are designed to encourage continuity in
employment and executive leadership and to remain competitive in
the market for talent and experience in the E&P business.
In addition to the above benefits, we provide Mr. Craft
with a long-term disability plan, for which we pay a monthly
premium of approximately $355 per month, and reimbursement of
club membership dues and expenses. Please see the Summary
Compensation Table for all compensation received by our named
executive officers.
Deductibility
of Executive Compensation
Section 162(m) of the Code, as clarified by the Internal
Revenue Service and applicable regulations, generally disallows
a federal income tax deduction to public companies for
compensation in excess of $1,000,000 paid for any fiscal year to
each of the companys Covered Employees as of the end of
any fiscal year. However, the regulations currently exempt
qualified, performance-based compensation from the $1,000,000
deduction limit if certain requirements are met.
Newly-public companies are not subject to the deduction
limitations of Section 162(m) of the Code until the first
meeting of stockholders occurring after the close of the third
calendar year following the calendar year in which the
companys initial public offering occurred. Therefore, the
Company will become subject to the limitations and requirements
of Section 162(m) as of the 2011 annual meeting.
Our policy is to have compensation programs that recognize and
reward performance that increases stockholder value, and, to the
extent consistent with this policy, to seek to maintain the
favorable tax treatment of that compensation. We believe,
however, that under some circumstances, such as to attract or
retain key
39
executives or to recognize outstanding performance, it is in the
Companys and our stockholders best interests to
provide compensation to selected executives even if it is not
deductible.
We designed our performance-based, cash incentive award program
for executive officers for 2010 and 2011 so that incentive
compensation based on our company-wide performance measures will
be exempt from the Section 162(m) $1,000,000 deduction
limitation as qualified performance-based compensation.
Incentive compensation based on individual performance will not
be exempt from the $1,000,000 deduction limitation as qualified
performance-based compensation. Therefore, if the $1,000,000
deduction limitation is exceeded, the tax deductibility of
incentive compensation based on individual performance will be
limited.
COMPENSATION
COMMITTEE REPORT
The Compensation Committee has reviewed and discussed the
Compensation Discussion and Analysis with our management. Based
on this review and discussion, the Compensation Committee
recommended to the Board that the Compensation Discussion and
Analysis be included in this proxy statement and incorporated by
reference in the Companys annual report on
Form 10-K
for the fiscal year ended December 31, 2010.
Respectfully submitted by the Compensation Committee of the
Board,
James H. Brandi, Chairman
James C. Crain
Sheldon B. Lubar
COMPENSATION
PRACTICES AS THEY RELATE TO RISK MANAGEMENT
The Compensation Committee believes that an appropriate part of
total compensation is fixed for our executive officers, while
another, equally appropriate portion is variable and linked to
performance. Although the majority of the compensation provided
to the named executive officers is performance-based, we believe
our compensation programs do not encourage excessive and
unnecessary risk taking by our executive officers (or other
employees) because these programs are designed to encourage our
officers and other employees to remain focused on both our near-
and long-term operational and financial goals.
While annual cash incentive awards play an appropriate role in
our executive compensation program, the committee believes that
awards should be determined based on Company performance on a
wide variety of measures, including both growth and cost control
measures, which the committee believes mitigates excessive
risk-taking that could produce unsustainable gains in one area
of performance at the expense of our overall long-term
interests. In addition, the committee sets performance goals
that it believes are reasonable in light of our past
performance, then-current business projections and market
conditions. A portion of the variable compensation we provide is
composed of performance-based, time-vesting LTI awards, which
can retain value even in a depressed market, so executives are
less likely to take unreasonable risks. Similar to our annual
cash incentive awards, the committee believes that the LTI
awards should be subject to measures of both growth and debt
control, to build stockholder value while preserving a
sustainable capital structure.
COMPENSATION
COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of our executive officers serves as a member of the board
or compensation committee of any entity that has one or more of
its executive officers serving as a member of our Board or
Compensation Committee.
40
EXECUTIVE
COMPENSATION
As explained in our Compensation Discussion and Analysis, set
forth below is the compensation awarded to, earned by or paid to
our named executive officers for services rendered for 2008,
2009 and 2010 in all capacities, consisting of base salaries,
cash bonuses, long-term equity incentives and other compensation.
Summary
Compensation Table
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|
|
|
|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
|
|
Incentive Plan
|
|
All Other
|
|
|
|
|
|
|
Salary
|
|
Bonus
|
|
Awards
|
|
Compensation
|
|
Compensation
|
|
Total
|
Name and Principal Position
|
|
Year
|
|
($)
|
|
($)
|
|
($)(1)
|
|
($)(2)
|
|
($)(3)
|
|
($)
|
(a)
|
|
(b)
|
|
(c)
|
|
(d)
|
|
(e)
|
|
(g)
|
|
(i)
|
|
(j)
|
|
J. Ross Craft
|
|
|
2010
|
|
|
|
312,500
|
|
|
|
|
|
|
|
810,000
|
|
|
|
187,500
|
|
|
|
19,163
|
|
|
|
1,329,163
|
|
Director, President and
|
|
|
2009
|
|
|
|
303,400
|
|
|
|
|
|
|
|
504,002
|
|
|
|
182,040
|
|
|
|
18,925
|
|
|
|
1,008,367
|
|
Chief Executive Officer
|
|
|
2008
|
|
|
|
297,100
|
|
|
|
|
|
|
|
|
|
|
|
331,875
|
|
|
|
26,935
|
|
|
|
655,910
|
|
Steven P. Smart
|
|
|
2010
|
|
|
|
263,500
|
|
|
|
|
|
|
|
540,000
|
|
|
|
105,400
|
|
|
|
9,800
|
|
|
|
918,700
|
|
Executive Vice President
|
|
|
2009
|
|
|
|
256,000
|
|
|
|
|
|
|
|
287,998
|
|
|
|
102,400
|
|
|
|
9,800
|
|
|
|
656,198
|
|
and Chief Financial Officer
|
|
|
2008
|
|
|
|
251,500
|
|
|
|
|
|
|
|
|
|
|
|
190,625
|
|
|
|
14,500
|
|
|
|
456,625
|
|
J. Curtis Henderson
|
|
|
2010
|
|
|
|
257,500
|
|
|
|
|
|
|
|
540,000
|
|
|
|
103,000
|
|
|
|
9,800
|
|
|
|
910,300
|
|
Executive Vice President,
|
|
|
2009
|
|
|
|
250,000
|
|
|
|
|
|
|
|
287,998
|
|
|
|
100,000
|
|
|
|
9,800
|
|
|
|
647,798
|
|
General Counsel and Secretary
|
|
|
2008
|
|
|
|
250,000
|
|
|
|
|
|
|
|
|
|
|
|
190,625
|
|
|
|
14,276
|
|
|
|
454,901
|
|
Qingming Yang
|
|
|
2010
|
|
|
|
220,000
|
|
|
|
|
|
|
|
665,050
|
|
|
|
66,000
|
|
|
|
9,800
|
|
|
|
960,850
|
|
Executive Vice President
|
|
|
2009
|
|
|
|
95,898
|
|
|
|
40,000
|
|
|
|
209,700
|
|
|
|
28,570
|
|
|
|
3,273
|
|
|
|
377,440
|
|
Business Development and Geosciences
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ralph P. Manoushagian
|
|
|
2010
|
|
|
|
187,000
|
|
|
|
|
|
|
|
405,000
|
|
|
|
56,100
|
|
|
|
|
|
|
|
648,100
|
|
Executive Vice President Land
|
|
|
2009
|
|
|
|
170,000
|
|
|
|
|
|
|
|
144,003
|
|
|
|
51,000
|
|
|
|
|
|
|
|
365,003
|
|
|
|
|
2008
|
|
|
|
170,000
|
|
|
|
|
|
|
|
|
|
|
|
121,125
|
|
|
|
|
|
|
|
291,125
|
|
|
|
|
(1) |
|
Stock awards represent the aggregate grant date fair value for
stock awards granted under the 2007 Plan, calculated in
accordance with FASB ASC Topic 718 based on the closing price of
our common stock on NASDAQ on the grant date. The amounts
reflect the Companys accounting expense for the awards and
do not necessarily correspond to the actual value that will be
recognized by the named executive officers. Additional
information on the assumptions used in the computation of our
share-based compensation is included in Note 5 to our
consolidated financial statements in our annual report on
Form 10-K
for the year ended December 31, 2010. For 2010, the
Stock Awards column includes (i) the grant of
performance-based, restricted stock awards to our named
executive officers in August 2010 covering 400,000 shares
of common stock, and (ii) the grant of a restricted stock
award to Dr. Yang in May 2010 covering 35,000 shares
of common stock. See pages 27-28 and 35-38 of this proxy
statement for additional information regarding the 2010 equity
awards. |
|
(2) |
|
Represents cash awards earned under the Companys annual
performance-based incentive plans. The awards were paid to the
named executive officers in the first quarter of the year
following the year in which the awards were earned. |
|
(3) |
|
The All Other Compensation column includes the
following: (i) Company matching contributions to the 401(k)
retirement accounts of all of the named executive officers
except for Mr. Manoushagian; and (ii) for
Mr. Craft only, disability insurance premiums and
reimbursement for club dues. |
41
Grants of
Plan-Based Awards for Year Ended December 31,
2010
The table below sets forth the range of potential annual cash
incentive awards for 2010 performance as a dollar amount for
each of the named executive officers under the Companys
2010 annual incentive plan. The table also sets forth the number
of shares and grant date fair value of restricted stock awarded
during 2010 to the Companys named executive officers under
the 2007 Plan.
|
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|
|
|
All Other
|
|
|
|
|
|
|
|
|
|
|
Stock
|
|
|
|
|
|
|
|
|
|
|
Awards:
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
Estimated Future Payouts
|
|
Shares of
|
|
Grant Date
|
|
|
|
|
Under Non-Equity Incentive
|
|
Stock or
|
|
Fair Value of
|
|
|
|
|
Plan Awards(1)
|
|
Units
|
|
Stock Awards
|
Name
|
|
Grant Date
|
|
Threshold ($)
|
|
Maximum ($)
|
|
(#)(2)
|
|
($)(3)
|
(a)
|
|
(b)
|
|
(c)
|
|
(e)
|
|
(i)
|
|
(l)
|
|
J. Ross Craft
|
|
|
|
|
|
|
156,250
|
|
|
|
468,750
|
|
|
|
|
|
|
|
|
|
|
|
|
August 2, 2010
|
|
|
|
|
|
|
|
|
|
|
|
120,000
|
|
|
|
810,000
|
|
Steven P. Smart
|
|
|
|
|
|
|
131,750
|
|
|
|
263,500
|
|
|
|
|
|
|
|
|
|
|
|
|
August 2, 2010
|
|
|
|
|
|
|
|
|
|
|
|
80,000
|
|
|
|
540,000
|
|
J. Curtis Henderson
|
|
|
|
|
|
|
128,750
|
|
|
|
257,500
|
|
|
|
|
|
|
|
|
|
|
|
|
August 2, 2010
|
|
|
|
|
|
|
|
|
|
|
|
80,000
|
|
|
|
540,000
|
|
Qingming Yang
|
|
|
|
|
|
|
77,000
|
|
|
|
165,000
|
|
|
|
|
|
|
|
|
|
|
|
|
August 2, 2010
|
|
|
|
|
|
|
|
|
|
|
|
60,000
|
|
|
|
405,000
|
|
|
|
|
May 7, 2010
|
|
|
|
|
|
|
|
|
|
|
|
35,000
|
|
|
|
260,050
|
|
Ralph P. Manoushagian
|
|
|
|
|
|
|
65,450
|
|
|
|
140,250
|
|
|
|
|
|
|
|
|
|
|
|
|
August 2, 2010
|
|
|
|
|
|
|
|
|
|
|
|
60,000
|
|
|
|
405,000
|
|
|
|
|
(1) |
|
These columns show the range of potential values for the payout
of the annual cash incentive awards for 2010 performance for
each named executive officer. The potential payout is determined
by Company and individual performance. Amounts included in the
threshold column assume that the threshold level of
all Company and individual performance measures were met under
the 2010 incentive plan. Amounts included in the maximum column
assume that the excellent levels of all Company and
individual performance measures were met under the 2010
incentive plan. The actual amount of the annual cash incentive
award paid for 2010 performance is set forth above in this proxy
statement in the Summary Compensation Table in the
Non-Equity Incentive Plan Compensation column. For a
detailed description of the 2010 annual incentive plan, see
Compensation Discussion Analysis Elements of
the Companys Executive Officer Compensation
Program Performance-Based Annual Incentive
Awards. |
|
(2) |
|
Other than the 35,000 restricted shares granted to Dr. Yang
in May 2010, these shares of restricted stock were subject to
performance conditions in the year of grant (fiscal year 2010).
All of the applicable performance measures were achieved as of
December 31, 2010; however, these awards remain subject to
time-based vesting restrictions through December 31, 2014.
See pages 35-37 of this proxy statement for a more detailed
discussion of the 2010 LTI grant. The 35,000 restricted shares
granted to Dr. Yang are only subject to time-based vesting
conditions and will vest in 1/3 annual increments on each of the
first, second and third anniversaries of the grant date,
provided Dr. Yang remains continuously employed by the
Company. |
|
(3) |
|
This column represents the aggregate grant date fair value
calculated in accordance with FASB ASC Topic 718 and is based on
the closing price of our common stock on NASDAQ on the
respective dates of grant. The amounts reflect the
Companys accounting expense for the awards and do not
necessarily correspond to the actual value that will be
recognized by the named executive officers. |
42
Outstanding
Equity Awards at Fiscal Year End
The following table summarizes the number of securities
underlying outstanding equity plan awards for each named
executive officer as of December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
Stock Awards
|
|
|
Number of
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
Securities
|
|
Securities
|
|
|
|
|
|
Number of
|
|
Market Value
|
|
|
Underlying
|
|
Underlying
|
|
|
|
|
|
Shares of
|
|
of Shares of
|
|
|
Unexercised
|
|
Unexercised
|
|
Option
|
|
|
|
Stock That
|
|
Stock That
|
|
|
Options
|
|
Options
|
|
Exercise
|
|
|
|
Have Not
|
|
Have Not
|
|
|
Exercisable
|
|
Unexercisable
|
|
Price
|
|
Option
|
|
Vested
|
|
Vested
|
Name
|
|
(#)
|
|
(#)
|
|
($)
|
|
Expiration Date
|
|
(#)(1)
|
|
($)(2)
|
(a)
|
|
(b)
|
|
(c)
|
|
(e)
|
|
(f)
|
|
(g)
|
|
(h)
|
|
J. Ross Craft
|
|
|
152,892
|
|
|
|
|
|
|
|
3.33
|
|
|
|
August 16, 2014
|
|
|
|
158,182
|
|
|
|
3,654,004
|
|
Steven P. Smart
|
|
|
28,845
|
|
|
|
|
|
|
|
3.33
|
|
|
|
August 16, 2014
|
|
|
|
101,818
|
|
|
|
2,351,996
|
|
J. Curtis Henderson
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101,818
|
|
|
|
2,351,996
|
|
Qingming Yang
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
115,000
|
|
|
|
2,656,500
|
|
Ralph P. Manoushagian
|
|
|
28,845
|
|
|
|
|
|
|
|
3.33
|
|
|
|
August 16, 2014
|
|
|
|
70,910
|
|
|
|
1,638,021
|
|
|
|
|
(1) |
|
For each executive officer, the number of shares of stock that
have not vested is composed of: |
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
|
|
|
of Stock That Have
|
Name
|
|
Grant Date(a)
|
|
Not Vested
|
|
J. Ross Craft
|
|
June 3, 2009
|
|
|
38,182
|
|
|
|
August 2, 2010
|
|
|
120,000
|
|
Steven P. Smart
|
|
June 3, 2009
|
|
|
21,818
|
|
|
|
August 2, 2010
|
|
|
80,000
|
|
J. Curtis Henderson
|
|
June 3, 2009
|
|
|
21,818
|
|
|
|
August 2, 2010
|
|
|
80,000
|
|
Qingming Yang
|
|
July 27, 2009
|
|
|
20,000
|
|
|
|
May 7, 2010
|
|
|
35,000
|
|
|
|
August 2, 2010
|
|
|
60,000
|
|
Ralph P. Manoushagian
|
|
June 3, 2009
|
|
|
10,910
|
|
|
|
August 2, 2010
|
|
|
60,000
|
|
|
|
|
(a) |
|
Awards granted on June 3, 2009, July 27, 2009, and
May 7, 2010, vest in 1/3 annual increments on each of the
first, second and third anniversaries of the respective date of
grant of the awards. The vesting schedule applicable to the
awards granted on August 2, 2010, is described above on
pages 35-37
of this proxy statement. The treatment of these awards under
certain termination and change in control events is described
below under Potential Payments Upon a
Termination or Change in Control. |
|
|
|
(2) |
|
Based on the closing price of our common stock on NASDAQ of
$23.10 per share on December 31, 2010. |
43
Option
Exercises and Stock Vested
The following table reflects option awards actually exercised
and/or stock
awards that vested for each of our named executive officers
during 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
Stock Awards
|
|
|
Number of Shares
|
|
Value Realized
|
|
Number of Shares
|
|
Value Realized
|
|
|
Acquired on Exercise
|
|
on Exercise
|
|
Acquired on Vesting
|
|
on Vesting
|
Name
|
|
(#)
|
|
($)
|
|
(#)
|
|
($)(1)
|
(a)
|
|
(b)
|
|
(c)
|
|
(d)
|
|
(e)
|
|
J. Ross Craft
|
|
|
|
|
|
|
|
|
|
|
19,091
|
|
|
|
142,801
|
|
Steven P. Smart
|
|
|
|
|
|
|
|
|
|
|
10,909
|
|
|
|
81,599
|
|
J. Curtis Henderson
|
|
|
|
|
|
|
|
|
|
|
10,909
|
|
|
|
81,599
|
|
Qingming Yang
|
|
|
|
|
|
|
|
|
|
|
10,000
|
|
|
|
70,100
|
|
Ralph P. Manoushagian
|
|
|
|
|
|
|
|
|
|
|
5,454
|
|
|
|
40,796
|
|
|
|
|
(1) |
|
Based on the closing price of our common stock on NASDAQ of
$7.48 per share on the date of vesting, June 3, 2010, for
Mr. Craft, Mr. Smart, Mr. Henderson and
Mr. Manoushagian. Based on the closing price of our common
stock on NASDAQ of $7.01 per share on the date of vesting,
July 27, 2010, for Dr. Yang. |
Pension
Benefits
We do not have any plan that provides for payments or other
benefits at, following or in connection with retirement, other
than our 401(k) plan.
Non-Qualified
Deferred Compensation
We do not have any plan that provides for the deferral of
compensation on a basis that is not tax qualified.
Potential
Payments upon Termination or Change in Control
Employment
Agreements
We entered into employment agreements with each of our named
executive officers in January 2011. Mr. Crafts and
Mr. Smarts employment agreements restated and
replaced existing employment agreements originally entered into
on January 1, 2003, and previously amended on
December 31, 2008. These agreements, and the employment
agreement with Mr. Henderson, are included as exhibits to a
Form 8-K
dated January 1, 2011, and filed with the SEC on
January 6, 2011. We entered into employment agreements with
each of Dr. Yang and Mr. Manoushagian on
January 24, 2011. These agreements are included as exhibits
to a
Form 8-K
dated January 24, 2011, and filed with the SEC on
January 28, 2011.
The employment agreements provide for potential severance
payments upon the termination of the officers employment
in certain situations, including in connection with a change in
control, without cause by the Company or for
good reason by the executive officer, upon proper
notice of nonrenewal by either party and upon the death or
permanent disability of the executive officer. Other than the
prior employment agreements with Mr. Craft and
Mr. Smart and our stock-based incentive awards, there were
no arrangements with other named executive officers providing
severance or change in control benefits during 2010. In order to
provide our stockholders with an understanding of the severance
and change in control arrangements currently in effect, the
discussion below is of the benefits payable under the 2011
employment agreements, assuming such arrangements were in place
as of December 31, 2010. Additional information regarding
the employment agreements is included above under
Compensation Discussion and Analysis Elements
of the Companys Executive Officer Compensation
Program Employment Agreements.
Under the terms of the employment agreements, in the event of an
executives death or if he becomes permanently
disabled, as defined in the agreements, the agreements
will terminate and we will pay the executive or his estate a
lump sum severance payment equal to (i) 100% of the
executives then-current annual
44
base salary, and (ii) 100% of the average of any bonuses
received by the executive in the two years immediately before
the separation from service.
If the agreements are terminated by the Company without
cause, as defined in the agreements, by the
executive for good reason, as defined in the
agreements, or by the Companys proper notice of nonrenewal
of the agreement, the Company will pay each named executive
officer a lump sum severance payment equal to (i) 150% of
the greater of the executive officers then-current base
salary or the executive officers base salary at any time
within two years immediately before the separation from service
(200% in the case of Mr. Craft) and (ii) 100% of the
bonus that the named executive officer would have received based
on achievement of applicable performance goals in the year of
termination (prorated for any partial year of service in the
case of the named executive officers other than Mr. Craft
and in the case of the Companys prior notice of nonrenewal
for any of the named executive officers). The Company will also
reimburse the named executive officers for certain premiums paid
under the Consolidated Omnibus Reconciliation Act of 1985
(COBRA), for up to 18 months (24 months in
the case of Mr. Craft and, for all named executive
officers, 12 months if the executive terminates his
employment for good reason), depending on the executives
eligibility for continuation of coverage under COBRA.
If Mr. Craft is employed by the Company at the time of a
change in control, as defined in the agreements,
Mr. Crafts agreement will terminate, regardless of
whether Mr. Craft experiences a separation from service,
and Mr. Craft will receive payments equal to (i) 200%
of the greater of Mr. Crafts then-current base salary
and Mr. Crafts base salary at any time within the two
years before the change in control, and (ii) 200% of the
average of any bonuses received by Mr. Craft in the two
years before the change in control. We will also reimburse
Mr. Craft for certain premiums paid under COBRA for up to
24 months following his separation from service, depending
on Mr. Crafts eligibility for continuation of
coverage under COBRA.
If one of the other named executive officers is employed by us
at the time of a change in control and his agreement is
terminated without cause or by the executive for good reason
within one year of the change in control, the executive will
receive severance payments equal to (i) 150% of the greater
of the executives then-current base salary and his base
salary at any time within the two years immediately before the
change in control, and (ii) 100% of the average of bonuses
received by the executive in the two years before the change in
control. We will also reimburse the executive for certain
premiums paid under COBRA for a period of up to 18 months,
depending on the executives eligibility for continuation
of coverage under COBRA.
If a named executive officer is terminated by the Company
without cause or if he terminates his employment for good
reason, in either case, within 120 days before the
occurrence of a change in control, then the named executive
officer will be entitled to receive, in addition to the benefits
described above for termination without cause or for good
reason, a lump sum equal to the excess, if any, of the change in
control benefits he would have received if he had been employed
on the date of the change in control over the severance benefits
he actually received in connection with his termination of
employment.
All payments and benefits due under the employment agreements
are conditioned upon the execution and non-revocation by the
executive officer of a release for the Companys benefit.
Under the agreements, the executive officers have also agreed to
certain confidentiality, non-competition and non-solicitation
covenants with respect to the Company. The confidentiality
covenants apply during the term of the agreement and for a one
year period following the executive officers termination
of employment. The non-competition and non-solicitation
covenants apply during the term of the agreement and for one
year following the executive officers termination of
employment (for six months following termination of employment
(i) in the case of Mr. Craft, in the event of his
termination from employment for good reason or in connection
with a change in control, or (ii) in the case of the other
named executive officers, if the executive officer is terminated
without cause or for good reason within one year following a
change in control). Violation of these restrictive covenants
entitles us to complete relief, including restitution. Further,
in the event of a breach of the restrictive covenants during the
executive officers employment with us, the executive could
be terminated for cause (provided the breach constituted a
material violation of the employment agreement). The employment
agreements do not prohibit the waiver of a breach of these
covenants.
45
If amounts payable to an executive officer under his employment
agreement (together with any other amounts that are payable by
us as a result of a change in ownership or control)
(collectively, the Payments) exceed the amount
allowed under Section 280G of the Code for such executive
(thereby subjecting the executive to an excise tax), then the
Payments due to the executive officer under the employment
agreement will either (i) be reduced (but not below zero)
so that the aggregate present value of the Payments fall within
the amount allowed by Section 280G, or (ii) be paid in
full, whichever produces the better, net, after-tax result for
the executive officer (taking into account any applicable excise
or income taxes).
Employment Agreement Terms. For purposes of
the employment agreements, the following terms have been given
the meanings set forth below:
Change in control is generally defined as
(i) any consolidation or merger of the Company in which the
Company is not the continuing or surviving corporation or under
which shares of the Companys common stock would be
converted into cash, securities or other property, other than a
merger of the Company in which the holders of the Companys
common stock immediately before the merger have the same
proportionate ownership of common stock of the surviving
corporation immediately after the merger, (ii) any sale,
lease, exchange or other transfer (in one transaction or a
series of related transactions) of all or substantially all, of
the assets of the Company and the its subsidiaries to any other
person or entity (other than an affiliate of the Company),
(iii) the stockholders of the Company approve any plan or
proposal for liquidation or dissolution of the Company,
(iv) any person or entity (other than Yorktown Energy
Partners V, L.P., or any of its affiliated funds),
including a group as contemplated by
Section 13(d)(3) of the Exchange Act, acquires or gains
ownership or control (including, without limitation, power to
vote) of more than 50% of the outstanding shares of the
Companys voting stock (based upon voting power) or
(v) as a result of or in connection with a contested
election of directors, the persons who were directors of the
Company before such election shall cease to constitute a
majority of the Board. A change in control does not include a
public offering of the Companys common stock or a
transaction with its sole purpose to change the state of the
Companys incorporation or to create a holding company that
will be owned in substantially the same proportions by the
persons who held the Companys securities immediately
before such transaction.
Cause is generally defined as (i) the willful
and continued failure by the executive substantially to perform
his duties, responsibilities or authorities (other than any such
failure resulting from the executive becoming permanently
disabled), (ii) the willful engaging by the executive in
misconduct that is materially injurious to the Company,
(iii) any misconduct by the executive in the course and
scope of the executives employment, including but not
limited to dishonesty, disloyalty, disorderly conduct,
insubordination, harassment of other employees or third parties,
abuse of alcohol or controlled substances or other violations of
the Companys personnel policies, rules or Code of Conduct,
(iv) any material violation by the executive of his
employment agreement or (v) any violation by the executive
of any fiduciary duty owed by the executive to the Company or
its affiliates. For these purposes, no act, or failure to act,
on the executives part shall be considered
willful unless done, or omitted to be done, by him
not in good faith and without reasonable belief that his action
or omission was in the best interest of the Company.
Good reason is generally defined as, without the
executives consent, (i) a material diminution in the
executives annual base salary, duties, responsibilities or
authorities, (ii) a requirement that the executive report
to an officer or employee other than the Board (or, in the case
of executive officers other than Mr. Craft, to an officer
or employee other than the president or the Board), (iii) a
material relocation of the executives primary work
location more than 25 miles away from the Companys
corporate headquarters for the Mr. Craft, and 50 miles
for the other named executive officers or (iv) any other
material breach by the Company of its obligations under the
employment agreement.
An executive will be deemed to have become permanently
disabled when (i) he receives disability benefits
under either Social Security or the Companys long-term
disability plan, if any, (ii) the Board, upon the written
report of a qualified physician designated by the Board or its
insurers, shall have determined (after a complete physical
examination of the executive at any time after he has been
absent from the Company for a total period of 180 or more
calendar days in any
12-month
period) that the executive has become physically
and/or
mentally incapable of performing his essential job functions
with or without reasonable accommodation
46
as required by law or (iii) he is otherwise unable for a
continuous period of 120 calendar days to perform his essential
job functions with or without reasonable accommodation as
required by law due to injury, illness or other incapacity
(90 days in the case of executive officers other than
Mr. Craft).
Potential Severance Benefits. The following
table summarizes the potential severance payments payable to our
executive officers under their employment agreements. The table
is only intended to summarize various terms of the employment
agreements and is qualified in its entirety by reference to the
full text of the actual agreements, copies of which are on file
with the SEC as discussed above.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By Company
|
|
|
|
|
|
|
|
|
Change in
|
|
Without Cause
|
|
Notice of
|
|
Death or
|
|
|
|
|
Control or
|
|
or by Executive
|
|
Nonrenewal by
|
|
Permanent
|
Name
|
|
Title
|
|
CIC(1)
|
|
For Good Reason
|
|
Company
|
|
Disability
|
|
J. Ross Craft
|
|
President & CEO
|
|
(a) 200% of base salary, (b) 200% of average bonus during two
years before CIC and (c) COBRA premiums for up to 24 months.
|
|
(a) 200% of base salary, (b) 100% of bonus and (c) COBRA
premiums for up to 24 months (12 months if executive
terminates for good reason).
|
|
(a) 200% of base salary, (b) 100% of bonus, prorated for partial
year of service and (c) COBRA premiums for up to 24 months.
|
|
(a) 100% of base salary and (b) 100% of average bonus during two
years before separation of service.
|
Steven P. Smart
|
|
Executive Vice President & CFO
|
|
150% of base salary, (b) 100% of average bonus during two years
before CIC and (c) COBRA premiums for up to 18 months.
|
|
(a) 150% of base salary, (b) 100% of bonus, prorated for partial
year of service and (c) COBRA premiums for up to 18 months
(12 months if executive terminates for good reason).
|
|
(a) 150% of base salary, (b) 100% of bonus, prorated for partial
year of service and (c) COBRA premiums for up to 18 months.
|
|
(a) 100% of base salary and (b) 100% of average bonus during two
years before separation of service.
|
J. Curtis Henderson
|
|
Executive Vice President & General Counsel
|
|
Same as Mr.
Smart.
|
|
Same as Mr.
Smart.
|
|
Same as Mr.
Smart.
|
|
Same as Mr.
Smart.
|
Qingming Yang
|
|
Executive Vice President Business Development &
Geosciences
|
|
Same as Mr.
Smart.
|
|
Same as Mr.
Smart.
|
|
Same as Mr.
Smart.
|
|
Same as Mr.
Smart.
|
Ralph P. Manoushagian
|
|
Executive Vice President Land
|
|
Same as Mr.
Smart.
|
|
Same as Mr.
Smart.
|
|
Same as Mr.
Smart.
|
|
Same as Mr.
Smart.
|
|
|
|
(1) |
|
Change in control must be followed by termination of employment
by the Company without cause or by the executive for good
reason, each within one year of the change in control, for
severance to be payable to the named executive officers other
than Mr. Craft. Amounts due to Mr. Craft are payable
upon change in control regardless of termination of employment. |
Stock
Incentive Plan
In addition to potential severance payments under the executive
employment agreements discussed above, certain restricted stock
awards granted under the 2007 Plan provide for the accelerated
vesting of such awards in the event of a change in control or
certain termination events. Specifically, the 2007 Plan provides
that restricted shares will vest in full upon the occurrence of
a change in control. In addition, the stock award agreements for
restricted shares granted to executive officers after
August 1, 2010, provide that restricted shares will vest in
full upon termination of employment by reason of death or
disability. The definitions for change in control in the 2007
Plan and applicable restricted stock award agreements are the
same as in the employment agreements and are discussed above
under Employment Agreement Terms. The
definition of disability in the restricted stock award
agreements is the same as in the 2007 Plan: (i) the
executive is unable to engage in any substantial gainful
activity by reason of any medically determinable physical or
mental
47
impairment that can be expected to result in death or can be
expected to last for a continuous period of not less than
12 months, or (ii) the executive is, by reason of any
medically determinable physical or mental impairment that can be
expected to result in death or can be expected to last for a
continuous period of not less than 12 months, receiving
income replacement benefits for a period of not less than three
months under an accident or health plan covering employees of
the Company or an affiliate.
Quantification
of Payments
The table below summarizes the dollar amounts of potential
payments to each named executive officer assuming that one of
the events described in the table below occurs and assuming that
the employment agreements with all the named executive officers
were in effect on December 31, 2010. The table assumes that
each specified event occurred on December 31, 2010, when
the closing price of the Companys common stock was $23.10.
The values below are our best estimate of the severance payments
and benefits the executives would receive upon a termination of
employment or a change in control as of December 31, 2010,
and we believe the amounts below have been calculated using
reasonable assumptions. All amounts are before taxes, which
would reduce amounts ultimately due to our named executive
officers. Any actual payments that may be made pursuant to the
agreements described above are dependent on various factors,
which may or may not exist at the time a change in control
actually occurs
and/or the
named executive officer is actually terminated. Therefore, such
amounts and disclosures should be considered forward
looking statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By Company
|
|
|
|
|
|
|
|
|
|
|
|
|
Without Cause or
|
|
|
Notice of
|
|
|
Death or
|
|
|
|
Change in
|
|
|
by Executive For
|
|
|
Nonrenewal by
|
|
|
Permanent
|
|
Name
|
|
Control or CIC(1)
|
|
|
Good Reason
|
|
|
Company
|
|
|
Disability
|
|
|
J. Ross Craft
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salary
|
|
$
|
625,000
|
|
|
$
|
625,000
|
|
|
$
|
625,000
|
|
|
$
|
312,500
|
|
Bonus
|
|
|
513,915
|
|
|
|
187,500
|
|
|
|
187,500
|
|
|
|
256,958
|
|
Accelerated Equity
|
|
|
3,654,004
|
|
|
|
|
|
|
|
|
|
|
|
2,772,000
|
|
Continued Medical (COBRA)(2)
|
|
|
47,509
|
|
|
|
47,509
|
|
|
|
47,509
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total(3)
|
|
$
|
4,840,428
|
|
|
$
|
860,009
|
|
|
$
|
860,009
|
|
|
$
|
3,341,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steven P. Smart
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salary
|
|
$
|
395,250
|
|
|
$
|
395,250
|
|
|
$
|
395,250
|
|
|
$
|
263,500
|
|
Bonus
|
|
|
146,513
|
|
|
|
105,400
|
|
|
|
105,400
|
|
|
|
146,513
|
|
Accelerated Equity
|
|
|
2,351,996
|
|
|
|
|
|
|
|
|
|
|
|
1,848,000
|
|
Continued Medical (COBRA)(2)
|
|
|
17,261
|
|
|
|
17,261
|
|
|
|
17,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total(3)
|
|
$
|
2,911,020
|
|
|
$
|
517,911
|
|
|
$
|
517,911
|
|
|
$
|
2,258,013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
J. Curtis Henderson
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salary
|
|
$
|
386,250
|
|
|
$
|
386,250
|
|
|
$
|
386,250
|
|
|
$
|
257,500
|
|
Bonus
|
|
|
145,313
|
|
|
|
103,000
|
|
|
|
103,000
|
|
|
|
145,313
|
|
Accelerated Equity
|
|
|
2,351,996
|
|
|
|
|
|
|
|
|
|
|
|
1,848,000
|
|
Continued Medical (COBRA)(2)
|
|
|
29,241
|
|
|
|
29,241
|
|
|
|
29,241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total(3)
|
|
$
|
2,912,800
|
|
|
$
|
518,491
|
|
|
$
|
518,491
|
|
|
$
|
2,250,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Qingming Yang
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salary
|
|
$
|
330,000
|
|
|
$
|
330,000
|
|
|
$
|
330,000
|
|
|
$
|
220,000
|
|
Bonus
|
|
|
28,570
|
|
|
|
66,000
|
|
|
|
66,000
|
|
|
|
28,570
|
|
Accelerated Equity
|
|
|
2,656,500
|
|
|
|
|
|
|
|
|
|
|
|
1,386,000
|
|
Continued Medical (COBRA)(2)
|
|
|
29,241
|
|
|
|
29,241
|
|
|
|
29,241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total(3)
|
|
$
|
3,044,311
|
|
|
$
|
425,241
|
|
|
$
|
425,241
|
|
|
$
|
1,634,570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By Company
|
|
|
|
|
|
|
|
|
|
|
|
|
Without Cause or
|
|
|
Notice of
|
|
|
Death or
|
|
|
|
Change in
|
|
|
by Executive For
|
|
|
Nonrenewal by
|
|
|
Permanent
|
|
Name
|
|
Control or CIC(1)
|
|
|
Good Reason
|
|
|
Company
|
|
|
Disability
|
|
|
Ralph P. Manoushagian
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salary
|
|
$
|
280,500
|
|
|
$
|
280,500
|
|
|
$
|
280,500
|
|
|
$
|
187,000
|
|
Bonus
|
|
|
86,063
|
|
|
|
56,100
|
|
|
|
56,100
|
|
|
|
86,063
|
|
Accelerated Equity
|
|
|
1,638,021
|
|
|
|
|
|
|
|
|
|
|
|
1,386,000
|
|
Continued Medical (COBRA)(2)
|
|
|
19,518
|
|
|
|
19,518
|
|
|
|
19,518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total(3)
|
|
$
|
2,024,102
|
|
|
$
|
356,118
|
|
|
$
|
356,118
|
|
|
$
|
1,659,063
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
For the named executive officers other than Mr. Craft, the
change in control must be followed by a termination of
employment by the Company without cause or by the executive for
good reason, in either case within one year of the change in
control, in order for the Salary, Bonus
and Continued Medical (COBRA) amounts reported above
to become payable. Accelerated vesting of equity awards and all
payments due to Mr. Craft are triggered upon the occurrence
of a change in control regardless of termination of employment. |
|
(2) |
|
Based on assumptions used for financial reporting purposes under
GAAP. In the event of a termination by the executive for good
reason, the duration of continued medical benefits would only
last up to 12 months; however, for purposes of quantifying
amounts in this table, the By Company Without Cause or by
Executive For Good Reason column reports up to
18 months of continued coverage (24 months in the case
of Mr. Craft) in the event of a termination without cause
or for good reason. |
|
(3) |
|
Total amounts are calculated without regard to the
potential 280G cutback limitation described above under
Employment Agreements. |
DIRECTOR
COMPENSATION
Our directors received an annual retainer of $50,000 in common
stock for services rendered in 2010 under our director
compensation plan. Our directors also received an annual
retainer of $35,000 in cash, stock or a combination of both at
the election of the director and payable in four equal
installments on the first trading day of each quarter. In
addition, the Chairmen of the Audit and Compensation Committees
received $15,000 and $5,000, respectively, in cash, stock or a
combination of both, also at the election of the Chairman and
payable in four equal installments on the first trading day of
each quarter. Further, directors and committee members received
cash meeting fees of $1,000 for each Board meeting attended,
$1,000 for each Audit Committee meeting attended and $500 for
each Compensation Committee meeting attended.
Additionally, each director is reimbursed for travel and
miscellaneous expenses to attend meetings and activities of the
Board or its committees, and travel and miscellaneous expenses
related to such directors participation in general
education and programs for directors.
The following table sets forth a summary of the compensation we
paid to our directors in 2010. The calculation of the amounts
elected to be received in common stock was calculated in
accordance with FASB ASC Topic 718 and based on the NASDAQ
closing price of our common stock on the date of grant.
Mr. Craft,
49
who is a full-time employee, and Mr. Lawrence, who is
affiliated with Yorktown Energy Partners, do not receive
compensation for serving as directors.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees Earned
|
|
|
|
|
|
|
or Paid in
|
|
Stock
|
|
|
Name
|
|
Cash ($)
|
|
Awards ($)
|
|
Total ($)
|
(a)
|
|
(b)
|
|
(c)
|
|
(h)
|
|
Alan D. Bell(1)
|
|
|
5,000
|
|
|
|
35,805
|
|
|
|
40,805
|
|
James H. Brandi
|
|
|
19,000
|
|
|
|
85,000
|
|
|
|
104,000
|
|
James C. Crain
|
|
|
34,000
|
|
|
|
85,000
|
|
|
|
119,000
|
|
Sheldon B. Lubar
|
|
|
13,000
|
|
|
|
90,000
|
|
|
|
103,000
|
|
Christopher J. Whyte
|
|
|
13,000
|
|
|
|
85,000
|
|
|
|
98,000
|
|
|
|
|
(1) |
|
Alan D. Bell became a member of the Board in August 2010. |
For 2011, upon the recommendation of the Compensation Committee
and in light of the complexity of compensation issues considered
by the Compensation Committee and time spent on these issues, as
well as additional governance matters required to be overseen as
a result of the Dodd-Frank Act and related SEC regulations, the
Board raised the annual chair fee for the Compensation Committee
from $5,000 to $7,500 and meeting fee from $500 per meeting to
$1,000 per meeting.
EQUITY
COMPENSATION PLAN TABLE
The following table summarizes information about our long-term
incentive compensation plans as of December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares to
|
|
|
|
|
|
|
|
|
|
be Issued Upon
|
|
|
Weighted-Average
|
|
|
Number of Shares
|
|
|
|
Exercise of
|
|
|
Exercise Price of
|
|
|
Remaining Available
|
|
|
|
Outstanding
|
|
|
Outstanding
|
|
|
for Future Issuance
|
|
|
|
Options, Warrants
|
|
|
Options, Warrants
|
|
|
Under Equity
|
|
|
|
and Rights(1)
|
|
|
and Rights
|
|
|
Compensation Plans
|
|
|
Equity compensation plans approved by stockholders
|
|
|
334,329
|
|
|
$
|
7.01
|
|
|
|
691,080
|
|
Equity compensation plans not approved by stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
334,329
|
|
|
$
|
7.01
|
|
|
|
691,080
|
|
For more information about our 2007 Plan, see
Proposal 4 Reapproval of Material Terms
of Our 2007 Stock Incentive Plan to Comply with
Section 162(m) of the Internal Revenue Code and
Compensation Discussion and Analysis Elements
of the Companys Executive Officer Compensation
Program Long-Term Incentive Stock Compensation.
CERTAIN
RELATIONSHIPS AND RELATED-PARTY TRANSACTIONS
Our Board has approved a written policy that requires our Audit
Committee to review on an annual basis all transactions with
related parties, or in which a related party has a direct or
indirect interest, and to determine whether to ratify or approve
the transaction after consideration of the related partys
interest in the transaction. For these purposes, a related-party
transaction is a transaction between the Company and any related
party, such as an officer, director or 5% stockholder of the
Company, other than transactions available to all employees
generally or transactions involving less than $5,000 when
combined with all similar transactions. We had no related-party
transactions in 2010.
50
INDEPENDENT
REGISTERED PUBLIC ACCOUNTANTS
The Audit Committee has appointed Hein & Associates
LLP as our independent registered public accounting firm to
audit our consolidated financial statements and internal control
over financial reporting as of and for the fiscal year ending
December 31, 2011. Stockholders are being asked to ratify
the appointment of Hein at the 2011 annual meeting of
stockholders, under Proposal 5.
Representatives of Hein are expected to be present at the annual
meeting. Hein representatives will have an opportunity to make a
statement if they desire and are expected to be available to
respond to appropriate questions at the annual meeting.
Audit
Fees
Our independent registered public accounting firm for 2010 and
2009 was Hein & Associates LLP. The fees billed to us
by Hein are shown in the table below.
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Audit fees
|
|
$
|
402,550
|
|
|
$
|
380,973
|
|
Audit-related fees
|
|
|
2,525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
405,075
|
|
|
$
|
380,973
|
|
|
|
|
|
|
|
|
|
|
Audit fees consist of fees billed for professional services for
the audit of our annual financial statements, reviews of the
financial statements included in our quarterly reports and
services that are normally provided in connection with statutory
and regulatory filings. For 2010, these services include the
review of our prospectus for our 2010 equity offering and the
audit of our internal controls over financial reporting. For
2009, these services included the review of our registration
statement on
Form S-3
and the audit of our internal controls over financial reporting.
Audit-related fees consist of fees billed for assurance and
related services that are reasonably related to the performance
of the audit or review of our consolidated financial statements
and are not reported under Audit Fees. These
services consisted of consultations concerning financial
accounting and reporting standards.
Pre-Approval
Policy and Procedures
The Audit Committee must give prior approval to any management
request for any amount or type of service (audit, audit-related
and tax services or to the extent permitted by law, non-audit
services) our independent registered public accounting firm
provides. All audit and audit-related services rendered by
Hein & Associates LLP in 2010 and 2009 were approved
by the Audit Committee before Hein was engaged for such
services. No services of any kind were approved pursuant to a
waiver permitted under 17 CFR 210.2-01(c)(7)(i)(C).
AUDIT
COMMITTEE REPORT
The following statement is furnished by our Audit Committee
and is not incorporated by reference into any document that we
file with the SEC.
This statement is being provided to inform stockholders of the
Audit Committees oversight with respect to our financial
reporting.
The Audit Committee has reviewed and discussed the audited
financial statements as of and for the year ended
December 31, 2010, and related notes with management and
the independent registered public accounting firm. In addition,
the Audit Committee has discussed with the independent
registered public accounting firm the matters required to be
discussed by Statement of Auditing Standards No. 61,
Communications with Audit Committees as
amended (AICPA, Professional Standards, Vol. 1. AU
Section 380), as adopted by the Public Company Accounting
Oversight Board (United States) (the PCAOB)
51
in Rule 3200T. The Audit Committee discussed with our
independent registered public accounting firm the independence
of such firm from our management, including a review of audit
and non-audit fees, and received the written disclosures and the
letter from the independent registered public accounting firm
required by applicable requirements of the PCAOB regarding the
independent registered public accounting firms
communications with the Audit Committee concerning independence.
The Audit Committee has also discussed with our management and
the independent registered public accounting firm such other
matters and received such assurance from them, as the Audit
Committee deemed appropriate.
Management is responsible for the preparation and presentation
of the Companys audited financial statements, the
establishment and maintenance of our disclosure controls and
procedures and the establishment, maintenance and evaluation of
the effectiveness of our internal controls over financial
reporting. The independent registered public accounting firm is
responsible for performing an independent audit of our financial
statements and internal control over financial reporting in
accordance with the standards of the PCAOB and issuing reports
thereon. The Audit Committees responsibility is to monitor
and oversee this process.
Based on the foregoing review and discussions with management
and the independent registered public accounting firm, and
relying thereon, we have recommended to the Company and the
Board the inclusion of the audited financial statements in the
Companys annual report on
Form 10-K
for the year ended December 31, 2010, for filing with the
SEC.
The members of the Audit Committee are not professionally
engaged in the practice of auditing or accounting for the
Company and are not experts in auditor independence standards.
Members of the Audit Committee rely without independent
verification on the information provided to them and on the
representations made by management and the Companys
independent registered public accounting firm. Accordingly, the
Audit Committees oversight does not provide an independent
basis to determine that management has maintained appropriate
accounting and financial reporting principles or appropriate
internal controls and procedures designed to assure compliance
with accounting standards and applicable laws and regulations.
Furthermore, the Audit Committees considerations and
discussions referred to above do not assure that the audit of
the Companys financial statements and internal control
over financial reporting has been carried out in accordance with
the standards of the PCAOB, that the financial statements are
presented in accordance with GAAP standards, or that
Hein & Associates LLP is in fact independent.
Respectfully submitted by the Audit Committee of the Board,
Alan D. Bell, Chairman
James H. Brandi
James C. Crain
Christopher J. Whyte
OTHER
MATTERS
Other
Proposals at the Annual Meeting of Stockholders
Our Board does not know of any other matters that are to be
presented for action at the annual meeting. However, if any
other matters properly come before the annual meeting or any
adjournment(s) or postponement(s) thereof, it is intended that
the enclosed proxy will be voted in accordance with the judgment
of the persons voting the proxy.
The information contained in this proxy statement in the
sections entitled Compensation Committee Report and
Audit Committee Report shall not be deemed to be
soliciting material or to be filed with
the SEC, nor shall such information be incorporated by reference
into any future filings with the SEC, or subject to the
liabilities of Section 18 of the Exchange Act, except to
the extent that we specifically incorporate it by reference into
a document filed under the Securities Act or the Exchange Act.
52
Submission
of Stockholder Proposals and Other Deadlines for the 2012 Annual
Meeting of Stockholders
Pursuant to
Rule 14a-8
under the Exchange Act, some stockholder proposals may be
eligible for inclusion in our 2012 proxy statement. Under the
SECs rules and regulations, stockholders interested in
submitting proposals in our proxy materials and for presentation
at our 2012 annual meeting of stockholders may do so by
following the procedures set forth in
Rule 14a-8
under the Exchange Act. In general, stockholder proposals must
be received by our Corporate Secretary at Approach Resources
Inc., One Ridgmar Centre, 6500 West Freeway,
Suite 800, Fort Worth, Texas 76116 no later than
December 24, 2011, to be eligible for inclusion in our
proxy materials.
Alternatively, as more specifically provided for in our bylaws,
a stockholder making a nomination for election to our Board or a
proposal of business (other than proposals to be included in our
proxy statement and proxy as discussed in the previous
paragraph) for our 2011 annual meeting of stockholders must
deliver proper notice to our Corporate Secretary at Approach
Resources Inc., One Ridgmar Centre, 6500 West Freeway,
Suite 800, Fort Worth, Texas 76116 not less than 90
and no more than 120 calendar days before the one year
anniversary of the date of this proxy statement. As a result,
for a stockholder nomination for election to our Board or a
proposal of business to be considered at the 2012 annual meeting
of stockholders, it must be properly submitted to our Corporate
Secretary no earlier than December 23, 2011, and no later
than January 22, 2012.
Pursuant to
Rule 14a-4(c)
of the Exchange Act, our Board may exercise discretionary voting
authority under proxies solicited by it with respect to any
matter properly presented by a stockholder at the 2011 annual
meeting that the stockholder does not seek to have included in
our proxy statement if (except as described in the following
sentence) the proxy statement discloses the nature of the matter
and how our Board intends to exercise its discretion to vote on
such matter, unless we are notified of the proposal on or before
January 22, 2012, and the stockholder satisfies the other
requirements of
Rule 14a-4(c)(2).
If we first receive notice of such matter after January 22,
2012, and the matter nonetheless is permitted to be presented at
the 2012 annual meeting of stockholders, our Board may exercise
discretionary voting authority with respect to any such matter
without including any discussion of the matter in the proxy
statement for the 2012 annual meeting of stockholders. We
reserve the right to reject, rule out of order or take other
appropriate action with respect to any proposal that does not
comply with the requirements described above and other
applicable requirements.
For each individual that a stockholder proposes to nominate as a
director and for each matter of business proposed to be
considered, the stockholder must provide notice to our Corporate
Secretary within the time limits described above for delivering
notice of such stockholder proposal and comply with the
information requirements in our bylaws relating to stockholder
nominations. See Corporate Governance
Identifying and Evaluating Nominees for Directors for
additional information about stockholder nominations.
Detailed information for submitting stockholder proposals is
available upon written request to our Corporate Secretary at
Approach Resources Inc., One Ridgmar Centre, 6500 West
Freeway, Suite 800, Fort Worth, Texas 76116. These
requirements are separate from, and in addition to, the
SECs rules and regulations that a stockholder must meet to
have a stockholder proposal included in our proxy statement for
the 2012 annual meeting of stockholders.
2010
Annual Report to Stockholders
Our 2010 annual report to stockholders accompanies this proxy
statement. The 2010 annual report to stockholders is not a part
of the proxy soliciting material.
Stockholder
List
In accordance with the Delaware General Corporation Law, we will
maintain at our corporate offices in Fort Worth, Texas a
list of the stockholders entitled to vote at the annual meeting.
The list will be open to the examination of any stockholder, for
purposes relevant to the annual meeting, during ordinary
business hours for 10 days before the annual meeting.
53
Additional
Information About Approach Resources Inc.
If you would like to receive information about Approach
Resources Inc., please visit our website at
www.approachresources.com. A link to our investor
relations site can be found at
http://ir.approachresources.com/.
Our investor relations site contains, among other things,
management presentations, financial information, stock quotes
and links to our filings with the SEC.
To have information such as our latest quarterly earnings
release, annual report on
Form 10-K
or quarterly reports on
Form 10-Q
mailed to you, please contact investor relations at
(817) 989-9000
or via our website at
http://ir.approachresources.com/.
You may read without charge, and copy at prescribed rates, all
or any portion of the proxy statement or any reports, statements
or other information in the files at the public reference
facilities of the SECs principal office at Room 1580,
100 F Street, N.E., Washington, D.C., 20549. You
can request copies of these documents upon payment of a
duplicating fee by writing to the SEC. You may call the SEC at
1-800-SEC-0330
for further information on the operation of its public reference
rooms. Our filings are also available to you on the Internet web
site maintained by the SEC at www.sec.gov.
In this proxy statement, we state that information and documents
are available on our web site. These references are merely
intended to suggest where our stockholders may obtain additional
information. The materials and other information presented on
our web site are not incorporated in and should not otherwise be
considered part of this proxy statement.
BY ORDER OF THE BOARD OF DIRECTORS,
J. Curtis Henderson
Executive Vice President, General Counsel
and Secretary
Fort Worth, Texas
April 21, 2011
54
Appendix 1
APPROACH RESOURCES INC.
2007 STOCK INCENTIVE PLAN
ARTICLE I. ESTABLISHMENT AND PURPOSE
1.1 Establishment. Approach Resources Inc. (Approach) hereby establishes the Approach
Resources Inc. 2007 Stock Incentive Plan, as set forth in this document, as an amendment and
restatement of the Approach Resources Inc. 2003 Stock Option Plan. Awards granted pursuant to the
Approach Resources Inc. 2003 Stock Option Plan shall continue to be governed by the terms of such
plan as in effect at the time of the award and the terms of the related award agreement.
1.2 Purpose. The purposes of this Plan are to attract and retain highly qualified individuals
to perform services for the Company, to further align the interests of those individuals with those
of the stockholders of Approach, and to more closely link compensation with Company performance.
Approach is committed to creating long-term stockholder value. Approachs compensation philosophy
is based on the belief that Approach can best create stockholder value if key employees, officers,
directors and others performing services for Approach and its Affiliates act and are rewarded as
business owners. Approach believes that an equity stake through equity compensation programs
effectively aligns service provider and stockholder interests by motivating and rewarding
performance that will enhance stockholder value.
1.3 Effectiveness and Term. This Plan shall become effective on June 28, 2007 (the Effective
Date), the date of its approval by the holders of at least a majority of the shares of Common
Stock either (a) present or represented and entitled to vote at a special meeting of the
stockholders of Approach duly held in accordance with applicable law or (b) by written action in
lieu of a meeting in accordance with applicable law. Unless terminated earlier by the Board
pursuant to Section 14.1, this Plan shall terminate on the day prior to the tenth anniversary of
the Effective Date.
ARTICLE II. DEFINITIONS
2.1 Affiliate means any corporation, partnership, limited liability company or partnership,
association, trust or other organization which, directly or indirectly, controls, is controlled by,
or is under common control with, Approach. For purposes of the preceding sentence, control
(including, with correlative meanings, the terms controlled by and under common control with),
as used with respect to any entity or organization, shall mean the possession, directly or
indirectly, of the power (a) to vote more than 50% of the securities having ordinary voting power
for the election of directors of the controlled entity or organization, or (b) to direct or cause
the direction of the management and policies of the controlled entity or organization, whether
through the ownership of voting securities or by contract or otherwise.
2.2 Approach means Approach Resources Inc., a Delaware corporation, or any successor
thereto.
2.3 Award means an award granted to a Participant in the form of Options, SARs, Restricted
Stock, Restricted Stock Units, Performance Awards, Stock Awards or Other Incentive Awards, whether
granted singly or in combination.
2.4 Award Agreement means a written agreement between Approach and a Participant that sets
forth the terms, conditions, restrictions and limitations applicable to an Award.
2.5 Board means the Board of Directors of Approach.
2.6 Cash Dividend Right means a contingent right, granted in tandem with a specific
Restricted Stock Unit Award, to receive an amount in cash equal to the cash distributions made by
Approach with respect to a share of Common Stock during the period such Award is outstanding.
2.7 Cause means any of the following: (a) a Participants conviction of, or plea of nolo
contendere to, any felony or to any crime or offense causing substantial harm to Approach or its
Affiliates or involving acts of theft, fraud, embezzlement, moral turpitude or similar conduct; (b)
a Participants repeated intoxication by alcohol or drugs during the performance of his duties in a
manner that materially and adversely affects the Participants performance of such duties; (c)
malfeasance in the conduct of the Participants duties, including, but not limited to (i) willful
and intentional misuse or diversion of funds of Approach or its Affiliates, (ii) embezzlement or
(iii) fraudulent or willful and material misrepresentations or concealments on any written reports
submitted to Approach or its Affiliates; (d) a Participants material violation of any provision of
any employment, nonsolicitation, noncompetition or other agreement with Approach or any of its
Affiliates; or (e) a Participants material failure to perform the duties of the Participants
employment or material failure to follow or comply with the reasonable and lawful written
directives of the Board or senior officers of Approach, in any case under clause (d) or (e) only
after the Participant shall have been informed in writing of such material failure and given a
period of not more than 30 days to remedy same.
2.8 Change of Control means (a) any consolidation or merger of Approach in which Approach is
not the continuing or surviving corporation or pursuant to which shares of Approachs Common Stock
would be converted into cash, securities or other property, other than a merger of Approach in
which the holders of Approachs Common Stock immediately prior to the merger have the same
proportionate ownership of common stock of the surviving corporation immediately after the merger,
(b) any sale, lease, exchange or other transfer (in one transaction or a series of related
transactions) of all or substantially all, of the assets of Approach and its subsidiaries to any
other person or entity (other than an Affiliate of Approach), (c) the stockholders of Approach
approve any plan or proposal for liquidation or dissolution of Approach, (d) any person or entity
(other than Yorktown Energy Partners V, L.P., or any of its affiliated funds), including a group
as contemplated by section 13(d)(3) of the Exchange Act acquires or gains ownership or control
(including, without limitation, power to vote) of more than 50% of the outstanding shares of
Approachs voting stock (based upon voting power) or (e) as a result of or in connection with a
contested election of Directors, the persons who were Directors of Approach before such election
shall cease to constitute a majority of the Board. Notwithstanding the foregoing, a Change of
Control shall not include the initial public offering of the Common Stock.
2.9 Code means the Internal Revenue Code of 1986, as amended from time to time, including
regulations thereunder and successor provisions and regulations.
2.10 Committee means the Compensation Committee of the Board or such other committee of the
Board as may be designated by the Board to administer the Plan, which committee shall consist of
two or more members of the Board; provided, however, that with respect to the application of the
Plan to Awards made to Outside Directors, the Committee shall be the Board. During such time as
the Common Stock is registered under Section 12 of the Exchange Act, each member of the Committee
shall be an Outside Director. To the extent that no Committee exists that has the authority to
administer the Plan, the functions of the Committee shall be exercised by the Board. If for any
reason the appointed Committee does not meet the requirements of Rule 16b-3 or Section 162(m) of
the Code, such noncompliance with such requirements shall not affect the validity of Awards,
grants, interpretations or other actions of the Committee.
- 2 -
2.11 Common Stock means the common stock of Approach, $0.01 par value per share, or any
stock or other securities hereafter issued or issuable in substitution or exchange for the Common
Stock.
2.12 Company means Approach and any Affiliate.
2.13 Disability means (a) the Participant is unable to engage in any substantial gainful
activity by reason of any medically determinable physical or mental impairment that can be expected
to result in death or can be expected to last for a continuous period of not less than 12 months or
(b) the Participant is, by reason of any medically determinable physical or mental impairment that
can be expected to result in death or can be expected to last for a continuous period of not less
than 12 months, receiving income replacement benefits for a period of not less than three months
under an accident or health plan covering employees of Approach or an Affiliate.
2.14 Dividend Unit Right means a contingent right, granted in tandem with a specific
Restricted Stock Unit Award, to have an additional number of Restricted Stock Units credited to a
Participant in respect of the Award equal to the number of shares of Common Stock that could be
purchased at Fair Market Value with the amount of each cash distribution made by Approach with
respect to a share of Common Stock during the period such Award is outstanding.
2.15 Effective Date means the date this Plan becomes effective as provided in Section 1.3.
2.16 Employee means an employee of the Company; provided, however, that the term Employee
does not include an Outside Director or an individual performing services for the Company who is
treated for tax purposes as an independent contractor at the time of performance of services.
2.17 Exchange Act means the Securities Exchange Act of 1934, as amended.
2.18 Fair Market Value means (a) if the Common Stock is listed on any established stock
exchange or a national market system, including without limitation Nasdaq Global Select Market,
Nasdaq Global Market, Nasdaq Capital Market and the New York Stock Exchange, the closing sales
price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or
system for the date of the determination (or if there was no quoted price for such date, then for
the last preceding business day on which there was a quoted price), as reported in The Wall Street
Journal or such other source as the Committee deems reliable, (b) if the Common Stock is regularly
quoted by a recognized securities dealer but selling prices are not reported, the mean between the
high bid and low asked prices for the Common stock for the date of the determination, as reported
in The Wall Street Journal or such other source as the Committee deems reliable or (c) if the
Common Stock is not reported or quoted by any such organization, (i) with respect to Incentive
Stock Options, the fair market value of the Common Stock as determined in good faith by the
Committee within the meaning of Section 422 of the Code or (ii) with respect to other Awards, fair
market value of the Common Stock as determined in good faith by the Committee using a reasonable
application of a reasonable valuation method within the meaning of Section 409A of the Code and
the regulations and other guidance thereunder.
2.19 Grant Date means the date an Award is determined to be effective by the Committee upon
the grant of such Award.
2.20 Inability to Perform means and shall be deemed to have occurred if the Participant has
been determined under the Companys or any co-employers long-term disability plan to be eligible
for long-term disability benefits. In the absence of the Participants participation in,
application for
- 3 -
benefits under, or existence of such a plan, Inability to Perform means a finding by the
Committee in its sole judgment that the Participant is, despite any reasonable accommodation
required by law, unable to perform the essential functions of his position because of an illness or
injury for (a) 60% or more of the normal working days during six consecutive calendar months or (b)
40% or more of the normal working days during twelve consecutive calendar months.
2.21 Incentive Stock Option means an Option that is intended to meet the requirements of
Section 422(b) of the Code.
2.22 NASDAQ means The NASDAQ Stock Market, Inc.
2.23 Nonqualified Stock Option means an Option that is not an Incentive Stock Option.
2.24 Option means an option to purchase shares of Common Stock granted to a Participant
pursuant to Article VII. An Option may be either an Incentive Stock Option or a Nonqualified Stock
Option, as determined by the Committee.
2.25 Other Incentive Award means an incentive award granted to a Participant pursuant to
Article XII.
2.26 Outside Director means a member of the Board who (a) meets the independence
requirements of the principal exchange or quotation system upon which the shares of Common Stock
are listed or quoted, (b) from and after the date on which the remuneration paid (or Awards made)
pursuant to the Plan becomes subject to the deduction limitation under Section 162(m) of the Code,
qualifies as an outside director under Section 162(m) of the Code, (c) qualifies as a
non-employee director of Approach under Rule 16b-3 and (d) satisfies independence criteria under
any other applicable laws or regulations relating to the issuance of shares of Common Stock to
Employees.
2.27 Participant means an Employee, Outside Director or other individual or entity
performing services for the Company that has been granted an Award; provided, however, that no
Award that may be settled in Common Stock may be issued to a Participant that is not a natural
person.
2.28 Performance Award means an Award granted to a Participant pursuant to Article XI to
receive cash or Common Stock conditioned in whole or in part upon the satisfaction of specified
performance criteria.
2.29 Permitted Transferee shall have the meaning given such term in Section 15.4.
2.30 Plan means the Approach Resources Inc. 2007 Stock Incentive Plan, as in effect from
time to time.
2.31 Prior Plan means the Approach Resources Inc. 2003 Stock Option Plan, as in effect prior
to the Effective Date.
2.32 Restricted Period means the period established by the Committee with respect to an
Award of Restricted Stock or Restricted Stock Units during which the Award remains subject to
forfeiture.
2.33 Restricted Stock means a share of Common Stock granted to a Participant pursuant to
Article IX that is subject to such terms, conditions and restrictions as may be determined by the
Committee.
- 4 -
2.34 Restricted Stock Unit means a fictional share of Common Stock granted to a Participant
pursuant to Article X that is subject to such terms, conditions and restrictions as may be
determined by the Committee.
2.35 Rule 16b-3 means Rule 16b-3 promulgated by the SEC under the Exchange Act, or any
successor rule or regulation that may be in effect from time to time.
2.36 SEC means the United States Securities and Exchange Commission, or any successor agency
or organization.
2.37 Securities Act means the Securities Act of 1933, as amended.
2.38 Stock Appreciation Right or SAR means a right granted to a Participant pursuant to
Article VIII with respect to a share of Common Stock to receive upon exercise cash, Common Stock or
a combination of cash and Common Stock, equal to the appreciation in value of a share of Common
Stock.
ARTICLE III. PLAN ADMINISTRATION
3.1 Plan Administrator and Discretionary Authority. The Plan shall be administered by the
Committee. The Committee shall have total and exclusive responsibility to control, operate, manage
and administer the Plan in accordance with its terms. The Committee shall have all the authority
that may be necessary or helpful to enable it to discharge its responsibilities with respect to the
Plan. Without limiting the generality of the preceding sentence, the Committee shall have the
exclusive right to (a) interpret the Plan and the Award Agreements executed hereunder, (b) decide
all questions concerning eligibility for, and the amount of, Awards granted under the Plan, (c)
construe any ambiguous provision of the Plan or any Award Agreement, (d) prescribe the form of
Award Agreements, (e) correct any defect, supply any omission or reconcile any inconsistency in the
Plan or any Award Agreement, (f) issue administrative guidelines as an aid to administering the
Plan and make changes in such guidelines as the Committee from time to time deems proper, (g) make
regulations for carrying out the Plan and make changes in such regulations as the Committee from
time to time deems proper, (h) determine whether Awards should be granted singly or in combination,
(i) to the extent permitted under the Plan, grant waivers of Plan terms, conditions, restrictions
and limitations, (j) accelerate the exercise, vesting or payment of an Award when such action or
actions would be in the best interests of the Company, (k) require Participants to hold a stated
number or percentage of shares of Common Stock acquired pursuant to an Award for a stated period
and (l) take any and all other actions the Committee deems necessary or advisable for the proper
operation or administration of the Plan. The Committee shall have authority in its sole discretion
with respect to all matters related to the discharge of its responsibilities and the exercise of
its authority under the Plan, including without limitation its construction of the terms of the
Plan and its determination of eligibility for participation in, and the terms of Awards granted
under, the Plan. The decisions of the Committee and its actions with respect to the Plan shall be
final, conclusive and binding on all persons having or claiming to have any right or interest in or
under the Plan, including without limitation Participants and their respective Permitted
Transferees, estates, beneficiaries and legal representatives. In the case of an Award intended to
be eligible for the performance-based compensation exemption under section 162(m) of the Code, the
Committee shall exercise its discretion consistent with qualifying the Award for such exemption.
3.2 Liability; Indemnification. No member of the Committee, nor any person to whom it has
delegated authority, shall be personally liable for any action, interpretation or determination
made in good faith with respect to the Plan or Awards granted hereunder, and each member of the
Committee (or delegatee of the Committee) shall be fully indemnified and protected by Approach with
respect to any
- 5 -
liability he may incur with respect to any such action, interpretation or determination, to
the maximum extent permitted by applicable law.
ARTICLE IV. SHARES SUBJECT TO THE PLAN
4.1 Available Shares.
(a) Subject to adjustment as provided in Sections 4.2, the maximum number of shares of
Common Stock that shall be available for grant of Awards under the Plan shall be (i) ten
percent of the outstanding shares of Common Stock, as adjusted on the first business day
after the closing of the initial public offering of the Common Stock and thereafter on the
first business day of each calendar year, plus (ii) all shares of Common Stock that, as of
the Effective Date, remain available for grant of awards under the Prior Plan, plus (iii)
shares of Common Stock subject to outstanding awards under the Prior Plan on the Effective
Date, that later cease to be subject to such awards for any reason other than such awards
having been exercised. In addition, subject to adjustment as provided in Section 4.2,
115,385 shares of Common Stock covered by awards granted under the Prior Plan and
outstanding as of the Effective Date, shall be available for issuance under this Plan, but
shall available for grant of Awards under this Plan only as provided in (iii) above. If an
Award granted under this Plan expires, is forfeited or becomes unexercisable for any reason
without having been exercised in full, the undelivered shares of Common Stock which were
subject to the Award shall, unless the Plan shall have been terminated, become available for
future Awards under the Plan.
(b) The maximum number of shares of Common Stock that may be subject to Incentive Stock
Options granted under the Plan is 1,100,000. The maximum number of shares of Common Stock
that may be subject to all Awards granted under the Plan to any one Participant each fiscal
year is 330,000 shares. The maximum number of shares of Common Stock that may be subject to
Nonqualified Stock Options and SARs granted under the Plan to any one Participant during a
fiscal year is 330,000. The limitations provided in this Section 4.1(b) shall be subject to
adjustment as provided in Section 4.2.
(c) Shares of Common Stock issued pursuant to the Plan may be original issue or
treasury shares or a combination of the foregoing, as the Committee, in its sole discretion,
shall from time to time determine. During the term of this Plan, Approach will at all times
reserve and keep available such number of shares of Common Stock as shall be sufficient to
satisfy the requirements of the Plan.
(d) Notwithstanding any provision of this Plan to the contrary, the Board or the
Committee shall have the right to substitute or assume awards in connection with mergers,
reorganizations, separations or other transactions to which Section 424(a) of the Code
applies, provided such substitutions or assumptions are permitted by Section 424 of the Code
(or, if applicable, Section 409A of the Code) and the regulations promulgated thereunder.
4.2 Adjustments for Recapitalizations and Reorganizations. Subject to Article XIII, if there
is any change in the number or kind of shares of Common Stock outstanding (a) by reason of a stock
dividend, spin-off, recapitalization, stock split or combination or exchange of shares, (b) by
reason of a merger, reorganization or consolidation, (c) by reason of a reclassification or change
in par value or (d) by reason of any other extraordinary or unusual event affecting the outstanding
Common Stock as a class without Approachs receipt of consideration, or if the value of outstanding
shares of Common Stock is reduced as a result of a spin-off or Approachs payment of an
extraordinary cash dividend, or distribution or dividend or distribution consisting of any assets
of Approach other than cash, the maximum number
- 6 -
and kind of shares of Common Stock available for issuance under the Plan, the maximum number
and kind of shares of Common Stock for which any individual may receive Awards in any fiscal year
or under the Plan, the number and kind of shares of Common Stock covered by outstanding Awards, and
the price per share or the applicable market value or performance target of such Awards will be
appropriately adjusted by the Committee to reflect any increase or decrease in the number of, or
change in the kind or value of, issued shares of Common Stock to preclude, to the extent
practicable, the enlargement or dilution of rights under such Awards; provided, however, that any
fractional shares resulting from such adjustment shall be eliminated; provided, further, that the
number and kind of shares of Common Stock available for issuance as Incentive Stock Options under
the Plan shall be adjusted only in accordance with Sections 422 and 424 of the Code and the
regulations thereunder.
4.3 Adjustments for Awards. The Committee shall have sole discretion to determine the manner
in which shares of Common Stock available for grant of Awards under the Plan are counted. Without
limiting the discretion of the Committee under this Section 4.3, unless otherwise determined by the
Committee, the following rules shall apply for the purpose of determining the number of shares of
Common Stock available for grant of Awards under the Plan:
(a) Options, Restricted Stock and Stock Awards. The grant of Options, Restricted Stock
or Stock Awards shall reduce the number of shares of Common Stock available for grant of
Awards under the Plan by the number of shares of Common Stock subject to such an Award.
(b) SARs. The grant of SARs that may be paid or settled (i) only in Common Stock or
(ii) in either cash or Common Stock shall reduce the number of shares available for grant of
Awards under the Plan by the number of shares subject to such an Award; provided, however,
that upon the exercise of SARs, the excess of the number of shares of Common Stock with
respect to which the Award is exercised over the number of shares of Common Stock issued
upon exercise of the Award shall again be available for grant of Awards under the Plan. The
grant of SARs that may be paid or settled only for cash shall not affect the number of
shares available for grant of Awards under the Plan.
(c) Restricted Stock Units. The grant of Restricted Stock Units (including those
credited to a Participant in respect of a Dividend Unit Right) that may be paid or settled
(i) only in Common Stock or (ii) in either cash or Common Stock shall reduce the number of
shares available for grant of Awards under the Plan by the number of shares subject to such
an Award; provided, however, that upon settlement of the Award, the excess, if any, of the
number of shares of Common Stock that had been subject to such Award over the number of
shares of Common Stock issued upon its settlement shall again be available for grant of
Awards under the Plan. The grant of Restricted Stock Units that may be paid or settled only
for cash shall not affect the number of shares available for grant of Awards under the Plan.
(d) Performance Awards and Other Incentive Awards. The grant of a Performance Award or
Other Incentive Award in the form of Common Stock or that may be paid or settled (i) only in
Common Stock or (ii) in either Common Stock or cash shall reduce the number of shares
available for grant of Awards under the Plan by the number of shares subject to such an
Award; provided, however, that upon settlement of the Award, the excess, if any, of the
number of shares of Common Stock that had been subject to such Award over the number of
shares of Common Stock issued upon its settlement shall again be available for grant of
Awards under the Plan. The grant of a Performance Award or Other Incentive Award that may
be paid or settled only for cash shall not affect the number of shares available for grant
of Awards under the Plan.
- 7 -
(e) Cancellation, Forfeiture and Termination. If any Award referred to in Sections
4.3(a), (b), (c) or (d) (other than an Award that may be paid or settled only for cash) is
canceled or forfeited, or terminates, expires or lapses, for any reason, the shares then
subject to such Award shall again be available for grant of Awards under the Plan.
(f) Payment of Exercise Price and Withholding Taxes. If shares of Common Stock are
used to pay the exercise price of an Award, the number of shares available for grant of
Awards under the Plan shall be increased by the number of shares delivered as payment of
such exercise price. If shares of Common Stock are used to pay withholding taxes payable
upon exercise, vesting or payment of an Award, or shares of Common Stock that would be
acquired upon exercise, vesting or payment of an Award are withheld to pay withholding taxes
payable upon exercise, vesting or payment of such Award, the number of shares available for
grant of Awards under the Plan shall be increased by the number of shares delivered or
withheld as payment of such withholding taxes.
ARTICLE V. ELIGIBILITY
The Committee shall select Participants from those Employees, Outside Directors and other
individuals or entities providing services to the Company that, in the opinion of the Committee,
are in a position to make a significant contribution to the success of the Company. Once a
Participant has been selected for an Award by the Committee, the Committee shall determine the type
and size of Award to be granted to the Participant and shall establish in the related Award
Agreement the terms, conditions, restrictions and limitations applicable to the Award, in addition
to those set forth in the Plan and the administrative guidelines and regulations, if any,
established by the Committee.
ARTICLE VI. FORM OF AWARDS
6.1 Form of Awards. Awards may be granted under the Plan, in the Committees sole discretion,
in the form of Options pursuant to Article VII, SARs pursuant to Article VIII, Restricted Stock
pursuant to Article IX, Restricted Stock Units pursuant to Article X, Performance Awards pursuant
to Article XI and Stock Awards and Other Incentive Awards pursuant to Article XII, or a combination
thereof. All Awards shall be subject to the terms, conditions, restrictions and limitations of the
Plan. The Committee may, in its sole discretion, subject any Award to such other terms,
conditions, restrictions and/or limitations (including without limitation the time and conditions
of exercise, vesting or payment of an Award and restrictions on transferability of any shares of
Common Stock issued or delivered pursuant to an Award), provided they are not inconsistent with the
terms of the Plan. The Committee may, but is not required to, subject an Award to such conditions
as it determines are necessary or appropriate to ensure than an Award constitutes qualified
performance based compensation within the meaning of Section 162(m) of the Code and the
regulations thereunder. Awards under a particular Article of the Plan need not be uniform, and
Awards under more than one Article of the Plan may be combined in a single Award Agreement. Any
combination of Awards may be granted at one time and on more than one occasion to the same
Participant. Subject to compliance with applicable tax law, an Award Agreement may provide that a
Participant may elect to defer receipt of income attributable to the exercise or vesting of an
Award.
6.2 No Repricing or Reload Rights. Except for adjustments made pursuant to Section 4.2, no
Award may be repriced, replaced, regranted through cancellation or otherwise modified without
stockholder approval, if the effect would be to reduce the exercise price for the shares underlying
such Award. The Committee may not cancel an outstanding Option that is under water for the purpose
of granting a replacement Award of a different type.
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6.3 Loans. The Committee may, in its sole discretion, approve the extension of a loan by the
Company to a Participant who is an Employee to assist the Participant in paying the exercise price
or purchase price of an Award; provided, however, that no loan shall be permitted if the extension
of such loan would violate any provision of applicable law. Any loan will be made upon such terms
and conditions as the Committee shall determine.
ARTICLE VII. OPTIONS
7.1 General. Awards may be granted in the form of Options that may be Incentive Stock Options
or Nonqualified Stock Options, or a combination of both; provided, however, that Incentive Stock
Options may be granted only to employees of Approach or a parent corporation or a subsidiary
corporation of Approach, as those terms are defined in Sections 424(e) and (f) of the Code,
respectively. Nonqualified Stock Options may be granted only to Employees, Outside Directors or
other individuals or entities performing services for a corporation or other type of entity in a
chain of corporations or other entities, starting with Approach, in which each corporation or other
entity has a controlling interest in another corporation or entity in the chain, but not
corporations or other entities in the chain below the corporation or other entity for which the
Employees, Outside Directors or other individuals or entities are providing services on the date of
grant of the Nonqualified Stock Options. For purposes of this Section, controlling interest
means (i) in the case of a corporation, ownership of stock possessing at least 50% of total
combined voting power of all classes of stock entitled to vote of such corporation or at least 50%
of the total value of shares of all classes of stock of such corporation; (ii) in the case of a
partnership, ownership of at least 50% of the profits interest or capital interest of such
partnership; (iii) in the case of a sole proprietorship, ownership of the sole proprietorship; or
(iv) in the case of a trust or estate, ownership of an actuarial interest (as defined in Treasury
Regulation Section 1.414(c)-2(b)(2)(ii)) of at least 50% of such trust or estate.
7.2 Terms and Conditions of Options. An Option shall be exercisable in whole or in such
installments and at such times as may be determined by the Committee. The price at which a share
of Common Stock may be purchased upon exercise of an Option shall be determined by the Committee,
but such exercise price shall not be less than 100% of the Fair Market Value per share of Common
Stock on the Grant Date unless the Option is granted through the assumption of, or in substitution
for, outstanding awards previously granted to individuals who became Employees (or other service
providers) as a result of a merger, consolidation, acquisition or other corporate transaction
involving the Company and complies with Section 409A of the Code. Except as otherwise provided
in Section 7.3, the term of each Option shall be as specified by the Committee; provided, however,
that no Options shall be exercisable later than 10 years after the Grant Date. Options may be
granted with respect to Restricted Stock or shares of Common Stock that are not Restricted Stock,
as determined by the Committee in its sole discretion.
7.3 Restrictions Relating to Incentive Stock Options.
(a) Options granted in the form of Incentive Stock Options shall, in addition to being
subject to the terms and conditions of Section 7.2, comply with Section 422(b) of the Code.
To the extent the aggregate Fair Market Value (determined as of the dates the respective
Incentive Stock Options are granted) of Common Stock with respect to which Incentive Stock
Options are exercisable for the first time by an individual during any calendar year under
all incentive stock option plans of Approach and its parent and subsidiary corporations
exceeds $100,000, such excess Incentive Stock Options shall be treated as options that do
not constitute Incentive Stock Options. The Committee shall determine, in accordance with
the applicable provisions of the Code, which of a Participants Incentive Stock Options will
not constitute Incentive Stock Options because of such limitation and shall notify the
Participant of such determination as soon
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as practicable after such determination. The price at which a share of Common Stock may be
purchased upon exercise of an Incentive Stock Option shall be determined by the Committee,
but such exercise price shall not be less than 100% of the Fair Market Value of a share of
Common Stock on the Grant Date. No Incentive Stock Option shall be granted to an Employee
under the Plan if, at the time such Option is granted, such Employee owns stock possessing
more than 10% of the total combined voting power of all classes of stock of Approach or of
its parent or subsidiary corporations, within the meaning of Section 422(b)(6) of the Code,
unless (i) on the Grant Date of such Option, the exercise price of such Option is at least
110% of the Fair Market Value of the Common Stock subject to the Option and (ii) such Option
by its terms is not exercisable after the expiration of five years from the Grant Date of
the Option.
(b) Each Participant awarded an Incentive Stock Option shall notify Approach in writing
immediately after the date he or she makes a disqualifying disposition of any shares of
Common Stock acquired pursuant to the exercise of such Incentive Stock Option. A
disqualifying disposition is any disposition (including any sale) of such Common Stock
before the later of (i) two years after the Grant Date of the Incentive Stock Option or (ii)
one year after the date of exercise of the Incentive Stock Option.
7.4 Exercise of Options.
(a) Subject to the terms and conditions of the Plan, Options shall be exercised by the
delivery of a written notice of exercise to Approach, setting forth the number of whole
shares of Common Stock with respect to which the Option is to be exercised, accompanied by
full payment for such shares.
(b) Upon exercise of an Option, the exercise price of the Option shall be payable to
Approach in full either (i) in cash or an equivalent acceptable to the Committee, (ii) in
the sole discretion of the Committee and in accordance with any applicable administrative
guidelines established by the Committee, (A) by tendering one or more previously acquired
nonforfeitable, unrestricted shares of Common Stock having an aggregate Fair Market Value at
the time of exercise equal to the total exercise price or (B) by surrendering a sufficient
portion of the shares with respect to which the Option is exercised having an aggregate Fair
Market Value at the time of exercise equal to the total exercise price or (iii) in a
combination of the forms specified in (i) or (ii) of this subsection; provided, however,
that payment of the exercise price by means of tendering or surrendering shares of Common
Stock shall not be permitted when the same may, in the reasonable opinion of the Committee,
cause Approach to record a loss or expense as a result thereof.
(c) During such time as the Common Stock is registered under Section 12 of the Exchange
Act, to the extent permissible under applicable law, payment of the exercise price of an
Option may also be made, in the absolute discretion of the Committee, by delivery to
Approach or its designated agent of an executed irrevocable option exercise form together
with irrevocable instructions to a broker-dealer to sell or margin a sufficient portion of
the shares with respect to which the Option is exercised and deliver the sale or margin loan
proceeds directly to Approach to pay the exercise price and any required withholding taxes.
(d) As soon as reasonably practicable after receipt of written notification of exercise
of an Option and full payment of the exercise price and any required withholding taxes,
Approach shall (i) deliver to the Participant, in the Participants name or the name of the
Participants designee, a stock certificate or certificates in an appropriate aggregate
amount based upon the number of shares of Common Stock purchased under the Option or (ii)
cause to be issued in the
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Participants name or the name of the Participants designee, in book-entry form, an
appropriate number of shares of Common Stock based upon the number of shares purchased under
the Option.
7.5 Termination of Employment or Service. Each Award Agreement embodying the Award of an
Option shall set forth the extent to which the Participant shall have the right to exercise the
Option following termination of the Participants employment or service with the Company. Such
provisions shall be determined by the Committee in its absolute discretion, need not be uniform
among all Options granted under the Plan and may reflect distinctions based on the reasons for
termination of employment or service. In the event a Participants Award Agreement embodying the
award of an Option does not set forth such termination provisions, the following termination
provisions shall apply with respect to such Award:
(a) Termination For Cause. If the employment or service of a Participant shall
terminate for Cause, each outstanding Option held by the Participant shall automatically
terminate as of the date of such termination of employment or service, and the right to
exercise the Option shall immediately terminate.
(c) Termination By Reason of Death or Disability. In the event of a Participants
death or Disability while employed by or in the service of Approach or an Affiliate, each
outstanding Option shall remain outstanding and may be exercised by the person who acquires
the Option by will or the laws of descent and distribution, or by the Participant, as the
case may be, but only (i) within the one year period following the date of death or
Disability (if otherwise prior to the date of expiration of the Option), and not thereafter,
and (ii) to purchase the number of shares of Common Stock that were subject to purchase upon
exercise of the Option at the time of such death or Disability, plus the number of shares of
Common Stock that would have become purchasable upon the next vesting date.
(c) Termination For Reasons Other Than Cause, Death or Disability. If a Participants
employment or service with Approach and its Affiliates is terminated voluntarily by the
Participant or by action of Approach or an Affiliate for reasons other than for Cause, an
Option may be exercised, but only (i) within three months after such termination (if
otherwise prior to the date of expiration of the Option), and not thereafter, and (ii) to
purchase the number of shares of Common Stock, if any, that could be purchased upon exercise
of the Option at the date of termination of the Participants employment or service.
Notwithstanding the foregoing, an Option will not be treated as an Incentive Stock Option unless at
all times beginning on the Grant Date and ending on the day three months (one year in the case of a
Participant who is disabled within the meaning of Section 22(e)(3) of the Code) before the date
of exercise of the Option, the Participant is an employee of Approach or a parent corporation or
a subsidiary corporation of Approach, as those terms are defined in Sections 424(e) and (f) of
the Code, respectively (or a corporation or a parent or subsidiary corporation of such corporation
issuing or assuming an option in a transaction to which Section 424(a) of the Code applies).
ARTICLE VIII. STOCK APPRECIATION RIGHTS
8.1 General.
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(a) The Committee may grant Awards in the form of SARs in such numbers and at such
times as it shall determine. SARs shall vest and be exercisable in whole or in such
installments and at such times as may be determined by the Committee. The price at which
SARs may be exercised shall be determined by the Committee but shall not be less than 100%
of the Fair Market Value per share of Common Stock on the Grant Date unless the SARs are
granted through the assumption of, or in substitution for, outstanding awards previously
granted to individuals who became Employees (or other service providers) as a result of a
merger, consolidation, acquisition or other corporate transaction involving the Company and
comply with Section 409A of the Code. The term of each SAR shall be as specified by the
Committee; provided, however, that no SARs shall be exercisable later than 10 years after
the Grant Date. At the time of an Award of SARs, the Committee may, in its sole discretion,
prescribe additional terms, conditions, restrictions and limitations applicable to the SARs,
including without limitation rules pertaining to the termination of employment or service
(by reason of death, permanent and total disability, or otherwise) of a Participant prior to
exercise of the SARs, as it determines are necessary or appropriate, provided they are not
inconsistent with the Plan.
(b) SARs may be granted only to an Employee, Outside Director or other individual or
entity performing services for a corporation or other type of entity in a chain of
corporations or other entities, starting with Approach, in which each corporation or other
entity has a controlling interest in another corporation or entity in the chain, but not
corporations or other entities in the chain below the corporation or other entity for which
the Employee, Outside Director or other individual or entity is providing services on the
date of grant of the SARs. For purposes of this subsection, controlling interest means
(i) in the case of a corporation, ownership of stock possessing at least 50% of total
combined voting power of all classes of stock entitled to vote of such corporation or at
least 50% of the total value of shares of all classes of stock of such corporation; (ii) in
the case of a partnership, ownership of at least 50% of the profits interest or capital
interest of such partnership; (iii) in the case of a sole proprietorship, ownership of the
sole proprietorship; or (iv) in the case of a trust or estate, ownership of an actuarial
interest (as defined in Treasury Regulation Section 1.414(c)-2(b)(2)(ii)) of at least 50% of
such trust or estate.
8.2 Exercise of SARs. SARs shall be exercised by the delivery of a written notice of exercise
to Approach, setting forth the number of whole shares of Common Stock with respect to which the
Award is being exercised. Upon the exercise of SARs, the Participant shall be entitled to receive
an amount equal to the excess of the aggregate Fair Market Value of the shares of Common Stock with
respect to which the Award is exercised (determined as of the date of such exercise) over the
aggregate exercise price of such shares. Such amount shall be payable to the Participant in cash
or in shares of Common Stock, as provided in the Award Agreement.
ARTICLE IX. RESTRICTED STOCK
9.1 General. Awards may be granted in the form of Restricted Stock in such numbers and at
such times as the Committee shall determine. The Committee shall impose such terms, conditions and
restrictions on Restricted Stock as it may deem advisable, including without limitation providing
for vesting upon the achievement of specified performance goals pursuant to a Performance Award and
restrictions under applicable Federal or state securities laws. A Participant shall not be
required to make any payment for Restricted Stock unless required by the Committee pursuant to
Section 9.2.
9.2 Purchased Restricted Stock. The Committee may in its sole discretion require a
Participant to pay a stipulated purchase price for each share of Restricted Stock.
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9.3 Restricted Period. At the time an Award of Restricted Stock is granted, the Committee
shall establish a Restricted Period applicable to such Restricted Stock. Each Award of Restricted
Stock may have a different Restricted Period in the sole discretion of the Committee.
9.4 Other Terms and Conditions. Restricted Stock shall constitute issued and outstanding
shares of Common Stock for all corporate purposes. Restricted Stock awarded to a Participant under
the Plan shall be registered in the name of the Participant or, at the option of Approach, in the
name of a nominee of Approach, and shall be issued in book-entry form or represented by a stock
certificate. Subject to the terms and conditions of the Award Agreement, a Participant to whom
Restricted Stock has been awarded shall have the right to receive dividends thereon during the
Restricted Period, to vote the Restricted Stock and to enjoy all other stockholder rights with
respect thereto, except that (a) Approach shall retain custody of any certificates evidencing the
Restricted Stock during the Restricted Period and (b) the Participant may not sell, transfer,
pledge, exchange, hypothecate or otherwise dispose of the Restricted Stock during the Restricted
Period. A breach of the terms and conditions established by the Committee pursuant to the Award of
the Restricted Stock may result in a forfeiture of the Restricted Stock. At the time of an Award
of Restricted Stock, the Committee may, in its sole discretion, prescribe additional terms,
conditions, restrictions and limitations applicable to the Restricted Stock, including without
limitation rules pertaining to the termination of employment or service (by reason of death,
permanent and total disability, retirement, cause or otherwise) of a Participant prior to
expiration of the Restricted Period.
9.5 Miscellaneous. Nothing in this Article shall prohibit the exchange of shares of
Restricted Stock pursuant to a plan of merger or reorganization for stock or other securities of
Approach or another corporation that is a party to the reorganization, provided that the stock or
securities so received in exchange for shares of Restricted Stock shall, except as provided in
Article XIII, become subject to the restrictions applicable to such Restricted Stock. Any shares
of Common Stock received as a result of a stock split or stock dividend with respect to shares of
Restricted Stock shall also become subject to the restrictions applicable to such Restricted Stock.
ARTICLE X. RESTRICTED STOCK UNITS
10.1 General. Awards may be granted in the form of Restricted Stock Units in such numbers and
at such times as the Committee shall determine. The Committee shall impose such terms, conditions
and restrictions on Restricted Stock Units as it may deem advisable, including without limitation
prescribing the period over which and the conditions upon which a Restricted Stock Unit may become
vested or be forfeited, and providing for vesting upon the achievement of specified performance
goals pursuant to a Performance Award. Upon the lapse of restrictions with respect to each
Restricted Stock Unit, the Participant shall be entitled to receive one share of Common Stock or an
amount of cash equal to the Fair Market Value of one share of Common Stock, as provided in the
Award Agreement. A Participant shall not be required to make any payment for Restricted Stock
Units.
10.2 Restricted Period. At the time an Award of Restricted Stock Units is granted, the
Committee shall establish a Restricted Period applicable to such Restricted Stock Units. Each
Award of Restricted Stock Units may have a different Restricted Period in the sole discretion of
the Committee.
10.3 Cash Dividend Rights and Dividend Unit Rights. To the extent provided by the Committee
in its sole discretion, a grant of Restricted Stock Units may include a tandem Cash Dividend Right
or Dividend Unit Right grant. A grant of Cash Dividend Rights may provide that such Cash Dividend
Rights shall be paid directly to the Participant at the time of payment of related dividend, be
credited to a bookkeeping account subject to the same vesting and payment provisions as the tandem
Award (with or without interest in the sole discretion of the Committee), or be subject to such
other
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provisions or restrictions as determined by the Committee in its sole discretion. A grant of
Dividend Unit Rights may provide that such Dividend Unit Rights shall be subject to the same
vesting and payment provisions as the tandem Award or be subject to such other provisions and
restrictions as determined by the Committee in its sole discretion.
10.4 Other Terms and Conditions. At the time of an Award of Restricted Stock Units, the
Committee may, in its sole discretion, prescribe additional terms, conditions, restrictions and
limitations applicable to the Restricted Stock Units, including without limitation rules pertaining
to the termination of employment or service (by reason of death, Disability, retirement, Cause or
otherwise) of a Participant prior to expiration of the Restricted Period.
ARTICLE XI. PERFORMANCE AWARDS
11.1 General. Awards may be granted in the form of Performance Awards that may be payable in
the form of cash, shares of Common Stock or a combination of both, in such amounts and at such
times as the Committee shall determine. Performance Awards shall be conditioned upon the level of
achievement of one or more stated performance goals over a specified performance period that shall
not be shorter than one year. Performance Awards may be combined with other Awards to impose
performance criteria as part of the terms of such other Awards.
11.2 Terms and Conditions. Each Award Agreement embodying a Performance Award shall set forth
(a) the amount, including a target and maximum amount if applicable, a Participant may earn in the
form of cash or shares of Common Stock or a formula for determining such amount, (b) the
performance criteria and level of achievement versus such criteria that shall determine the amount
payable or number of shares of Common Stock to be granted, issued, retained and/or vested, (c) the
performance period over which performance is to be measured, (d) the timing of any payments to be
made, (e) restrictions on the transferability of the Award and (f) such other terms and conditions
as the Committee may determine that are not inconsistent with the Plan.
11.3 Code Section 162(m) Requirements. From and after the date on which remuneration paid (or
Awards granted) pursuant to the Plan becomes subject to the deduction limitation of Section 162(m)
of the Code, the Committee shall determine in its sole discretion whether all or any portion of a
Performance Award shall be intended to satisfy the requirements for performance-based
compensation under Section 162(m) of the Code (the 162(m) Requirements). The performance
criteria for any Performance Award that is intended to satisfy the 162(m) Requirements shall be
established in writing by the Committee based on one or more performance goals as set forth in
Section 11.4 not later than 90 days after commencement of the performance period with respect to
such Award, provided that the outcome of the performance in respect of the goals remains
substantially uncertain as of such time. The maximum amount that may be paid in cash pursuant to
Performance Awards granted to a Participant with respect to a Approachs fiscal year that are
intended to satisfy the 162(m) Requirements is $5,000,000; provided, however, that such maximum
amount with respect to a Performance Award that provides for a performance period longer than one
fiscal year shall be the foregoing limit multiplied by the number of full fiscal years in the
performance period. At the time of the grant of a Performance Award and to the extent permitted
under Code Section 162(m) and regulations thereunder for a Performance Award intended to satisfy
the 162(m) Requirements, the Committee may provide for the manner in which the performance goals
will be measured in light of specified corporate transactions, extraordinary events, accounting
changes and other similar occurrences.
11.4 Performance Goals. The performance measure(s) to be used for purposes of Performance
Awards may be described in terms of objectives that are related to the individual Participant or
objectives that are Company-wide or related to a subsidiary, division, department, region, function
or
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business unit of the Company in which the Participant is employed or with respect to which the
Participant performs services, and may consist of one or more or any combination of the following
criteria: (a) earnings or earnings per share (whether on a pre-tax, after-tax, operational or
other basis), (b) return on equity, (c) return on assets or net assets, (d) return on capital or
invested capital and other related financial measures, (e) cash flow or EBITDA or EBITDAX, (f)
revenues, (g) income or operating income, (h) expenses or costs or expense levels or cost levels
(absolute or per unit), (i) one or more operating ratios, (j) stock price, (k) total stockholder
return, (l) operating profit, (m) profit margin, (n) capital expenditures, (o) net borrowing, debt
leverage levels, credit quality or debt ratings, (p) the accomplishment of mergers, acquisitions,
dispositions, public offerings or similar extraordinary business transactions, (q) net asset value
per share, (r) economic value added, (s) individual business objectives, (t) growth in production,
(u) growth in reserves, (v) reserve replacement ratio and/or (w) finding and development cost per
unit. The performance goals based on these performance measures may be made relative to the
performance of other business entities.
11.5 Certification and Negative Discretion. Prior to the payment of any compensation pursuant
to a Performance Award that is intended to satisfy the 162(m) Requirements, the Committee shall
certify the extent to which the performance goals and other material terms of the Award have been
achieved or satisfied. The Committee in its sole discretion shall have the authority to reduce,
but not to increase, the amount payable and the number of shares to be granted, issued, retained or
vested pursuant to a Performance Award.
ARTICLE XII. STOCK AWARDS AND OTHER INCENTIVE AWARDS
12.1 Stock Awards. Stock Awards may be granted to Participants upon such terms and conditions
as the Committee may determine. Shares of Common Stock issued pursuant to Stock Awards may be
issued for cash consideration or for no cash consideration. The Committee shall determine the
number of shares of Common Stock to be issued pursuant to a Stock Award.
12.2 Other Incentive Awards. Other Incentive Awards may be granted in such amounts, upon such
terms and at such times as the Committee shall determine. Other Incentive Awards may be granted
based upon, payable in or otherwise related to, in whole or in part, shares of Common Stock if the
Committee, in its sole discretion, determines that such Other Incentive Awards are consistent with
the purposes of the Plan. Each grant of an Other Incentive Award shall be evidenced by an Award
Agreement that shall specify the amount of the Other Incentive Award and the terms, conditions,
restrictions and limitations applicable to such Award. Payment of Other Incentive Awards shall be
made at such times and in such form, which may be cash, shares of Common Stock or other property
(or a combination thereof), as established by the Committee, subject to the terms of the Plan.
ARTICLE XIII. CHANGE OF CONTROL
13.1 Vesting of Awards. Except as provided otherwise in an Award Agreement at the time an
Award is granted, notwithstanding any provision of this Plan to the contrary, in the event of a
Change of Control, any time periods, conditions or contingencies relating to the exercise or
realization of, or lapse of restrictions under, an Award granted hereunder shall be accelerated or
waived (assuming with respect to any Performance Awards, all performance criteria and other
conditions are achieved or fulfilled to the maximum extent possible) so that:
(a) if no exercise of the Award is required, the Award may be realized in full at the
time of the occurrence of the Change of Control (the Change Effective Time) or
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(b) if exercise of the Award is required, the Award may be exercised in full at the
Change Effective Time;
provided, however, that with respect to any Award that consists of deferred compensation within the
meaning of Section 409A of the Code, in the event of a Change of Control that does not satisfy the
requirements for a change in the ownership or effective control of Approach or a change in the
ownership of a substantial portion of the assets of Approach within the meaning of Section 409A of
the Code and Treasury guidance and regulations thereunder, then delivery of payment with respect to
such Award as provided herein shall be made upon the earliest of (i) the Participants separation
from service (within the meaning of Code Section 409A and the regulations thereunder), (ii) the
Participants becoming disabled (within the meaning of Code Section 409A(a)(2)(C)), (iii) the
Participants death or (iv) a Change of Control that does satisfy the requirements for a change in
the ownership or effective control of Approach or a change in the ownership of a substantial
portion of the assets of Approach within the meaning of Section 409A of the Code and Treasury
guidance and regulations thereunder; provided, however, that delivery of payment upon separation
from service to a Participant who is a specified employee (as defined in Code Section 409A and
the regulations thereunder) as of the date of his or her separation from service shall be delayed
for a period of six months after the Participants separation from service (or, if earlier than the
end of the six-month period, the date of death of the Participant).
13.2 Assumption of Awards. Upon a Change of Control where Approach is not the surviving
corporation (or survives only as a subsidiary of another corporation), unless the Committee
determines otherwise, all outstanding Options that are not exercised before the Change of Control
will be assumed by or replaced with comparable options or rights in the surviving corporation (or a
parent of the surviving corporation) in accordance with Section 424(a) of the Code and the
regulations thereunder, and other outstanding Awards will be converted into similar awards of the
surviving corporation (or a parent of the surviving corporation).
13.3 Cancellation of Awards. Notwithstanding the foregoing, in the event of a Change of
Control of Approach, then the Committee, in its discretion, may, no later than the effective time
of such Change of Control, require any Participant holding an Award to surrender such Award in
exchange for (a) with respect to each share of Common Stock subject to an Option or SAR (whether or
not vested), payment by the Company (or a successor), in cash, of an amount equivalent to the
excess of the value of the consideration received for each share of Common Stock by holders of
Common Stock in connection with such Change of Control (the Change of Control Consideration) over
the exercise price or grant price per share, (b) with respect to each share of Common Stock subject
to an Award of Restricted Stock Units or Other Incentive Awards, and related Cash Dividend Rights
and Dividend Unit Rights (if applicable), payment by the Company (or a successor), in cash, of an
amount equivalent to the value of any such Cash Dividend Rights and Dividend Unit Rights plus the
value of the Change of Control Consideration for each share covered by the Award, assuming all
restrictions or limitations (including risks of forfeiture) have lapsed and (c) with respect to a
Performance Award, payment by the Company (or a successor), in cash, of an amount equivalent to the
value of such Award, as determined by the Committee, taking into account, to the extent applicable,
the Change of Control Consideration, and assuming all performance criteria and other conditions to
payment of such Awards are achieved or fulfilled to the maximum extent possible. Payments made
upon a Change of Control pursuant to this Section shall be made no later than the date on which the
Change of Control occurs. Notwithstanding the foregoing, with respect to any Award that consists
of deferred compensation within the meaning of Section 409A of the Code, in the event of a Change
of Control that does not satisfy the requirements for a change in the ownership or effective
control of Approach or a change in the ownership of a substantial portion of the assets of Approach
within the meaning of Section 409A of the Code and Treasury guidance and regulations thereunder,
then delivery of payment with respect to such Award as provided herein shall be made upon the
earliest of (i) the Participants separation from service (within the meaning of Code
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Section 409A and the regulations thereunder), (ii) the Participants becoming disabled (within the
meaning of Code Section 409A(a)(2)(C)), (iii) the Participants death or (iv) a Change of Control
that does satisfy the requirements for a change in the ownership or effective control of Approach
or a change in the ownership of a substantial portion of the assets of Approach within the meaning
of Section 409A of the Code and Treasury guidance and regulations thereunder; provided, however,
that delivery of payment upon separation from service to a Participant who is a specified
employee (as defined in Code Section 409A and the regulations thereunder) as of the date of his or
her separation from service shall be delayed for a period of six months after the Participants
separation from service (or, if earlier than the end of the six-month period, the date of death of
the Participant).
ARTICLE XIV. AMENDMENT AND TERMINATION
14.1 Plan Amendment and Termination. The Board may at any time suspend, terminate, amend or
modify the Plan, in whole or in part; provided, however, that no amendment or modification of the
Plan shall become effective without the approval of such amendment or modification by the holders
of at least a majority of the shares of Common Stock if (a) such amendment or modification
increases the maximum number of shares subject to the Plan (except as provided in Article IV) or
changes the designation or class of persons eligible to receive Awards under the Plan or (b)
counsel for Approach determines that such approval is otherwise required by or necessary to comply
with applicable law or the listing requirements of NASDAQ or such other exchange or association on
which the Common Stock is then listed or quoted. An amendment to the Plan shall not require
stockholder approval if it curtails rather than expands the scope of the Plan, nor if it is made to
conform the Plan to statutory or regulatory requirements, such as, without limitation, Code Section
409A, or regulations issued thereunder. Upon termination of the Plan, the terms and provisions of
the Plan shall, notwithstanding such termination, continue to apply to Awards granted prior to such
termination. Except as otherwise provided herein, no suspension, termination, amendment or
modification of the Plan shall adversely affect in any material way any Award previously granted
under the Plan, without the consent of the Participant (or the Permitted Transferee) holding such
Award. Notwithstanding the foregoing, Approach may amend any Award Agreement to be exempt from
Code Section 409A or to comply with the requirements of Code Section 409A or to modify any
provision that causes an Award that is intended to be classified as an equity instrument under
FAS 123R to be classified as a liability on Approachs financial statements.
14.2 Award Amendment and Cancellation. The Committee may amend the terms of any outstanding
Award granted pursuant to the Plan, but except as otherwise provided herein, no such amendment
shall adversely affect in any material way the Participants (or a Permitted Transferees) rights
under an outstanding Award without the consent of the Participant (or the Permitted Transferee)
holding such Award.
ARTICLE XV. MISCELLANEOUS
15.1 Award Agreements. After the Committee grants an Award under the Plan to a Participant,
Approach and the Participant shall enter into an Award Agreement setting forth the terms,
conditions, restrictions and limitations applicable to the Award and such other matters as the
Committee may determine to be appropriate. The Committee may permit or require a Participant to
defer receipt of the payment of cash or the delivery of shares of Common Stock that would otherwise
be due to the Participant in connection with any Award. Awards that are not paid currently shall
be recorded as payable on Approachs records for the Plan. The terms and provisions of the
respective Award Agreements need not be identical. All Award Agreements shall be subject to the
provisions of the Plan, and in the event of any conflict between an Award Agreement and the Plan,
the terms of the Plan shall govern.
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15.2 Listing; Suspension.
(a) As long as the Common Stock is listed on a national securities exchange or system
sponsored by a national securities association, the issuance of any shares of Common Stock
pursuant to an Award shall be conditioned upon such shares being listed on such exchange or
system. Approach shall have no obligation to issue such shares unless and until such shares
are so listed, and the right to exercise any Option or other Award with respect to such
shares shall be suspended until such listing has been effected.
(b) If at any time counsel to Approach or its Affiliates shall be of the opinion that
any sale or delivery of shares of Common Stock pursuant to an Award is or may in the
circumstances be unlawful or result in the imposition of excise taxes on Approach or its
Affiliates under the laws of any applicable jurisdiction, Approach or its Affiliates shall
have no obligation to make such sale or delivery, or to make any application or to effect or
to maintain any qualification or registration under the Securities Act, or otherwise, with
respect to shares of Common Stock or Awards, and the right to exercise any Option or other
Award shall be suspended until, in the opinion of such counsel, such sale or delivery shall
be lawful or will not result in the imposition of excise taxes on Approach or its
Affiliates.
(c) Upon termination of any period of suspension under this Section, any Award affected
by such suspension that shall not then have expired or terminated shall be reinstated as to
all shares available before such suspension and as to shares that would otherwise have
become available during the period of such suspension, but no such suspension shall extend
the term of any Award unless otherwise determined by the Committee in its sole discretion.
15.3 Additional Conditions. Notwithstanding anything in the Plan to the contrary (a) the
Committee may, if it shall determine it necessary or desirable in its sole discretion, at the time
of grant of any Award or the issuance of any shares of Common Stock pursuant to any Award, require
the recipient of the Award or such shares of Common Stock, as a condition to the receipt thereof,
to deliver to Approach a written representation of present intention to acquire the Award or such
shares of Common Stock for his own account for investment and not for distribution, (b) the
certificate for shares of Common Stock issued to a Participant may include any legend that the
Committee deems appropriate to reflect any restrictions on transfer and (c) all certificates for
shares of Common Stock delivered under the Plan shall be subject to such stop transfer orders and
other restrictions as the Committee may deem advisable under the rules, regulations and other
requirements of the SEC, any stock exchange or association upon which the Common Stock is then
listed or quoted, any applicable federal or state securities law, and any applicable corporate law,
and the Committee may cause a legend or legends to be placed on any such certificates to make
appropriate reference to such restrictions.
15.4 Transferability.
(a) All Awards granted to a Participant shall be exercisable during his lifetime only
by such Participant, or if applicable, a Permitted Transferee as provided in subsection (c)
of this Section; provided, however, that in the event of a Participants legal incapacity,
an Award may be exercised by his guardian or legal representative. When a Participant dies,
the personal representative, beneficiary, or other person entitled to succeed to the rights
of the Participant may acquire the rights under an Award. Any such successor must furnish
proof satisfactory to Approach of the successors entitlement to receive the rights under an
Award under the Participants will or under the applicable laws of descent and distribution.
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(b) Except as otherwise provided in this Section, no Award shall be subject to
execution, attachment or similar process, and no Award may be sold, transferred, pledged,
exchanged, hypothecated or otherwise disposed of, other than by will or pursuant to the
applicable laws of descent and distribution. Any attempted sale, transfer, pledge,
exchange, hypothecation or other disposition of an Award not specifically permitted by the
Plan or the Award Agreement shall be null and void and without effect.
(c) If provided in the Award Agreement, Nonqualified Stock Options may be transferred
by a Participant to a Permitted Transferee. For purposes of the Plan, Permitted
Transferee means (i) a member of a Participants immediate family, (ii) any person sharing
the Participants household (other than a tenant or employee of the Participant), (iii)
trusts in which a person listed in (i) or (ii) above has more than 50% of the beneficial
interest, (iv) a foundation in which the Participant or a person listed in (i) or (ii) above
controls the management of assets, (v) any other entity in which the Participant or a person
listed in (i) or (ii) above owns more than 50% of the voting interests, provided that in the
case of the preceding clauses (i) through (v), no consideration is provided for the transfer
and (vi) any transferee permitted under applicable securities and tax laws as determined by
counsel to Approach. In determining whether a person is a Permitted Transferee, immediate
family members shall include a Participants child, stepchild, grandchild, parent,
stepparent, grandparent, spouse, former spouse, sibling, niece, nephew, mother-in-law,
father-in-law, son-in-law, daughter-in-law, brother-in-law or sister-in-law, including
adoptive relationships.
(d) Incident to a Participants divorce, the Participant may request that Approach
agree to observe the terms of a domestic relations order which may or may not be part of a
qualified domestic relations order (as defined in Code Section 414(p)) with respect to all
or a part of one or more Awards made to the Participant under the Plan. Approachs decision
regarding such a request shall be made by the Committee, in its sole and absolute
discretion, based upon the best interests of Approach. The Committees decision need not be
uniform among Participants. As a condition of participation, a Participant agrees to hold
Approach harmless from any claim that may arise out of Approachs observance of the terms of
any such domestic relations order.
15.5 Withholding Taxes. The Company shall be entitled to deduct from any payment made under
the Plan, regardless of the form of such payment, the amount of all applicable income and
employment taxes required by law to be withheld with respect to such payment, may require the
Participant to pay to the Company such withholding taxes prior to and as a condition of the making
of any payment or the issuance or delivery of any shares of Common Stock under the Plan, and shall
be entitled to deduct from any other compensation payable to the Participant any withholding
obligations with respect to Awards. In accordance with any applicable administrative guidelines it
establishes, the Committee may allow a Participant to pay the amount of taxes required by law to be
withheld from or with respect to an Award by (a) withholding shares of Common Stock from any
payment of Common Stock due as a result of such Award, or (b) permitting the Participant to deliver
to the Company previously acquired shares of Common Stock, in each case having an aggregate Fair
Market Value equal to the amount of such required withholding taxes. No payment shall be made and
no shares of Common Stock shall be issued pursuant to any Award unless and until the applicable tax
withholding obligations have been satisfied.
15.6 No Fractional Shares. No fractional shares of Common Stock shall be issued or delivered
pursuant to the Plan or any Award granted hereunder, provided that the Committee in its sole
discretion may round fractional shares down to the nearest whole share or settle fractional shares
in cash.
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15.7 Notices. All notices required or permitted to be given or made under the Plan or
pursuant to any Award Agreement (unless provided otherwise in such Award Agreement) shall be in
writing and shall be deemed to have been duly given or made if (a) delivered personally, (b)
transmitted by first class registered or certified United States mail, postage prepaid, return
receipt requested, (c) sent by prepaid overnight courier service or (d) sent by telecopy or
facsimile transmission, with confirmation receipt, to the person who is to receive it at the
address that such person has theretofore specified by written notice delivered in accordance
herewith. Such notices shall be effective (a) if delivered personally or sent by courier service,
upon actual receipt by the intended recipient, (b) if mailed, upon the earlier of five days after
deposit in the mail or the date of delivery as shown by the return receipt therefore or (c) if sent
by telecopy or facsimile transmission, when the answer back is received. Approach or a Participant
may change, at any time and from time to time, by written notice to the other, the address that it
or such Participant had theretofore specified for receiving notices. Until such address is changed
in accordance herewith, notices hereunder or under an Award Agreement shall be delivered or sent
(a) to a Participant at his address as set forth in the records of the Company or (b) to Approach
at the principal executive offices of Approach clearly marked Attention: Corporate Secretary.
15.8 Compliance with Law and Stock Exchange or Association Requirements. In addition, it is
the intent of Approach that Options designated Incentive Stock Options comply with the applicable
provisions of Section 422 of the Code, and that Awards intended to constitute qualified
performance-based awards comply with the applicable provisions of Section 162(m) of the Code and
that any deferral of the receipt of the payment of cash or the delivery of shares of Common Stock
that the Committee may permit or require, and all Awards either be exempt from Code section 409A
or, if not exempt, comply with the requirements of Section 409A of the Code. To the extent that any
legal requirement of Section 16 of the Exchange Act or Sections 422, 162(m) or 409A of the Code as
set forth in the Plan ceases to be required under Section 16 of the Exchange Act or Sections 422,
162(m) or 409A of the Code, that Plan provision shall cease to apply. Any provision of this Plan
to the contrary notwithstanding, the Committee may revoke any Award if it is contrary to law,
governmental regulation or stock exchange or association requirements or modify an Award to bring
it into compliance with any government regulation or stock exchange or association requirements.
The Committee may agree to limit its authority under this Section.
15.9 Binding Effect. The obligations of Approach under the Plan shall be binding upon any
successor corporation or organization resulting from the merger, consolidation or other
reorganization of Approach, or upon any successor corporation or organization succeeding to all or
substantially all of the assets and business of Approach. The terms and conditions of the Plan
shall be binding upon each Participant and his Permitted Transferees, heirs, legatees, distributees
and legal representatives.
15.10 Severability. If any provision of the Plan or any Award Agreement is held to be illegal
or invalid for any reason, the illegality or invalidity shall not affect the remaining provisions
of the Plan or such agreement, as the case may be, but such provision shall be fully severable and
the Plan or such agreement, as the case may be, shall be construed and enforced as if the illegal
or invalid provision had never been included herein or therein.
15.11 No Restriction of Corporate Action. Nothing contained in the Plan shall be construed to
prevent Approach or any Affiliate from taking any corporate action (including any corporate action
to suspend, terminate, amend or modify the Plan) that is deemed by Approach or such Affiliate to be
appropriate or in its best interest, whether or not such action would have an adverse effect on the
Plan or any Awards made or to be made under the Plan. No Participant or other person shall have
any claim against Approach or any Affiliate as a result of such action.
- 20 -
15.12 Governing Law. The Plan shall be governed by and construed in accordance with the
internal laws (and not the principles relating to conflicts of laws) of the State of Texas except
as superseded by applicable federal law.
15.13 No Right, Title or Interest in Company Assets. No Participant shall have any rights as
a stockholder of Approach as a result of participation in the Plan until the date of issuance of
Common Stock in his name and, in the case of Restricted Stock, unless and until such rights are
granted to the Participant pursuant to the Plan. To the extent any person acquires a right to
receive payments from the Company under the Plan, such rights shall be no greater than the rights
of an unsecured general creditor of the Company, and such person shall not have any rights in or
against any specific assets of the Company. All Awards shall be unfunded.
15.14 Risk of Participation. Nothing contained in the Plan shall be construed either as a
guarantee by Approach or its Affiliates, or their respective stockholders, directors, officers or
employees, of the value of any assets of the Plan or as an agreement by Approach or its Affiliates,
or their respective stockholders, directors, officers or employees, to indemnify anyone for any
losses, damages, costs or expenses resulting from participation in the Plan.
15.15 No Guarantee of Tax Consequences. No person connected with the Plan in any capacity,
including without limitation Approach and the Affiliates and their respective directors, officers,
agents and employees, makes any representation, commitment or guarantee that any tax treatment,
including without limitation federal, state and local income, estate and gift tax treatment, will
be applicable with respect to any Awards or payments thereunder made to or for the benefit of a
Participant under the Plan or that such tax treatment will apply to or be available to a
Participant on account of participation in the Plan.
15.16 Continued Employment or Service. Nothing contained in the Plan or in any Award
Agreement shall confer upon any Participant the right to continue in the employ or service of the
Company, or interfere in any way with the rights of the Company to terminate a Participants
employment or service at any time, with or without cause. The loss of existing or potential profit
in Awards will not constitute an element of damages in the event of termination of employment or
service for any reason, even if the termination is in violation of an obligation of Approach or an
Affiliate to the Participant.
15.17 Miscellaneous. Headings are given to the articles and sections of the Plan solely as a
convenience to facilitate reference. Such headings shall not be deemed in any way material or
relevant to the construction of the Plan or any provisions hereof. The use of the masculine gender
shall also include within its meaning the feminine. Wherever the context of the Plan dictates, the
use of the singular shall also include within its meaning the plural, and vice versa.
IN WITNESS WHEREOF, this Plan has been executed as of the Effective Date.
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APPROACH RESOURCES INC.
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By: |
/s/ J. Ross Craft
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J. Ross Craft |
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President and Chief Executive Officer |
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Appendix 2
FIRST AMENDMENT TO THE
APPROACH RESOURCES INC.
2007 STOCK INCENTIVE PLAN
This First Amendment to the Approach Resources Inc. 2007 Stock Incentive Plan (the
Amendment) is made effective as of December 31, 2008, by Approach Resources Inc., a Delaware
corporation (Approach).
W I T N E S S E T H:
WHEREAS, Approach established the Approach Resources Inc. 2007 Stock Incentive Plan (the
Plan) effective as of June 28, 2007; and
WHEREAS, Approach now desires to amend the Plan for compliance with Internal Revenue Code
Section 409A and the Treasury Regulations issued thereunder;
NOW, THEREFORE, pursuant to the authority reserved in Section 14.1, the Plan is amended as
follows:
1. Section 4.2 of the Plan is hereby amended by the addition of the following sentence:
Notwithstanding the provisions of this Section 4.2, outstanding Awards and Award
Agreements shall be adjusted in accordance with (A) Sections 422 and 424 of the Code
and the regulations thereunder with respect to Incentive Stock Options and (B)
Section 409A of the Code and the regulations thereunder with respect to Nonqualified
Stock Options, SARs and, to the extent applicable, other Awards.
2. Article V of the Plan is hereby amended by the addition of the following sentence:
Notwithstanding the foregoing, Employees, Outside Directors and other individuals or
entities that provide services to Affiliates that are not considered a single
employer with Approach under Code Section 414(b) or Code Section 414(c) shall not be
eligible to receive Awards which are subject to Code Section 409A until the
Affiliate adopts this Plan as a participating employer in accordance with Section
15.18.
3. The second sentence of Section 7.1 of the Plan is hereby amended and restated in its
entirety as follows:
Nonqualified Stock Options may be granted only to Employees, Outside Directors or
other individuals or entities performing services for Approach or a corporation or
other type of entity in a chain of corporations or other entities in which each
corporation or other entity has a controlling interest in another corporation or
entity in the chain, starting with Approach and ending with the corporation or other
entity for which the Employee, Outside Director or other individual or entity
performs services.
4. The first sentence of Section 8.1(b) of the Plan is hereby amended and restated in its
entirety as follows:
SARs may be granted only to Employees, Outside Directors or other individuals or
entities performing services for Approach or a corporation or other type of entity
in a chain of corporations or other entities in which each corporation or other
entity has a
controlling interest in another corporation or entity in the chain, starting with
Approach and ending with the corporation or other entity for which the Employee,
Outside Director or other individual or entity performs services.
5. The Plan is hereby amended by the addition of the following as Section 15.18:
15.18 Participating Affiliates. With the consent of the Committee, any
Affiliate that is not considered a single employer with Approach under Code Section
414(b) or Code Section 414(c) may adopt the Plan for the benefit of its Employees by
written instrument delivered to the Committee before the grant to the Affiliates
Employees under the Plan of any Award subject to Code Section 409A.
6. Except as otherwise specifically set forth herein, all other terms and conditions of the
Plan shall remain in full force and effect.
IN WITNESS WHEREOF, Approach has caused this Amendment to be executed on its behalf by its
duly authorized officer as of this the 31st day of December, 2008.
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APPROACH RESOURCES INC.
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By: |
/s/ J. Ross Craft
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J. Ross Craft, President and Chief Executive Officer |
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ANNUAL MEETING OF STOCKHOLDERS OF
June 1, 2011
PROXY VOTING INSTRUCTIONS
INTERNET - Access www.voteproxy.com and follow the on-screen instructions. Have
your proxy card available when you access the web page, and use the Company Number and Account
Number shown on your proxy card.
TELEPHONE - Call toll-free 1-800-PROXIES (1-800-776-9437) in the United States or
1-718-921-8500 from foreign countries from any touch-tone telephone and follow the instructions.
Have your proxy card available when you call and use the Company Number and Account Number shown on
your proxy card.
Vote online/phone until 11:59 PM EST the day before the meeting.
MAIL - Sign, date and mail your proxy card in the envelope provided as soon as
possible.
IN PERSON - You may vote your shares in person by attending the Annual Meeting. To
obtain directions to attend the meeting and vote in person, contact investor relations at (817)
989-9000.
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COMPANY NUMBER |
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ACCOUNT NUMBER |
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NOTICE OF INTERNET AVAILABILITY OF PROXY MATERIAL:
The Notice of Annual Meeting of Stockholders, proxy statement, proxy card and 2010 annual report to stockholders
are available at http://www.approachresources.com
â Please detach along perforated line and mail in the envelope provided IF you are not voting via telephone or the Internet. â
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20330403030000000000 9 |
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060111 |
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The Board of Directors recommends that you vote FOR ALL NOMINEES on proposal 1, FOR proposals 2, 4 and 5 and for 1 YEAR on proposal 3.
PLEASE SIGN, DATE AND RETURN PROMPTLY IN THE ENCLOSED ENVELOPE. PLEASE MARK YOUR VOTE IN BLUE OR BLACK INK AS SHOWN HERE x
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1. Election of three Class I Directors |
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NOMINEES: |
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FOR
ALL NOMINEES
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¡ ¡
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Alan D. Bell Sheldon B. Lubar Christopher J. Whyte |
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WITHHOLD AUTHORITY
FOR ALL NOMINEES
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FOR ALL EXCEPT
(See instructions below) |
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INSTRUCTIONS: |
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To withhold authority to vote for any
individual nominee(s), mark FOR
ALL EXCEPT and fill in the
circle next to each nominee you wish to withhold, as shown
here:
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To change the address on your account, please check the
box at right and indicate your new address in the
address space above. Please note that changes to the
registered name(s) on the account may not be submitted
via this method.
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FOR
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AGAINST
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ABSTAIN |
2. Advisory vote on executive compensation |
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1 year
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2 years
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3 years
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ABSTAIN |
3. Advisory vote on the frequency of future advisory votes
on executive compensation
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FOR
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AGAINST
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ABSTAIN |
4. Reapprove certain material terms of the Companys 2007
Stock Incentive Plan to comply with Section 162(m) of the
Internal Revenue Code |
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FOR
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AGAINST
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ABSTAIN |
5. Ratify the appointment of Hein & Associates LLP as the
Companys independent registered public accounting firm for
the fiscal year ending December 31, 2011 |
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This proxy, when properly executed, will be voted in the manner
directed herein. If no direction is made, this proxy will be voted FOR
ALL NOMINEES in Proposal 1, FOR Proposal 2, for 1 YEAR in Proposal
3, FOR Proposals 4 and 5, and in the proxies discretion on any other
business that may properly come before the meeting or any postponement
or adjournment thereof.
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Signature of
Stockholder |
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Date: |
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Signature of
Stockholder
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Date: |
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Note:
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Please sign exactly as your name or names appear on this proxy. When shares are held jointly,
each holder should sign. When signing as executor, administrator, attorney, trustee or guardian,
please give full title as such. If the signer is a corporation, please sign full corporate name by
duly authorized officer, giving full title as such. If signer is a partnership, please sign in
partnership name by authorized person.
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THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned stockholder of Approach Resources Inc. (the Company) acknowledges receipt of
the Notice of Annual Meeting of Stockholders and accompanying proxy statement, proxy card and 2010
annual report of the Company and hereby appoints J. Ross Craft and J. Curtis Henderson, and each of
them, with full power of substitution, to act as attorneys and proxies for the undersigned to vote
all the shares of common stock of the Company that the undersigned is entitled to vote at the
Annual Meeting of Stockholders of the Company to be held at Approach Resources Inc., located at One
Ridgmar Centre, 6500 West Freeway, Suite 800 in Fort Worth, Texas, on June 1, 2011, at 10:00 a.m.,
Central Time, and at all postponements or adjournments thereof, as indicated on this proxy.
(Continued and to be signed on the reverse side)