GeoResources 10-K 2012
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Amendment No. 1)
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Fiscal Year ended December 31, 2011
Commission File Number 0-8041
(Exact name of registrant as specified in its charter)
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Indicated by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ¨ Yes x No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ¨ Yes x No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files) Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicated by check mark whether the registrant is a large accelerated file, an accelerated file, a non-accelerated filer, or a smaller reporting company. (Check one):
Indicated by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Aggregate market value of the voting common stock held by non-affiliates of the registrant at June 30, 2011: $451,046,891
Number of shares of the registrants common stock outstanding at April 24, 2012: 25,632,322
DOCUMENTS INCORPORATED BY REFERENCE:
GeoResources, Inc., a Colorado corporation, (the Company, we or us) is filing this Amendment No. 1 on Form 10-K/A (this Amendment) to amend our Annual Report on Form 10-K for the year ended December 31, 2011, originally filed with the Securities and Exchange Commission (the SEC) on March 13, 2012 (the Original Filing), to include the information required by Items 10 through 14 of Part III of Form 10-K. This information was previously omitted from the Original Filing in reliance on General Instruction G(3) to Form 10-K, which permits the information in the above referenced items to be incorporated in the Form 10-K by reference from our definitive proxy statement if such statement is filed no later than 120 days after our fiscal year-end. We are filing this Amendment to include Part III information in our Form 10-K because a definitive proxy statement containing such information may not be filed by the Company within 120 days after the end of the fiscal year covered by the Form 10-K. The reference on the cover of the Original Filing to the incorporation by reference to portions of our definitive proxy statement into Part III of the Original Filing is hereby deleted.
In accordance with Rule 12b-15 under the Securities Exchange Act of 1934, as amended (the Exchange Act), Part III, Items 10 through 14 of the Original Filing are hereby amended and restated in their entirety, and Part IV, Item 15 of the Original Filing is hereby amended and restated in its entirety, with the only changes being the addition of Exhibits 31.3 and 31.4 filed herewith and related footnotes. This Amendment No. 1 does not amend or otherwise update any other information in the Original Filing. Accordingly, this Amendment should be read in conjunction with the Original Filing and with our filings with the SEC subsequent to the Original Filing.
(Amendment No. 1)
TABLE OF CONTENTS
Item 10. Directors, Executive Officers and Corporate Governance
Directors and Executive Officers of the Registrant
The following table sets forth certain information as of April 24, 2012, regarding our directors and named executive officers:
Frank A. Lodzinski has served as our President, Chairman and Chief Executive Officer since 2007. He has 40 years of oil and gas industry experience. In 1984, he formed Energy Resource Associates, Inc., which acquired management and controlling interests in oil and gas limited partnerships, joint ventures and producing properties. Certain partnerships were exchanged for common shares of Hampton Resources Corporation in 1992, which Mr. Lodzinski joined as a director and President. Hampton was sold in 1995 to Bellwether Exploration Company. In 1996, he formed Cliffwood Corp and in 1997, Cliffwood shareholders acquired controlling interest in Texoil, Inc. where Mr. Lodzinski served as CEO and President. In 2001, Texoil, Inc. was sold to Ocean Energy, Inc. In 2001, Mr. Lodzinski was appointed CEO and President of AROC, Inc., to direct the restructuring and ultimate liquidation of that company. In 2003, AROC completed a monetization, of oil and gas assets with an institutional investor and began a plan of liquidation in 2004. In 2004, Mr. Lodzinski formed Southern Bay Energy, LLC, the general partner of Southern Bay which acquired the residual assets of AROC, Inc., and he served as President of Southern Bay Energy, LLC since its formation. He holds a BSBA degree in Accounting and Finance from Wayne State University in Detroit, Michigan.
Robert J. Anderson has served as our Executive Vice President Engineering & Acquisitions since April 2007 and was appointed to our Board of Directors and to the position of Chief Operating Officer Northern Division in January 2012. He is a petroleum engineer and has been active in the oil and gas industry since 1987 with diversified domestic and international experience for both major oil companies (ARCO International/Vastar Resources) and independent oil companies (Hunt Oil/Hugoton Energy/Anadarko Petroleum). From October 2000 through February 2004, he was employed by Anadarko Petroleum Corporation as a petroleum engineer. From March 2004 through December 2004 he was employed by AROC, Inc. as Vice President, Acquisitions and Divestitures. He joined Southern Bay Energy, LLC in January 2005 as Vice President, Acquisitions and Divestitures. His professional experience includes acquisition evaluation, reservoir and production engineering and field development, and project economics, budgeting and planning. Mr. Andersons domestic acquisition and divestiture experiences include the Gulf Coast of Texas and Louisiana (offshore and onshore), east and west Texas, north Louisiana, Mid-Continent and the Rockies. His international experience includes Canada, South America and Russia. He has an undergraduate degree in Petroleum Engineering from the University of Wyoming (1986) and also holds an MBA, Corporate Finance, from the University of Denver (1988).
Jay F. Joliat has, for more than the past nine years, been an independent investor and developer in commercial, industrial and garden style apartment real estate and development, residential home building, restaurant ownership and management, as well as venture private equity in generic pharmaceuticals, medical devices and oil and gas. He previously formed and managed his own investment management company early in his career and was formerly employed by E.F. Hutton and Dean Witter
Reynolds. He holds a Bachelor of Arts Degree in Management and Finance from the Oakland University (1982) and was awarded a Certified Investment Management Analyst certificate in 1983 after completion of the IMCA program at the Wharton School of Business of the University of Pennsylvania. From 1996 through 2003, Mr. Joliat served on the Board of Directors of Caraco Pharmaceutical Laboratories Ltd., a company with a class of equity securities registered under the Exchange Act, and served in various capacities on the audit, executive and compensation committees.
Bryant W. Seaman, III has been Managing Director at Bessemer Trust since November 2005, where he is Head of Private Asset Advisory. From 2004 through October 2005 he was a Partner, Merchant Banking, of Gregory & Hoenemeyer, Inc. From 2002 to 2004 he was Group Executive Vice President, International, of the New York Stock Exchange, Inc. From 1998 through 2001 he was a Managing Director of Deutsche Banc Alex. Brown. From 1995 through 1997 he was a General Partner of Asia/Pacific Capital Partners, and from 1983 to 1995 he was a Managing Director, Investment Banking, at Credit Suisse First Boston. Mr. Seaman holds an A.B. degree in Political Science from Stanford University and MBA and Juris Doctor degrees from Columbia University.
Michael A. Vlasic has served on the Board of Managers of Southern Bay Energy, LLC since its inception in 2004. He previously was a Director of Texoil, Inc., a company with a class of equity securities registered under the Exchange Act, where he served on its executive committee from 1997 until its sale to Ocean Energy Inc. in 2001. For more than the past nine years he has been Chief Executive Manager of Vlasic Investments L.L.C. He is a 1982 graduate of Brown University and holds an MBA from the University of Michigan (1986).
Nicholas L. Voller has been a shareholder with Voller Lee & Associates, P.C., a CPA firm located in Williston, North Dakota for over the past five years. Mr. Voller is a certified public account with over 30 years of practice in the public accounting field. He graduated from the University of North Dakota in 1972.
Donald J. Whelley has been a Managing Member of DJW Advisors, LLC since 2008, advising clients on their direct oil and gas investments, strategic resources, litigation support and due diligence. From 1993 to 2008, he was Executive Vice President of John S. Herold, Inc., where he was Chief Financial Officer and responsible for managing valuation and consulting engagements. From 1991 to 1993, he was the Chief Financial Officer of Damson Oil Corporation, guiding it through its bankruptcy and the ultimate disposition of its oil and gas properties. Prior to 1991, he held management positions with B&D Equities, Inc., a broker-dealer; Granada Corporation, an agricultural biotech company; Damson Oil Corporation; and Arthur Andersen & Co. Mr. Whelley holds a B.S. degree in Accounting from Clarkson University.
Howard E. Ehler has been our Chief Financial Officer and Principal Accounting Officer since April 2007. He was the Vice President and Chief Financial Officer of AROC, Inc. from May 2001 through December 2004. Since January 2005, Mr. Ehler has been employed by Southern Bay Energy, LLC as Vice President and Chief Financial Officer. He previously served as Vice President of Finance and Chief Financial Officer for Midland Resources, Inc. from March 1997 through October 1998. From November 1999 through April 2001 he performed independent accounting and auditing services in oil and gas as a sole practitioner in public accounting. He was employed in public accounting with various firms for over 21 years, including practice with Grant Thornton LLP, where he was admitted to the partnership. He has substantive experience in oil and gas banking, finance, accounting and reporting. In addition, his experience includes administration, tax, budgets, forecasts and cash management. Mr. Ehler holds an Accounting Degree from Texas Tech University (1966) and has been a Certified Public Accountant since 1970.
Timothy D. Merrifield was appointed Executive Vice President Geology and Geophysics in January 2012. Mr. Merrifield has over 30 years of industry experience. He has been employed by the Company since April 2007 and previously as Vice-President Geology and Geophysics for our Southern Division where he successfully led our exploration and development activities. His prior experience includes both domestic and international projects and he has also had responsibility for our reservoir engineering and project management. He was employed by AROC, Inc. as Vice President Exploration from November 1998 through December 2004. Since January 2005, he has been employed by Southern Bay Energy LLC as Vice President Geology and Geophysics. Additionally, he was employed by Forcenergy, Inc. from January 1997 to November 1998 as a Senior Explorationist and Great Western Resources, Inc. from January 1986 to January 1997 where he was promoted to Exploration Manager in February 1994. Prior to 1986 Mr. Merrifield was employed by L&B Oil Co., Inc., Core Laboratories, Inc., Mesa Petroleum and Atlantic Richfield, Inc. He attended Texas Tech University.
Francis M. Mury has been Executive Vice President and Chief Operating Officer Southern Division since April 2007. He has been active in the oil and gas industry since 1974. He was employed by AROC, Inc. as Executive Vice President from May 2001 through December 2004. Since January 2005, he has been employed by Southern Bay Energy LLC as Executive Vice
President. Mr. Mury worked for Texaco, Inc. from July 1974 through March 1979, ending his tenure there as a petroleum field engineer. From April 1979 through December 1985, he worked for Wainoco Oil & Gas as a production engineer and drilling superintendent. From January 1986 to November 1989 he worked for Diasu Oil & Gas as an operations manager. He has worked with Mr. Lodzinski since 1989, including at Hampton Resources Corporation, where he served as Vice President Operations from January 1992 through May 1995, and Texoil, Inc., where he served as Executive Vice President from November 1997 through February 2001. His experience extends to all facets of petroleum engineering, including reservoir engineering, drilling and production operations and further into petroleum economics, geology, geophysics, land and joint operations. Geographical areas of experience include the Gulf Coast (offshore and onshore), east and west Texas, Mid-Continent, Florida, New Mexico, Oklahoma, Wyoming, Pennsylvania and Michigan. Mr. Mury received a degree in Computer Science (1974) from Nicholls State University, Thibodeaux, Louisiana.
We are committed to high quality corporate governance, which helps us compete more effectively, sustain our success and build long-term shareholder value. Our Board reviews the Companys policies and business strategies, and advises and counsels the executive officers who manage the Company.
Governance is a continuing focus at the Company, starting with the Board and extending to management and all employees. In this section, we describe our key governance policies and practices. The Company is governed by a Board of Directors and committees of the Board that meet throughout the year. Directors discharge their responsibilities at Board and committee meetings and also through telephone contact and other communications with management.
Corporate Governance Materials
The full text of the charters of our Audit, Nominating and Compensation Committees and our Business Conduct and Code of Ethics can be found at www.georesourcesinc.com. Copies of these documents also may be obtained from our Corporate Secretary.
Board of Directors Diversity
The Board does not have a formal diversity policy. The Board considers candidates that will make the board as a whole reflective of a range of talents, skills, diversity and expertise.
Shareholder-Recommended Director Candidates
Our Nominating Committee will consider shareholder recommendations of director candidates who are highly qualified in terms of business experience and be both willing and expressly interested in serving on the Board. Shareholders recommending candidates for consideration should send their recommendations, including the candidates name and information about the candidates qualifications to:
c/o Cathy Kruse, Corporate Secretary
P.O. Box 1505
Williston, North Dakota 58801-1505
Submissions must include sufficient biographical information concerning the recommended individual, including age, educational background, employment history for at least the past five years indicating employers names and description of the employers business and any other biographical information that would assist the Nominating Committee in determining the qualifications of the individual. The Nominating Committee will consider all candidates, whether recommended by shareholders or members of management. The Nominating Committee will consider recommendations received by a date not later than 120 calendar days before the date our proxy statement was released to shareholders in connection with the prior years annual meeting for nomination at that annual meeting. The Board will consider nominations received beyond that date at the annual meeting subsequent to the next annual meeting.
The Board is responsible for the control and direction of the Company. The Board represents the Companys shareholders and its primary purpose is to build long-term shareholder value. Mr. Lodzinski serves as Chairman of the Board, President and Chief Executive Officer of the Company. The Board believes that Mr. Lodzinski is best situated to serve as Chairman because he is the director most familiar with the Companys business and industry and is also the person most capable of effectively identifying strategic priorities and leading the discussion and execution of corporate strategy. In this combined role, Mr.
Lodzinski is able to foster clear accountability and effective decision making. The Board believes that the combined role of Chairman and CEO strengthens the communication between the Board and management and provides a clear roadmap for shareholder communications. Further, as the individual with primary responsibility for managing day-to-day operations, Mr. Lodzinski is best positioned to chair Board meetings and ensure that key business issues and risks are brought to the attention of our Board and Audit Committee. We therefore believe that the creation of a lead independent director position is not necessary at this time.
Board Risk Oversight
Our Board has ultimate responsibility for general oversight of risk management processes. The Board receives regular reports from Mr. Lodzinski on areas of risk facing the Company. By its very nature, the exploration and production oil and gas business has numerous risks and our risk management processes are intended to identify and manage such risks, operations and business objectives. Generally, the full Board (or the appropriate committee in the case of risks in areas for which responsibility has been delegated to a particular committee) engages with the appropriate members of management to enable its members to understand and provide input to and oversight of our risk identification, risk management and risk mitigation strategies. The Audit Committee also meets without management present to, among other things, discuss the Companys risk management culture and processes. In the event, a committee receives a report from a member of management regarding areas of risk, the Chair of the relevant committee will report on the discussion to the full Board to the extent necessary or appropriate. This enables the Board to coordinate risk oversight, particularly with respect to interrelated or cumulative risks that may involve multiple areas for which more than one committee has responsibility.
Compensation Committee Risk Assessment
The Compensation Committee reviewed and discussed an internal risk assessment of the Companys executive and non-executive compensation programs and the outcomes of such assessment. Based on such review, the Compensation Committee believes that the Companys compensation programs (i) do not motivate our executives or our non-executive employees to take excessive risks, (ii) are aligned with shareholders best interests, and (iii) are not reasonably likely to have a material adverse effect on the Company. Our compensation programs are designed to support and reward appropriate risk taking and include the following:
Shareholder Communications with Directors
Shareholders and other interested parties may communicate with any of our independent directors, including Committee Chairs, by using the following address:
Board of Directors
c/o Cathy Kruse, Corporate Secretary
P.O. Box 1505
Williston, North Dakota 58801-1505
The Corporate Secretary of the Company reviews communications to the independent directors and forwards the communications to the independent directors as appropriate. All such communications should identify the author as a shareholder and clearly state whether the intended recipients are all members of the Board or just certain specified individual directors. Our Corporate Secretary will make copies of all such communications and circulate them to the appropriate director or directors. Communications involving substantive accounting or auditing matters will be immediately forwarded to the Chair of the Audit Committee. Communications that pertain to non-financial matters will be forwarded promptly to the appropriate committee. Certain items that are unrelated to the duties and responsibilities of the Board will not be forwarded such as: business solicitation or advertisements; product related inquiries; junk mail or mass mailings; resumes or other job related inquiries; spam and overly hostile, threatening, potentially illegal or similarly unsuitable communications.
Meetings of the Board and Committees
During 2011, our Board of Directors held two meetings. Each director attended at least 75% of the meetings (held during the period that such director served) of the Board and the committees on which such director served in 2011.
In addition, the Board acts from time to time by unanimous written consent in lieu of holding a meeting. During 2011, the Board effected four actions by unanimous written consent. Members of our Board are encouraged to attend our annual meeting of shareholders. Three of our directors attended our 2011 annual meeting.
The following table sets forth the three standing committees of our Board, the members of each committee, and the number of meetings held by our Board and the committees during 2011:
Committees of the Board
To assist it in carrying out its duties, the Board has delegated certain authority to an Audit Committee, Compensation Committee and Nominating Committee as the functions of each are described below.
Audit Committee. The Audit Committee provides oversight of the Companys accounting policies, internal controls, financial reporting practices and legal and regulatory compliance. Among other things, the Audit Committee: appoints our independent auditor and evaluates its independence and performance; maintains a line of communication between the Board, the Companys financial management and the independent auditor; and oversees compliance with the Companys policies for conducting business, including ethical business standards. Each member of the Audit Committee meets the independence criteria prescribed by applicable regulation and the rules of the SEC for audit committee membership and is an independent director within the meaning of applicable NASDAQ listing standards. Each Audit Committee member meets NASDAQs financial literacy requirements, and the Board has further determined that Mr. Voller and Mr. Whelley (i) are audit committee financial experts as such term is defined in Item 407(d) of Regulation S-K promulgated by the SEC and (ii) also meet NASDAQs financial sophistication requirements.
Nominating Committee. The Nominating Committee nominates board candidates based on whom they believe will be effective in serving the long-term interests of the Company and its shareholders. Candidates are evaluated based upon their backgrounds and the need for any required expertise on the Board and its committees. The members of our Nominating Committee are all independent directors within the meaning of applicable NASDAQ listing standards.
Compensation Committee. The Compensation Committee oversees the development and administration of the Companys compensation policies and programs. The primary function of this Committee is to review and approve our executive compensation and benefit programs. Additionally, this Committee approves the compensation of our named executive officers, including the Chief Executive Officer and reviews the Compensation Discussion and Analysis and prepares a compensation committee report for inclusion in our proxy statements. The Compensation Committee oversees all matters related to shareholder approval of executive compensation and evaluates the risk-taking incentives and risk management of our compensation policies and practices. The Compensation Committee also has the authority to obtain independent advice and assistance from internal or external legal, accounting and other advisors, at the Companys expense. Our Chief Executive Officer is expected to recommend to the Compensation Committee the compensation for our other named executive officers. The members of the Compensation Committee are all independent directors within the meaning of applicable NASDAQ listing standards, and all of the members are non-employee directors within the meaning of Rule 16b-3 under the Exchange Act and outside directors for purposes of Section 162(m) of the Internal Revenue Code of 1986, as amended (the Code).
The Compensation Committee has the sole authority to retain, amend the engagement with, and terminate any compensation consultant to be used to assist in the evaluation of director and named executive officer compensation, including change in control provisions. The Compensation Committee has sole authority to approve the consultants fees and other retention terms and has authority to cause the Company to pay the fees and expenses of such consultants. During 2011, the Compensation Committee engaged the services of Longnecker & Associates (Longnecker). The terms of Longneckers engagement are set forth in an engagement agreement that provides, among other things, that Longnecker is engaged by, and reports only to, the Compensation Committee and will perform the compensation advisory services requested by the Compensation Committee. Among the services Longnecker was asked to perform were apprising the Compensation Committee of compensation-related trends, developments in the marketplace and industry best practices; informing the Compensation Committee of compensation-related regulatory developments; providing peer group survey data to establish compensation ranges for the various elements of compensation; providing an evaluation of the competitiveness of the Companys executive and director compensation and benefits programs; assessing the relationship between executive pay and performance; advising on the background, rationale and design of change-in-control provisions; and advising on the design of the Companys incentive compensation programs. Longnecker does not provide any other services to the Company.
Business Conduct and Code of Ethics
Our Board has adopted a Business Conduct and Code of Ethics (Code of Ethics), which provides general statements of our expectations regarding ethical standards that we expect our directors, officers and employees to adhere to while acting on our behalf. Among other things, the Code of Ethics provides that:
Our Code of Ethics also contains procedures for employees to report, anonymously or otherwise, violations of the Code of Ethics.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act, requires the Companys directors and named executive officers, and persons who beneficially own more than ten percent of our common stock, to file initial reports of ownership and reports of changes in ownership of our common stock and our other equity securities with the SEC. As a practical matter, the Company assists its directors and officers by monitoring transactions and completing and filing Section 16 reports on their behalf. Based solely on a review of the copies of such forms in our possession and on written representations from reporting persons, we believe that during 2011 all of our named executive officers and directors filed the required reports on a timely basis under Section 16(a) of the Exchange Act, except that one Form 4 was filed for Mr. Vlasic on October 11, 2011 with respect to transactions occurring on October 5, 2011.
Item 11. Executive Compensation
Compensation Discussion and Analysis
2011 Shareholder Vote on Executive Compensation
In June 2011, the Company held its first shareholder advisory vote to approve the compensation paid to our named executive officers in 2010, which resulted in 98% of the votes cast approving such compensation. The Compensation Committee considered the results of the advisory vote in reviewing our executive compensation program, noting the high level of shareholder support, and elected to continue its efforts to bring the compensation of the named executive officers more in line with the Companys peers by utilizing the same principles in determining the types of compensation to be paid to our named executive officers in 2011. Accordingly, the Compensation Committee retained Longnecker, as its independent compensation consultant. The Committee will continue to focus on responsible executive compensation practices that attract, motivate and retain highly talented individuals with requisite technical and managerial skills to implement our business strategy.
The following Compensation Discussion and Analysis, or CD&A, provides information about the compensation program for our principal executive officer, principal financial officer and our other three most highly-compensated executive officers (collectively, the named executive officers), and is intended to place in perspective the information contained in the executive compensation tables that follow this discussion. This CD&A provides a general description of the material elements of our compensation program and specific information about its various components.
Although this CD&A focuses on the information in the tables below and related footnotes, as well as the supplemental narratives relating to the year ended December 31, 2011, we also describe compensation actions taken after the last completed year to the extent such discussion enhances the understanding of our named executive officer compensation disclosure.
During mid-2011, the Compensation Committee retained Longnecker to advise the Committee on all aspects of executive and non-employee director compensation. Thereafter, Longnecker undertook a thorough review of the Companys executive and non-employee director compensation and provided revised recommendations to the Committee. Thereafter, during the fourth quarter of 2011, the Committee met with Longnecker and thereafter determined to implement changes as discussed below. These changes related to base salaries, short-term incentive compensation and change in control payments. In addition, we modified our non-employee director compensation as discussed below.
Compensation Philosophy and Objectives
We operate in a highly competitive and challenging environment and must attract, motivate and retain highly talented individuals with the requisite technical and managerial skills to implement our business strategy. The objectives of our compensation program are to:
Elements of Our Compensation Program
Base Salary. Base salary is the principal fixed component of our compensation program and is generally reviewed in the first quarter each year. It provides our named executive officers with a regular source of income to compensate them for their day-to-day efforts in managing the Company. Base salary is primarily used to attract and retain highly talented individuals. Base salary varies depending on the named executive officers experience, responsibilities, education, professional standing in the industry, changes in the competitive marketplace and the importance of the position to the Company.
In January 2011, prior to retaining Longnecker, the Compensation Committee reviewed the compensation of our named executive officers in relation to the compensation of executive officers of companies in the peer group we used at that time (see Peer Group below) and determined that our named executive officers received compensation that was materially less than the executive officers in the peer group. Accordingly, the Compensation Committee adjusted the salaries of our named executive officers generally in seeking to bring such salaries into the range of the peer group. Although increases in base salary for Messrs. Lodzinski, Ehler, Anderson and Mury were significant, the Compensation Committee believes further adjustments were required as our base salaries have lagged behind industry competitors and the adjusted base salaries are well within the range for our peer group. In January 2012, further adjustments were made consistent with the analysis and recommendations provided to the Committee by Longnecker. These adjustments generally increased base salaries for our named executive officers to approximately the mid-point of our peer group. The following table shows the base salaries for our named executive officers in 2011 and 2012 (effective January 1, 2012):
Short-Term Incentives. Short-term incentive compensation is the short-term variable portion of our annual compensation program and is based on the principle of pay-for-performance. Short-term incentives have historically been reviewed in the first quarter of each year or at the end of the fourth quarter. The objective of short-term incentives is to reward our named executive officers based on the performance of the Company as a whole during the preceding 12-month period and the contributions of the individual named executive officer in relation to our success.
The evaluation of the Companys performance is based on a macro review of the Company at year-end in comparison to the prior year, including the following financial metrics: total production growth; proved reserve growth; earnings before interest, tax, depreciation, depletion, amortization and exploration expenses, as adjusted to exclude non-cash compensation, impairments, hedge ineffectiveness and income or loss on derivative contracts (Adjusted EBITDAX); and the Compensation Committee will also consider other factors including, operating income, finding and development costs and operating costs. Additionally, the prices of oil and gas will be considered as a result of their cyclical nature and correlation to our business. The Compensation Committee has determined that Adjusted EBITDAX continues to be 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. The Compensation Committee reviews all of these factors without assigning any specific weight to any of them.
The second part of the evaluation is the individual contribution by the named executive officer in relation to the Companys performance. This includes an analysis of each named executive officers hard work, individual responsibility and productivity in relation to the Companys reserve growth, production growth, performance and profitability for the year. These are broad parameters and any given individuals contribution to increases in reserve growth, production growth, Company performance and profitability ultimately is determined qualitatively. The Compensation Committee subjectively reviews all of the above factors without assigning any specific weight to any factor and without using any specific formula or calculation to determine and approve short-term incentive grants as it deems appropriate.
In early January 2012, the Compensation Committee reviewed the performance of the Company in 2011 compared to 2010 and determined that the Company had successfully expanded activities relating to the Bakken shale and Eagle Ford shale, as well as successfully achieving increases in production (4% for the year and 20% in the fourth quarter of 2011 compared to the same period in 2010), proved reserves (22%) and Adjusted EBITDAX (34%). The Compensation Committee also reviewed the data
previously provided by Longnecker with respect to the total annual cash compensation paid to the named executive officers of the companies in the peer group. Accordingly, the Compensation Committee awarded cash bonuses to our named executive officers in recognition of their individual efforts and performance, in recognition of the financial and operating results realized by the Company in 2011 and also as consideration of the fact that our compensation program has lagged behind our competitors. The following table shows the cash bonuses paid to our named executive officers in 2010 and 2011:
Long-Term Incentives. Long-term incentives are provided to our named executive officers under the GeoResources, Inc. Amended and Restated 2004 Employees Stock Incentive Plan (the 2004 Plan), which was most recently re-approved by our shareholders in June 2011. These incentives are intended to align the interests of shareholders with employees by providing employees with incentive to perform technically and financially in a manner that promotes total shareholder return. Furthermore, we believe that long-term incentives create an incentive for future performance and create a retention incentive. In determining long-term incentives, the Compensation Committee considers a named executive officers potential for future successful performance and leadership as part of the executive management team, taking into account past performance and leadership as a key indicator.
Under the 2004 Plan, the Compensation Committee has the flexibility to choose between a number of forms of long-term incentive compensation, including stock options, stock appreciation rights, restricted stock unit awards, restricted stock awards, performance units, performance shares, or other incentive awards. Historically, the Compensation Committee has primarily used stock options. In April 2011, consistent with past practice of periodically addressing long-term incentive compensation, the Compensation Committee reviewed the modifications to the base salaries and the status of the outstanding unvested stock options of our named executive officers in relation to the total compensation to be received by our named executive officers. As a result, the Compensation Committee granted restricted stock unit awards under the 2004 Plan to our named executive officers. One-third of the awards will vest on the first anniversary of the grant date and the remaining two-thirds will vest on a pro-rata monthly basis over the remaining two years subject to the named executive officers continued employment. Recognizing that we are constantly competing for the most talented individuals in our industry, we granted these restricted stock unit awards, to promote retention and future long-term performance. The restricted stock unit awards in 2011 were granted to our named executive officers on April 29, 2011 and the restricted stock unit awards for 2012 were granted on January 6, 2012, as set forth below:
Other Benefits. All employees may participate in our 401(k) Retirement Savings Plan (the 401(k) Plan) established many years ago. Each employee may make before-tax contributions in accordance with the limits of the Internal Revenue Service. We provide this 401(k) Plan to help our employees attain financial security by providing them with a program to save a portion of their cash compensation for retirement in a tax efficient manner. Our matching contribution is an amount equal to 100% of the employees elective deferral contribution not to exceed 4% of the employees compensation.
All full time employees, including our named executive officers, may participate in our health and welfare benefit programs, including medical, dental and vision care coverage, disability insurance and life insurance.
Roles of our CEO and the Compensation Committee in Setting Executive Compensation
Our Compensation Committee is comprised solely of independent directors and has overall responsibility for the compensation of our named executive officers. The Compensation Committee monitors our non-employee director and named executive officer compensation and benefit plans, policies and programs to insure that they are consistent with our compensation philosophy and objectives. Our Chief Executive Officer, Mr. Lodzinski, makes recommendations to the Compensation Committee regarding the base salary, short-term and long-term incentive compensation with respect to the named executive officers (other than himself) based on his analysis and assessment of their performance. Such officers are not present at the time of these deliberations. The Compensation Committee, in its discretion, may accept, modify or reject any or all such recommendations. The Compensation Committee independently determines the salary, short-term and long-term incentive compensation for our Chief Executive Officer with limited input from him. The Compensation Committee makes periodic awards to our named executive officers under the 2004 Plan.
Factors Considered in Setting Executive Compensation
To achieve the objectives of our compensation program, the Compensation Committee believes that the compensation of each of our named executive officers should reflect the performance of the Company as a whole and the contributions of the individual named executive officer in relation to our success. In other words, our compensation program is based on the principle of pay for performance. The following is a summary of the factors considered in setting compensation for our named executive officers in addition to the factors discussed above under each element of our compensation program.
Review of Peer Group Compensation Data. The Compensation Committee periodically reviews survey and peer group compensation information in monitoring our compensation program, including the types and levels of compensation of executives in a peer group of companies in the domestic exploration and production sector. The peer group was selected based on an assessment and determination that each of them is reasonably comparable to the Company in terms of business scope, market capitalization, total annual revenues and which compete with the Company for talent. We use this peer group information as a point of reference, but do not benchmark or target our compensation levels against our peer group. The Compensation Committee may make modifications to the peer group from time to time due to consolidations within, and to accommodate new companies entering, the domestic oil and gas exploration and production industry, or for other reasons.
After review of the peer group compensation programs, the Compensation Committee believes that the elements of our compensation program, which include base salary, short-term incentive compensation in the form of cash bonuses, long-term incentive compensation in the form of stock options and restricted stock unit awards (or other stock based compensation as allowed by the 2004 Plan) and our benefits compensation, including 401(k) retirement savings plan and other benefits, are comparable to those offered by our industry competitors. However, our Compensation Committee concluded that the base salary levels and the levels of total compensation of our named executive officers were lower than those of comparable executive officers in the peer group.
Peer Group. In the fourth quarter of 2011, members of our management team met with representatives from Longnecker, our independent compensation consultant, in advising our Compensation Committee in the selection of a group of companies that they consider a peer group for executive officer and director compensation analysis purposes. This peer group was then used for purposes of developing the recommendations presented to our Board for the 2011 annual incentive awards for our named executive officers. The oil and gas companies that comprise this peer group were selected primarily because they (i) have similar annual revenue, assets and market capitalization as us and (ii) potentially compete with us for executive talent. In light of the Compensation Committees discussions with Longnecker, it was determined that certain changes to the peer group utilized in the beginning of 2011 were necessary in order to establish an appropriate peer group going forward.
The following table sets forth (i) on the left-hand side 2011 Peer Group, the companies that comprise the peer group reviewed by the Compensation Committee in the beginning of 2011 with respect to the base salaries for and 2011 long-term incentive compensation decisions, and (ii) on the right-hand side 2012 Peer Group, companies that comprise the peer group reviewed by the Compensation Committee, after retaining Longnecker, with respect to the 2011 short-term incentive compensation determined in January 2012 compensation decisions.
Compensation Risks. The Compensation Committee reviewed the policies and practices of our compensation program, including, among other things, the types and level of our compensation in relation to the Company as a whole and on a per division basis and the fixed and variable aspects of our compensation. The Compensation Committee believes that the ownership stake in the Company provided by our long-term incentive compensation, including vesting of these awards over several years, is designed to align the interests of our named executive officers and employees with our shareholders and promote executive officer and employee retention. At the same time, the Compensation Committee believes that, as a result of our focus on long-term incentive compensation, our compensation program does not encourage our named executive officers to take unreasonable risks related to our business. Based upon this review, the Compensation Committee concluded that there are no risks that are reasonably likely to have a material adverse effect on the Company.
Lean Management Team. The Compensation Committee takes into consideration that the Company operates with a lean management team requiring each named executive officer to have significant responsibility.
Other Compensation Practices
Accounting and Tax Considerations. Awards of stock options, performance units, restricted stock and restricted stock units under the 2004 Plan are accounted for under FASB ASC Topic 718.
Section 162(m) of the Code, generally disallows a tax deduction to public companies for certain compensation in excess of $1 million paid to a companys chief executive officer and certain other highly compensated executive officers. Specified compensation, including qualified performance-based compensation, will not be subject to the deduction limit if certain requirements are met. The Compensation Committee generally seeks to structure compensation amounts and plans that meet the requirements for deductibility under this provision. Specifically, the Compensation Committee has taken steps to qualify the stock option awards as performance-based compensation for this purpose. However, the Compensation Committee considers it important to retain flexibility to design compensation programs that are in the best interests of the Company and our shareholders. To this end, the Compensation Committee reserves the right to use its judgment to authorize compensation payments that may be subject to the limitations under Section 162(m) when the Compensation Committee believes that compensation is appropriate and in the best interests of the Company and our shareholders, after taking into consideration changing business conditions and performance of our employees. In addition, because of uncertainties as to the application and interpretation of Section 162(m) and the regulations issued thereunder, the Compensation Committee cannot ensure that compensation intended by the Compensation Committee to satisfy the requirements for deductibility under Section 162(m) will in fact be deductible.
Stock Ownership Guidelines and Insider Trading Policy. We do not currently have ownership requirements or a stock retention policy for our named executive officers or non-employee directors.
Our Board has adopted a policy restricting all employees, including our named executive officers, and non-employee directors from engaging in any hedging transactions with respect to our common stock held by them, which includes the purchase of any financial instrument (including prepaid variable forward contracts, equity swaps, collars and exchange funds) designed to hedge
or offset any decrease in the market value of such equity securities. The Board also discourages our named executive officers and non-employee directors from pledging, or using as collateral, our common stock in order to secure personal loans or other obligations, which includes holding shares of our common stock in a margin account.
We will continue to periodically review best practices and re-evaluate our position with respect to stock ownership guidelines and hedging prohibitions.
Equity Grant Practices. The exercise price of each stock option awarded under the 2004 Plan is generally above the closing price of our common stock on the date of grant, which is the date of the Compensation Committee meeting at which equity awards for the named executive officers are determined. Board and committee meetings are generally scheduled well in advance. Scheduling decisions are made without regard to anticipated earnings or other major announcements by the Company. The 2004 Plan prohibits the repricing of stock options without the consent of our shareholders. Historically, each stock option grant is issued with one-half of the option shares with an exercise price at or slightly greater than the closing price of our common stock and the other half with an even greater exercise price. The typical vesting period for our stock option awards is four years. The Compensation Committee has recently utilized restricted stock unit awards with a vesting period of one-third vesting on the one-year anniversary of the grant date and the remaining two-thirds vesting in 24 equal monthly installments on the first day of the month, beginning one year and one month after the grant date.
Clawback Provisions. Although we do not presently have any formal policies or practices that provide for the recovery of prior incentive compensation awards that were based on financial information later restated as a result of the Companys material non-compliance with financial reporting requirements, in such event we reserve the right to seek all recoveries currently available under law. Beginning with our equity grants in April 2011, all equity awards to our named executive officers are subject to any clawback policies the Company may adopt which may result in the reduction, cancellation, forfeiture or recoupment of such awards if certain specified events occur, including, but not limited to, an accounting restatement due to any material noncompliance with financial reporting regulations by the Company. Although we have not yet adopted such a policy, we anticipate doing so upon promulgation of final rules by the SEC and are continuing to monitor the relevant laws and regulations regarding clawback policies.
No Employment Agreements. We have no employment contracts in place with any of our named executive officers, who serve at the will of our Board. Except as discussed in the following section with regard to the CIC Plan with respect to payments upon a change in control and reimbursement for health benefits, we do not have any compensatory plan or arrangement with respect to any named executive officer where such plan or arrangement will result in payments to such officer upon or following his resignation, retirement, or other termination of employment with us and our subsidiaries or upon a change in control of the Company.
Payments Triggered Upon a Change in Control. The Compensation Committee believes that change in control plans are an important element of the compensation program, support shareholder value creation and are necessary to attract and retain highly talented individuals with the requisite technical and managerial skills to implement our business strategy. Because the CIC Plan (as defined below) gives the named executive officers reasonable assurance of transitional employment support, the Compensation Committee believes executive officers are able to maintain a more balanced, shareholder-focused approach to change in control situations.
The Compensation Committee determined that it is in the best interests of the Company and its shareholders to assure that the Company will have the continued dedication of its named executive officers, notwithstanding the possibility, threat or occurrence of a change in control (as defined below) of the Company. The Compensation Committee believes it is imperative to diminish the inevitable distraction of the named executive officers by virtue of the personal uncertainties and risks created by a pending or threatened change in control and to encourage the named executive officers full attention and dedication to the Company currently and in the event of any threatened or pending change in control.
Unvested stock options and restricted stock unit awards become immediately exercisable and vested upon the occurrence of a change in control and do not require termination of employment. With regard to stock options, a change in control is defined in Section 14.2 of the 2004 Plan.
On March 14, 2012, after reviewing the information provided by Longnecker, our Compensation Committee adopted the GeoResources, Inc. Change in Control Plan (the CIC Plan). Pursuant to the CIC Plan, upon a change in control (as defined below) and contingent upon the named executive officers continuous employment with the Company through date of the change in control and execution of a binding release agreement, the named executive officer will be entitled to receive a lump sum cash payment in an amount equal to such named executive officers annual base salary as in effect immediately prior to the
change in control on the first payroll after the fifty-fifth day following a change in control. Additionally, in the event a named executive officer incurs a separation from service (as defined below) from the Company or its successor for any reason within two years after a change in control, during the applicable continuation period (as defined below) the Company will reimburse the named executive officer or the named executive officers descendants, as the case may be, the full cost for continued coverage pursuant to the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA).
A change in control will be deemed to exist upon the occurrence of any of the following: (i) the acquisition by any one person, or more than one person acting as a group, of ownership of stock of the Company that, together with stock held by such person or group, constitutes more than 50% of the total fair market value or total voting power of the stock of the Company; (ii) the acquisition by any one person, or more than one person acting as a group, of all or substantially all of the Companys assets during the 12-month period ending on the date of the most recent acquisition. The term substantially all means at least 60% of the assets of the Company immediately before such acquisition(s); or (iii) when a majority of the members of the Board are replaced during any 12-month period by directors whose appointment or election is not endorsed by a majority of the members of the Board before the date of the appointment or election. The term continuation period means a period commencing on the date of a named executive officers termination of employment until the earliest of: (i) 12 months following the date of termination; (ii) the date the named executive officer becomes eligible for coverage under the health insurance plan of a subsequent employer; or (iii) the date the named executive officer or the named executive officers eligible dependents cease to be eligible under COBRA. A separation from service means termination of a named executive officers employment with the Company; provided, that, such termination constitutes a separation from service within the meaning of Section 409A of the Code and the default presumptions set forth in the treasury regulations promulgated under Section 409A of the Code.
Also, see Item 11. Executive Compensation Potential Payments Triggered Upon a Change in Control below for a discussion and calculation of the value of the immediate vesting of outstanding stock options, restricted stock unit awards and payments under the CIC Plan for our named executive officers.
Summary Compensation Table
The following table presents, for the years ended December 31, 2011, 2010 and 2009, the compensation of Mr. Lodzinski, our principal executive officer, Mr. Ehler, our principal financial officer, and Messrs. Anderson, Merrifield and Mury, our three most highly-compensated executive officers (other than the principal executive officer and the principal financial officer) who were serving as executive officers (collectively, the named executive officers or NEOs) as of December 31, 2011. We do not have any employment contracts with any of our named executive officers. There has been no compensation awarded to, earned by or paid to any employees required to be reported in any table or column in the years covered by any table, other than what is set forth in the following table.
Grants of Plan-Based Awards for 2011
The following table provides information about time-based restricted stock unit awards granted under the 2004 Plan to our named executive officers during fiscal 2011.
April 29, 2011 Restricted Stock Unit Awards. Each restricted stock unit represents a contingent right to receive one share of our common stock upon vesting. The restricted stock unit awards granted to the named executive officers on April 29, 2011 are subject to the following vesting schedule: approximately one-third vest on May, 1, 2012 and the remaining two-thirds will vest on a pro-rata monthly basis over the remaining two years, beginning on June 1, 2012, subject to the named executive officers continued employment with the Company through the vesting date. The named executive officers do not have the right to vote or dispose of the restricted stock units.
Outstanding Equity Awards at Year End
The following table provides information concerning the holdings of stock option and restricted stock unit awards by our named executive officers as of December 31, 2011. This table includes unexercised (both vested and unvested) stock option awards and unvested restricted stock unit awards with vesting conditions that were not satisfied as of December 31, 2011. Each equity grant is shown separately for each named executive officer. The vesting schedule for each outstanding equity award is shown in the footnotes following this table.
Option Exercises in 2011
The following table provides information concerning stock options exercised and shares of our common stock acquired upon exercise by our named executive officers for the year ended December 31, 2011.
Employment Contracts and Termination of Employment
We have no employment contracts in place with any of our named executive officers, who serve at the will of our Board. Except as set forth in our CIC Plan with respect to payments upon a change in control and reimbursement for health care benefits, we do not have any compensatory plan or arrangement with respect to any named executive officer where such plan or arrangement will result in payments to such officer upon or following his resignation, retirement, or other termination of employment with us and our subsidiaries, or as a result of a change in control of the Company or a change in the named executive officers responsibilities following a change in control. See Item 11. Executive Compensation Potential Payments Triggered Upon a Change in Control.
Potential Payments Triggered Upon a Change in Control
As of December 31, 2011. The 2004 Plan, under which stock options and restricted stock unit awards have been granted, contains provisions concerning accelerated vesting upon a change in control. The amounts shown in the following table reflect the potential value to our named executive officers as of December 30, 2011, of unvested options and restricted stock unit awards where the vesting may accelerate upon a change in control of the Company. Consistent with SEC requirements, these estimated amounts have been calculated as if the change in control had occurred as of December 30, 2011, the last business day of 2011, and using the closing market price of our common stock on December 30, 2011 ($29.31 per share). The amounts below are estimates of the incremental amounts that would be received upon a change in control; the actual amount could be determined only at the time of any actual change in control. The below table does not include any amounts payable under our Change in Control Plan adopted March 14, 2012 (the CIC Plan) and the restricted stock unit awards granted on January 6, 2012; however, those are discussed in the below sub-section titled After December 31, 2011.
Estimated Potential Payments Upon a Change in Control (1)
After December 31, 2011. The above table does not include any amounts payable under our CIC Plan adopted March 14, 2012 and the restricted stock unit awards granted on January 6, 2012 to our named executive officers. Pursuant to the CIC Plan, upon a change in control (as defined below) and contingent upon the named executive officers continuous employment with the Company through date of the change in control and execution of a binding release agreement, the named executive officer will be entitled to receive a lump sum cash payment in an amount equal to such named executive officers annual base salary as in effect immediately prior to the change in control on the first payroll after the fifty-fifth day following a change in control. Additionally, in the event a named executive officer incurs a separation from service (as defined below) from the Company or its successor for any reason within two years after a change in control, during the applicable continuation period (as defined below) the Company will reimburse the named executive officer or the named executive officers descendants, as the case may be, the full cost for continued coverage pursuant to COBRA.
A change in control will be deemed to exist upon the occurrence of any of the following: (i) the acquisition by any one person, or more than one person acting as a group, of ownership of stock of the Company that, together with stock held by such
person or group, constitutes more than fifty percent (50%) of the total fair market value or total voting power of the stock of the Company; (ii) the acquisition by any one person, or more than one person acting as a group, of all or substantially all of the Companys assets during the 12-month period ending on the date of the most recent acquisition. The term substantially all means at least 60% of the assets of the Company immediately before such acquisition(s); or (iii) when a majority of the members of the Board are replaced during any 12-month period by directors whose appointment or election is not endorsed by a majority of the members of the Board before the date of the appointment or election. The term continuation period means a period commencing on the date of a named executive officers termination of employment until the earliest of: (i) twelve (12) months following the date of termination; (ii) the date the named executive officer becomes eligible for coverage under the health insurance plan of a subsequent employer; or (iii) the date the named executive officer or the named executive officers eligible dependents, as the case may be, cease to be eligible under COBRA. A separation from service means termination of a named executive officers employment with the Company; provided, that, such termination constitutes a separation from service within the meaning of Section 409A of the Code and the default presumptions set forth in the treasury regulations promulgated under Section 409A of the Code.
Compensation Committee Interlocks and Insider Participation
Messrs. Seaman, Joliat and Vlasic served as members of the Compensation Committee during 2011. There are no members of our Compensation Committee who were officers or employees of the Company or any of our subsidiaries during 2011. No members were formerly officers of the Company or had any relationship otherwise requiring disclosure hereunder. During 2011, no interlocking relationships existed between any of our named executive officers or members of our Board or Compensation Committee, on the one hand, and the executive officers or members of the board of directors or compensation committee of any other entity, on the other hand.
Compensation Committee Report
The Compensation Committee of our Board of Directors oversees GeoResources, Inc.s compensation program on behalf of the Board. In fulfilling its oversight responsibilities, the Compensation Committee reviewed and discussed with management the Compensation Discussion and Analysis set forth herein. Based on this review and discussion, the Compensation Committee recommended to the Board that the Compensation Discussion and Analysis set forth above under Compensation Discussion and Analysis be included in our Annual Report on Form 10-K for the year ended December 31, 2011.
Bryant W. Seaman, III (Chair)
Jay F. Joliat
Michael A. Vlasic
Director Compensation for 2011
The following table sets forth the aggregate compensation paid to our non-employee directors during 2011.
2011 Non-Employee Director Compensation Program
Directors who are employees of the Company receive no additional compensation for their services as directors. Non-employee directors are compensated for their service on the Board as described below. The following table describes the components of compensation for non-employee directors in effect during 2011:
Stock Option Grants. On February 3, 2009, each then non-employee director was granted stock options under the 2004 Plan to purchase 40,000 shares of common stock with exercise prices of $8.50 for 20,000 shares and $10.00 per share for the remaining 20,000 shares. The February 3, 2009, closing price of our common stock was $7.62 per share. On April 7, 2010, the
Compensation Committee granted stock options under the 2004 Plan to Mr. Whelley, a non-employee director who was appointed to our Board on March 30, 2010, to purchase 40,000 shares of common stock with exercise prices of $17.50 per share for 20,000 shares and $20.00 per share for the remaining 20,000 shares. The stock options vest equally between the two exercise prices in equal annual installments over a period of four years from the date of grant. The options have a term of 10 years and are subject to the terms and conditions of the 2004 Plan. The April 7, 2010, closing price of our common stock was $17.27 per share.
As of June 6, 2011, Mr. Seaman was permitted by his employer to accept equity compensation for his service on our Board. Accordingly, the Compensation Committee, in an effort to catch-up Mr. Seaman to the equity incentives received by Mr. Whelley, who was appointed to our Board on the same day as Mr. Seaman, granted stock options under the 2004 Plan to Mr. Seaman, a non-employee director who was appointed to our Board on March 30, 2010, to purchase 40,000 shares of common stock with exercise prices of $23.00 per share for 20,000 shares and $27.00 per share for the remaining 20,000 shares. The stock options vest equally between the two exercise prices in equal annual installments over a period of four years from the date of grant. The options have a term of 10 years and are subject to the terms and conditions of the 2004 Plan. The June 7, 2011, closing price of our common stock was $21.57 per share.
Restricted Stock Unit Awards. Additionally, on June 7, 2011, the Compensation Committee granted Mr. Seaman a restricted stock unit award for 5,000 restricted stock units that vest as to 2,000 units on June 1, 2012 and the remaining 3,000 shares in 24 equal monthly installments on the first day of the month, beginning on July 1, 2012, subject to his continued service on our Board. Each restricted stock unit represents a contingent right to receive one share of our common stock upon vesting.
2012 Non-Employee Director Compensation Program
Our Compensation Committee reviewed our non-employee director compensation program with the assistance of Longnecker who provided data on director compensation programs at a number of companies identified by the Compensation Committee and Longnecker as industry peers.
Our director compensation program is designed to provide a competitive level of compensation and enable the Company to attract and retain highly-qualified directors. Annual compensation for our non-employee directors consists of a cash retainer and equity compensation comprising restricted stock unit awards. Each of these components for 2012 is shown in the following table and explained further below.
Annual Board Retainer Cash Fee. Beginning in 2012, each non-employee director who continues to serve as a director will receive a cash annual board retainer fee of $40,000 per year. Non-employee directors who serve as chairs of committees will receive an additional retainer fee of $10,000. No additional fees are paid for attending board or committee meetings. Our directors may elect to receive the annual board cash retainer fee and cash fees for chairs of committees in the form of restricted stock unit awards. The election must be made by the first Friday in January and the number of restricted stock units is based on the closing price of our common stock on the second Friday of January. The restricted stock unit awards vest in four equal quarterly installments. All cash retainer fees are paid quarterly. Non-employee directors who are appointed to fill a vacancy on the board are paid a pro rata amount of the annual retainer immediately following the effective date of the directors appointment.
Annual Board Retainer Equity Award. Beginning in 2012, each non-employee director will receive $80,000 of the annual board retainer fee in the form of restricted stock unit awards with the number of restricted stock units determined by dividing that dollar amount by the closing price of our common stock on the date of grant. These restricted stock units will vest in four equal quarterly installments. The restricted stock unit awards will be forfeitable during that vesting period, though directors who leave the Board during the year will receive any vested restricted stock units.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Equity Compensation Plan Information
The following table provides information as of April 24, 2012, regarding compensation plans (including individual compensation arrangements) under which our equity securities are authorized for issuance. The table includes information regarding the 2004 Plan.
Security Ownership of Management and Certain Beneficial Owners
Directors and Named Executive Officers
The following table includes all holdings of common stock, par value $0.01 per share, of the Company, as of April 24, 2012 of our named executive officers, our directors and named executive officers and directors as a group.
Beneficial Owners of More than Five Percent
The following table shows the number of shares of our common stock, as of April 24, 2012, held by persons known to us to beneficially own more than five percent of our outstanding common stock.
Item 13. Certain Relationships, Related Transactions and Director Independence
Policies and Procedures for Approval of Related Party Transactions
Our officers and directors are required to obtain Audit Committee approval for any proposed related party transactions. In addition, our Code of Ethics requires that each director, officer and employee must do everything he or she reasonably can to avoid conflicts of interest or the appearance of conflicts of interest. Our Code of Ethics states that a conflict of interest exists when an individuals private interest interferes in any way or even appears to interfere with our interests and sets forth a list of broad categories of the types of transactions that must be reported to our Board. Under our Code of Ethics, we reserve the right to determine when an actual or potential conflict of interest exists and then to take any action we deem appropriate to prevent the conflict of interest from occurring.
As required by the NASDAQ Global Select Markets (NASDAQ) listing standards, a majority of the members of our Board must qualify as independent, as affirmatively determined by our Board. Our Board consults with our legal counsel to ensure that its determinations are consistent with all relevant securities and other laws and regulations regarding the definition of independent, including those set forth in the applicable NASDAQ listing standards.
The current Board consists of seven directors, two of whom are currently employed by the Company (Messrs. Lodzinski and Anderson). The Board conducted an annual review and affirmatively determined that a majority of our Board is comprised of independent directors. Our independent directors include: Mr. Joliat, Mr. Seaman, Mr. Vlasic, Mr. Voller and Mr. Whelley.
The Board made a subjective determination as to each independent director that no relationship exists; which, in the opinion of the Board, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. In making these determinations, the Board reviewed and discussed information provided by the Board and the Company with regard to each directors business and personal activities as they may relate to the Company and its management. Further, the Board determined that Mr. Lodzinski is not independent because he is the President and Chief Executive Officer of the Company and Mr. Anderson is not independent because he is an executive officer of the Company. Prior to his resignation, the Board determined that Mr. Chandler was not independent because he was an executive officer of the Company.
Item 14. Principal Accountant Fees and Services
The Audit Committee of the Board of Directors has retained Grant Thornton LLP (Grant Thornton) as our independent public accounting firm (our independent auditor). Grant Thornton audited our financial statements for the year ended December 31, 2011. The audit reports of Grant Thornton on our consolidated financial statements as of and for the year ended December 31, 2011 did not contain an adverse opinion or disclaimer of opinion, and was not qualified or modified as to uncertainty, audit scope or accounting principles.
Audit Committee Pre-Approval Policies and Procedures
To help assure independence of the independent auditor, the Audit Committee has established a policy whereby all audit, review, attest and non-audit engagements of the principal auditor or other firms must be approved in advance by the Audit Committee; provided, however, that de minimis non-audit services may instead be approved in accordance with applicable SEC rules. This policy is set forth in our Audit Committee Charter. Of the fees shown above in the table, which were paid to our independent auditor, 100% were approved by the Audit Committee.
Fees Paid to Grant Thornton LLP
The following is a summary and description of fees for services provided by Grant Thornton in 2011 and 2010.
Audit Fees. Audit fees relate to professional services rendered in connection with the audit of our annual financial statements and internal control over financial reporting, quarterly review of financial statements included in our quarterly reports on Form 10-Q and audit services provided in connection with other statutory and regulatory filings.
Item 15. Exhibits, Financial Statement Schedules
Exhibit Index for Amendment No. 1 on Form 10-K/A to the Form 10-K for the year ended December 31, 2011
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K/A to be signed on its behalf by the undersigned, thereunto duly authorized.