Kodiak Oil DEF 14A 2012
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Statement Pursuant to Section 14(a) of
To all Shareholders of Kodiak Oil & Gas Corp.:
NOTICE IS HEREBY GIVEN that the 2012 Annual Meeting of Shareholders of Kodiak Oil & Gas Corp. (the "Company") will be held at The Denver Athletic Club, Denver Room, 1325 Glenarm Place, Denver, CO 80204, on Wednesday, June 13, 2012, beginning at 9:00 a.m. MDT, for the following purposes:
The Board has fixed Wednesday, May 9, 2012 as the record date for the 2012 Annual Meeting. Only shareholders of the Company of record at the close of business on that date will be entitled to notice of, and to vote at, the Annual Meeting. A list of registered shareholders as of May 9, 2012 will be available at the Annual Meeting for inspection by any shareholder.
Shareholders will need to register at the Annual Meeting to attend. If your shares are not registered in your name, you will need to bring proof of your ownership of those shares to the Annual Meeting in order to register. You should ask the broker, bank or other institution that holds your shares to provide you with either a copy of an account statement or a letter that shows your ownership of the Company's stock as of May 9, 2012. Please bring that documentation to the Annual Meeting to register.
If you are a registered holder, whether or not you expect to attend the Annual Meeting, please sign and promptly return the enclosed proxy card. If you are a non-registered/beneficial holder, whether or not you expect to attend the Annual Meeting, please vote in accordance with the instructions on your voting instruction form, which may allow voting by telephone or via the Internet. Should you decide to attend, you may revoke your proxy in accordance with the revocation procedures discussed in the enclosed Proxy Statement and vote your shares in person.
By Order of the Board of Directors,
/s/ JAMES P. HENDERSON
James P. Henderson, Secretary
May 14, 2012
May 14, 2012
I am pleased to invite you to attend the 2012 Annual Meeting of Shareholders of Kodiak Oil & Gas Corp. (the "Company"), which will be held on Wednesday, June 13, 2012, at 9:00 a.m. MDT, in Denver, Colorado. We will meet at The Denver Athletic Club, Denver Room, 1325 Glenarm Place, Denver, CO 80204.
The matters to be acted upon are described in the accompanying Notice of Annual General Meeting and Proxy Statement. At the meeting, we will also report on the Company's operations and respond to any questions you may have.
Whether or not you are personally able to attend the Annual Meeting, please promptly vote your shares in accordance with the enclosed proxy card or voting instruction form as soon as possible. Submitting your vote by such means in advance of the Annual Meeting will not limit your right to attend and vote in person. Your vote is very important.
TABLE OF CONTENTS
Unless the context requires otherwise, references in this statement to "we," "us," or "our" refer to Kodiak Oil & Gas Corp.
The Annual Meeting ("Annual Meeting") of Shareholders of Kodiak Oil & Gas Corp. (the "Company") will be held on Wednesday, June 13, 2012 at The Denver Athletic Club, Denver Room, 1325 Glenarm Place, Denver, CO 80204, beginning at 9:00 a.m. MDT. We are providing the enclosed Proxy Statement, proxy materials and form of proxy in connection with the solicitation by the Company's Board of Directors (the "Board") of proxies for this Annual Meeting. The Company anticipates that this Proxy Statement, proxy materials and the form of proxy will be first mailed to holders of the Company's stock on or about May 16, 2012.
You are invited to attend the Annual Meeting at the above stated time and location. If you plan to attend and your shares are held in "street name"in an account with a bank, broker, or other nomineeyou must obtain a proxy issued in your name from such broker, bank or other nominee.
You can vote your shares by completing and returning the proxy card, or, if you are a non-registered/beneficial holder, by following the instructions set forth in the enclosed voting instruction form. A returned signed proxy card or voting instruction form without any indication of how shares should be voted will be voted FOR the election of directors, FOR the approval of the advisory resolution on executive compensation and FOR the ratification of the selection of Ernst & Young LLP as the Company's independent registered public accounting firm for the fiscal year ending December 31, 2012.
Our corporate by-laws define a quorum as two persons present in person, each being a shareholder entitled to vote or a duly appointed proxy for an absent shareholder so entitled and together holding or representing by proxy not less than 5% of the outstanding shares of the Company entitled to vote at the Annual Meeting. Our by-laws do not allow cumulative voting for directors. The nominees who receive the most votes will be elected. A simple majority of the votes cast is required to approve the advisory resolution on executive compensation and to ratify the selection of Ernst & Young LLP as our independent registered public accounting firm.
The Company is providing this Proxy Statement and proxy card directly to shareholders who are shareholders of record at the close of business on May 9, 2012 and are entitled to vote at the Annual Meeting. This Proxy Statement describes issues on which the Company would like you, as a shareholder, to vote. It provides information on these issues so that you can make an informed decision. You do not need to attend the Annual Meeting to vote your shares.
When you submit your executed proxy card, you appoint Lynn A. Peterson, President and Chief Executive Officer (or "CEO") of the Company and Chairman of the Board, and James P. Henderson, Secretary, Treasurer and Chief Financial Officer (or "CFO"), your representatives at the Annual Meeting. As your representatives, they will vote your shares at the Annual Meeting (or any adjournments or postponements) as you have instructed them on your proxy card. With proxy voting, your shares will be voted whether or not you attend the Annual Meeting. Even if you plan to attend the Annual Meeting, we recommend that you return your proxy card in advance of the Annual Meeting.
If an issue arises for voting at the Annual Meeting (or any adjournments or postponements) that is not described in this Proxy Statement, your representatives will vote your shares, under your proxy, at their discretion, subject to any limitations imposed by law.
Many, if not most, investors own their investment shares through a broker-dealer or other nominee. Broker-dealers frequently clear their transactions through other broker-dealers, and may hold the actual certificates for shares in the name of securities depositories, such as CEDE & Co. (operated by Depository Trust Company of New York City). In such a case, only the ultimate certificate holder appears on our records as a shareholder, even though that nominee may not have any economic interest in the shares that you actually own through your broker-dealer. You should contact your broker-dealer for more information about this process.
If your shares are held in an account with a brokerage firm, bank, dealer, or other similar organization, then you are the non-registered/beneficial owner of shares held in a "street name" and these proxy materials are being forwarded to you by that organization. The organization holding your account is considered the shareholder of record for purposes of voting at the Annual Meeting. As a beneficial owner, you have the right to direct your broker, bank or other nominee on how to vote the shares in your account by following the instructions on the enclosed voting instruction form. You are also invited to attend the Annual Meeting. However, since you are not the shareholder of record, you may not vote your shares in person at the Annual Meeting unless you request and obtain a valid proxy card from your broker, bank, or other nominee.
This solicitation is made on behalf of the management of the Company. No director has given management notice that he intends to oppose any action intended to be taken by management at the Annual Meeting. The Company will bear the cost of soliciting proxies. In an effort to have as large a representation at the Annual Meeting as possible, the Company's directors, officers and employees may solicit proxies by telephone or in person in certain circumstances. These individuals will receive no additional compensation for their services other than their regular salaries. Upon request, the Company will reimburse brokers, dealers, banks, voting trustees and their nominees who are holders of record of the Company's common stock on the record date for the reasonable expenses incurred for mailing copies of the proxy materials to the beneficial owners of such shares.
The Board has fixed Wednesday, May 9, 2012 as the record date for the Annual Meeting. Only holders of the Company's stock as of the close of business on that date will be entitled to vote at the Annual Meeting.
A total of 263,530,643 shares were outstanding as of May 9, 2012. Votes may be cast on each matter presented, consisting of one vote for each share of the Company's common stock outstanding as of the record date.
You are being asked to vote on the following:
Each share of common stock is entitled to one vote. No cumulative rights are authorized, and dissenters' rights are not applicable to any of the matters being voted upon.
The Board recommends a vote FOR each of the nominees to the Board, FOR the advisory vote on executive compensation and FOR ratification of the selection of Ernst & Young LLP as the Company's independent registered public accounting firm for the fiscal year ending December 31, 2012.
If you are a registered holder, you may vote your shares by promptly completing, signing and returning the enclosed proxy card in the enclosed envelope or by attending the Annual Meeting in person and voting. Joint owners must each sign the proxy card. If you are a non-registered/beneficial holder, you will receive a voting instruction form from a broker-dealer or other nominee that you will use to instruct such persons how to vote your shares. If you receive a voting instruction form, you may vote those shares by mail, telephonically by calling the telephone number shown on the voting form or via the Internet at the web site shown on the voting instruction form. If you are a non-registered/beneficial holder, you are not considered to be a shareholder of record, and you will not be permitted to vote your shares in person at the Annual Meeting unless you have obtained a proxy for those shares from the person who holds your shares of record. Should you require additional information regarding the Annual Meeting, please contact James P. Henderson at (303) 592-8075.
If you prefer, you may vote at the Annual Meeting. If you hold your shares through a brokerage account but do not have a physical share certificate, or the shares are registered in someone else's name, you must request a legal proxy from your stockbroker or the registered owner to vote at the Annual Meeting.
If you receive more than one proxy card, it likely means that you have multiple accounts with the transfer agent and/or with stockbrokers. Please vote all of the shares.
We have adopted a procedure that permits us and brokerage firms to send one copy of our 2011 Annual Report and this Proxy Statement and accompanying materials to multiple shareholders who share the same address, unless we receive contrary instructions from a shareholder.
In the event that a shareholder wishes to receive a separate copy of this proxy statement and accompanying materials for the Annual Meeting, the Company's 2011 Annual Report, or any future proxy materials or annual reports, the shareholder may promptly receive separate copies by written or oral request to James P. Henderson, Secretary of the Company, at (303) 592-8075, 1625 Broadway, Suite 250, Denver, Colorado 80202. Shareholders receiving multiple copies of these documents at the same address can request delivery of a single copy of these documents by contacting the Company in the same manner. Shareholders holding shares through a broker can request a single copy by contacting the broker. Please note that each shareholder should receive a separate proxy card to vote the shares they own.
You may revoke your proxy and change your vote at any time up until the commencement of the Annual Meeting. You may do so by:
To conduct the Annual Meeting, the Company must have a quorum, which means that two persons must be present in person, each being a shareholder entitled to vote or a duly appointed proxy for an absent shareholder so entitled and together holding or representing by proxy not less than 5% of the outstanding shares of the Company entitled to vote at the Annual Meeting.
Abstentions with respect to a proposal are counted for purposes of establishing a quorum. If a quorum is present, abstentions will not be included in vote totals and will not affect the outcome of the vote of any proposal contained in this year's Proxy Statement. "Broker non-votes," which are shares held in "street name" by brokers or nominees, who indicate on their proxies that they do not have discretionary authority to vote such shares as to a particular matter, will be counted for purposes of establishing a quorum. If a quorum is present, broker non-votes will not be counted as votes in favor of such matter, and also will not be counted as shares voting on such matter. Accordingly, abstentions and broker non-votes will have no effect on the voting on a matter that requires the affirmative vote of a certain percentage of the shares voting on the matter.
A nominee is entitled to vote shares held for a beneficial owner on "routine" matters, such as the ratification of the selection of Ernst & Young LLP as our independent auditors, without instructions from the beneficial owner of those shares. However, absent instructions from the beneficial owner of such shares, a nominee is not entitled to vote shares held for a beneficial owner on certain "non-routine" matters. The election of our directors and the advisory vote on executive compensation are treated as non-routine matters.
If you hold your shares in street name, it is critical that you cast your vote if you want it to count on all matters to be decided at the Annual Meeting. If you do not instruct your bank, broker, or other nominee how to vote in the election of directors and the advisory vote on executive compensation, then no votes will be cast on your behalf.
The nominees for election as directors at the 2012 Annual Meeting will be elected by a majority of the votes cast at the Annual Meeting. A properly executed proxy card or voting instruction form marked "Withheld" with respect to the election of directors will not be voted and will not count for or against any of the nominees.
Approval of the 2011 compensation of our Named Executive Officers requires the affirmative vote of a majority of the votes cast at the Annual Meeting.
While we intend to carefully consider the voting results of this proposal, the final vote is advisory in nature and therefore not binding on us, our Board of Directors or the Compensation Committee. Our Board of Directors and Compensation Committee value the opinions of all of our shareholders and will consider the outcome of this vote when making future decisions on executive compensation.
The selection of Ernst & Young LLP as our independent registered public accounting firm will be ratified by a majority of the votes cast at the Annual Meeting.
If your shares are registered in your name, and you do not sign and return your proxy card, your shares will not be voted at the Annual Meeting. If your shares are held through a brokerage account, your brokerage firm, under certain circumstances, may vote your shares.
Your shares will be voted as you indicate. If you simply submit your executed proxy card or voting instruction form with no further instructions, your shares will be voted:
Voting results will be tabulated and certified by a representative of Computershare Investor Services, Inc., scrutineer of the Annual Meeting.
The Company will publish the final results in a Current Report on Form 8-K, which will be filed with the Securities and Exchange Commission (the "SEC") and on http://www.sedar.com within four business days after the date of our Annual Meeting.
The Company's Proxy Statement and 2011 Annual Report on Form 10-K, including financial statements, are available through the SEC's website at http://www.sec.gov, through the Company's website at http://www.kodiakog.com and through http://www.sedar.com.
At the written request of any shareholder who owns common stock on the record date, the Company will provide to such shareholder, without charge, a paper copy of the Company's 2011 Annual Report on Form 10-K, including the financial statements but not including exhibits. Upon your request and for a reasonable fee, the Company will provide copies of the exhibits. Requests for additional paper copies of the 2011 Annual Report on Form 10-K should be mailed to:
Oil & Gas Corp.
The following materials accompany this Proxy Statement:
The Company's current bylaws require the Board to have at least three and no more than ten directors. The current Board is composed of five directors.
No, the Board is not divided into classes. All directors serve one-year terms until their successors are elected and qualified at the next Annual Meeting.
The Compensation and Nominating Committee has nominated the following five current Board members for election at the 2012 Annual Meeting, to hold office until the 2013 Annual Meeting:
The following nominees qualify as independent under the applicable New York Stock Exchange standards, SEC rules and the National Instrument 52-101: Rodney D. Knutson, Herrick K. Lidstone, Jr. and William J. Krysiak. Additional information concerning the above nominees, including their ages, positions and offices held with the Company, and terms of office as directors, is set forth below under the heading "Information Concerning the Board of Directors and Executive Officers."
Should any one or more of the nominees become unable or unwilling to serve, which is not anticipated, the Board may designate substitute nominees, in which event only the following persons may vote: (1) registered shareholders present at the Annual Meeting and (2) proxyholders having a legal proxy and who are present at the Annual Meeting.
Directors are elected by a majority of the votes present in person or represented by proxy and entitled to vote at the Annual Meeting.
Between annual meetings, the directors possess authority under Yukon law to appoint additional directors of up to one-third of the current number of Board members, or one additional director, subject to the overall limit of ten directors. The Board may also fill vacancies created during the year due to the death or resignation of a director.
The following table sets forth certain information with respect to our current directors and executive officers. The term for each director expires at our next annual meeting or at such time as his or her successor is appointed and qualified, upon ceasing to meet the qualifications for election as a director, upon death, upon removal by the shareholders or upon delivery or submission to the Company of the director's written resignation, unless the resignation specifies a later time of resignation. Each executive officer shall hold office until the earlier of the date his resignation becomes effective, the date his successor is appointed or he shall cease to be qualified for that office, or the date he is terminated by the Board. The ages of the directors and executive officers are shown as of December 31, 2011.
The following is a brief description of the employment background of the Company's current directors/director nominees and executive officers:
Lynn A. Peterson has served as a director of the Company since November 2001, President and Chief Executive Officer since July 2002 and Chairman of the Board since June 2011. Mr. Peterson has over 30 years of industry experience. Mr. Peterson was an owner of CP Resources, LLC, an independent oil and natural gas company from 1986 to 2001. Mr. Peterson served as Treasurer of Deca Energy from 1981 to 1986. Mr. Peterson was employed by Ernst and Whinney as a certified public accountant prior to this time. He received a Bachelor of Science in Accounting from the University of Northern Colorado in 1975. Mr. Peterson's business address is 1625 Broadway, Suite 250, Denver, Colorado 80202. The determination was made that Mr. Peterson should serve on our Board of Directors due to his extensive executive level experience working with oil and natural gas companies. In addition, we believe that it is important that the Board of Directors have the benefit of management's perspective, and in particular, that of the Chief Executive Officer.
James E. Catlin has served as a director of the Company since February 2001, Chairman of the Board from July 2002 until June 2011, Secretary from July 2002 to May 2008, Chief Operating Officer from June 2006 until June 2011 and Executive Vice President of Business Development since June 2011. Mr. Catlin has nearly 40 years of geologic experience, primarily in the Rocky Mountain Region. Mr. Catlin was an owner of CP Resources LLC, an independent oil and natural gas company from 1986 to 2001. Mr. Catlin was a founder and Vice-President of Deca Energy from 1980 to 1986 and worked as a district geologist for Petroleum Inc. and Fuelco prior to this time. He received a Bachelor of Arts and a Masters degree in Geology from the University of Northern Illinois in 1973. Mr. Catlin's business address is 1625 Broadway, Suite 250, Denver, Colorado 80202. The determination was made that Mr. Catlin should serve on our Board of Directors due to his extensive training and experience with respect to geology and executive level experience working with oil and natural gas companies.
James P. Henderson previously served as the Company's Chief Financial Officer from May 24, 2007 to May 10, 2008. He rejoined the Company as CFO on April 1, 2010 after two years as director of finance of Aspect Energy LLC, a Denver- based privately held energy company. Prior to May 2007, Mr. Henderson spent 17 years at Western Gas Resources and its successor, Anadarko Petroleum Corp., in its Denver office. During that time, he served as director, accounting services at Anadarko Petroleum Corp. and in various financial roles including director, financial planning and analysis at Western Gas Resources. Mr. Henderson holds a Bachelors degree in Accounting from Texas Tech University and a Master of Business Administration degree from Regis University in Denver. Mr. Henderson's business address is 1625 Broadway, Suite 250, Denver, Colorado 80202.
Dr. Russell A. Branting previously served as the Company's Operations Manager from June of 2007 to May of 2009 and Vice-President of Operations from May of 2009 until June of 2011. Dr. Branting currently serves as Executive Vice-President of Operations and has served in that capacity since June of 2011. He has more than 20 years of experience focused throughout the Rocky Mountain region, with extensive experience in the Green River Basin in Wyoming. He has served in various positions in petroleum engineering and operations with Western Gas Resources, Inc., Petropro Engineering, Inc., Tesco Underbalanced Drilling Services, Chevron USA, Inc., and Snyder Oil Corporation. He was most recently the Drilling Engineering Manager at Anadarko, where he was responsible for managing all drilling engineering operations ongoing in the Rocky Mountain Region. Dr. Branting earned his Ph. D. in Petroleum Engineering from the University of Wyoming in 1993. Dr. Branting's business address is 1625 Broadway, Suite 250, Denver, Colorado 80202.
Russ D. Cunningham previously served as the Company's Northern Rockies Exploration Manager from September of 2004 to December of 2007, Exploration Manager from December of 2007 to May of 2009, and Vice-President of Exploration from May of 2009 to June of 2011. Mr. Cunningham currently serves as Executive Vice-President of Exploration and has served in that capacity since June of 2011. He has over 30 years experience in oil and gas exploration, primarily in the Rocky Mountain Region and the Mid-Continent Region, as well as international experience in Colombia, South America and Russia. Mr. Cunningham was most recently with Cabot Oil and Gas Corporation exploring in Wyoming's Wind River Basin, the Paradox Basin of Colorado and Utah, and the Williston Basin of Montana and North Dakota. Prior to Cabot, Mr. Cunningham served as Vice-President Exploration for GHK Colombia Company, a subsidiary of Seven Seas Exploration. Mr. Cunningham has a Masters Degree in Geology from the University of Tulsa, Tulsa, Oklahoma and is a member of the American Association of Petroleum Geologists, Society of Economic Paleontologists and Mineralogists and the Geologic Society of America. Mr. Cunningham's business address is 1625 Broadway, Suite 250, Denver, Colorado 80202.
Rodney D. Knutson has served as a director of the Company since March 2001. Currently, he is a self-employed attorney in Aspen, Colorado. Prior to this, he had over thirty years of private law practice in Denver, Colorado working with oil, gas and mining companies. Mr. Knutson has a Bachelor of Electrical Engineering (1965) from the University of Minnesota and a Juris Doctor (1972) from the
University of Denver. Mr. Knutson is a former president of the Rocky Mountain Mineral Law Foundation. Mr. Knutson's business address is 1625 Broadway, Suite 250, Denver, Colorado 80202. The determination was made that Mr. Knutson should serve on our Board of Directors due to his extensive experience working with oil, gas and mining companies.
Herrick K. Lidstone, Jr. has served as a director of the Company since March 2006. Mr. Lidstone is an attorney at law in Greenwood Village, Colorado, and is currently with Burns, Figa & Will, P.C., where he practices in corporate and securities law, dealing frequently with mergers and acquisitions, finance transactions, and private and public securities offerings. Mr. Lidstone serves on the Securities Board for the Department of Regulatory Agencies in Colorado. He has been Adjunct Professor of Law at the University of Colorado and the University of Denver and has taught continuing education courses for the National Business Institute, CLE in Colorado, Inc., and other CLE providers. He has numerous legal publications and presentations to his credit. Mr. Lidstone received a Bachelor of Arts from Cornell University in 1971 and a Juris Doctor from the University of Colorado School of Law in 1978. Mr. Lidstone's business address is Suite 1000, 6400 South Fiddler's Green Circle, Greenwood Village, Colorado 80111. The determination was made that Mr. Lidstone should serve on our Board of Directors due to his extensive business and securities law experience and his experience in representing companies involved in natural resource exploration, development and production.
Mr. Krysiak has served as a director of the Company since September 2010. He is currently the CFO of Southwest Generation Operating Company, LLC, an independent power producer. Prior to his current position, from September 2007 to July 2009, he was the CFO of Aspect Holdings LLC, a Denver-based energy company. Prior to Aspect, he served in various financial-oriented management and officer positions at Western Gas Resources, Inc. from 1985 to 2006, including Chief Financial Officer. Subsequent to the sale of Western Gas Resources to Anadarko, Mr. Krysiak assisted Anadarko in a transition period from August 2006 through June 2007 as the Director of Financial Projects. He earned his BS in business administration with a major in accounting from Colorado State University in 1982 and is a Certified Public Accountant. Mr. Krysiak's business address is 1625 Broadway, Suite 250, Denver, Colorado 80202. The determination was made that Mr. Krysiak should serve on our Board of Directors due to his substantial financial reporting, compliance, capital markets and oil and gas transactional experience gained by way of his 18 years of experience as a corporate officer responsible for accounting and financial matters and his strong public company experience in the oil and gas industry.
There are no family relationships among the members of the Board or the members of senior management of our company. There are no arrangements or understanding with major shareholders, customers, suppliers or others, pursuant to which any member of the Board or member of senior management was selected.
During the 2011 fiscal year, none of the directors or officers were indebted to the Company or were a party to a material transaction with the Company.
The Company's current by-laws require the Board to have at least three and no more than ten directors. The current Board is comprised of the following five directors:
During the fiscal year ended December 31, 2011, the Board held 10 meetings. None of the incumbent directors attended fewer than 75% of the aggregate of the total number of Board meetings and meetings of the committees on which he serves.
Board members are not required to attend the annual general meeting. All of the board members, with the exception of Mr. Krysiak, serving as such at the time attended the 2011 Annual Meeting of Shareholders.
Shareholders who are interested in communicating directly with members of the Board, or the Board as a group, may do so by writing directly to the individual Board member c/o Secretary, James P. Henderson, Kodiak Oil & Gas Corp., 1625 Broadway, Suite 250, Denver, Colorado 80202. The Company's Secretary will forward communications directly to the appropriate Board member. If the correspondence is not addressed to the particular member, the communication will be forwarded to a Board member to bring to the attention of the Board. The Company's Secretary will review all communications before forwarding them to the appropriate Board member. The Board has requested that items unrelated to the duties and responsibilities of the Board, such as junk mail and mass mailings, business solicitations, advertisements and other commercial communications, surveys and questionnaires, and resumes or other job inquiries, not be forwarded.
Audit Committee and Audit Committee Financial Expert
The Audit Committee was established by the Board in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended, to oversee the Company's corporate accounting and financial reporting processes and audits of its financial statements. The members of our Audit Committee are Messrs. Krysiak, Lidstone and Knutson. Mr. Krysiak is chairman of the Audit Committee. All committee members qualify as independent directors under the applicable New York Stock Exchange standards, SEC rules and MI 52-110. The Board has determined that all current members of the Audit Committee are "financially literate" as interpreted by the Board in its business judgment. Mr. Krysiak further qualifies as an audit committee financial expert, as defined in the applicable rules of the SEC. The Audit Committee held five meetings during fiscal year 2011.
The Audit Committee meets periodically with our independent accountants and management to review the scope and results of the annual audit and to review our financial statements and related reporting matters prior to the submission of the financial statements to the Board. In addition, the
committee meets with the independent auditors at least on a quarterly basis to review and discuss the annual audit or quarterly review of our financial statements.
We have established an Audit Committee Charter that deals with the establishment of the Audit Committee and sets out its duties and responsibilities. The Audit Committee reviews and reassesses the adequacy of the Audit Committee Charter on an annual basis. The Audit Committee Charter is available on our Company website at http://www.kodiakog.com. Further information on our Audit Committee and related matters, including the Report of our Board on Audited Financial Statements, is located below under the section "Proposal ThreeRatification of the Appointment of Ernst & Young LLP."
Compensation and Nominating Committee
Our Board has established a Compensation and Nominating Committee, the current members of which are Messrs. Knutson, Lidstone and Krysiak. Mr. Lidstone is chairman of the Committee. All current committee members qualify as independent directors under the applicable New York Stock Exchange standards, SEC rules and MI 52-110. The Committee held three meetings during the fiscal year 2011. The Committee's Charter is available on our website at http://www.kodiakog.com. The Committee, acting pursuant to its written charter, serves the following purposes: (i) to assist the Board in fulfilling its oversight responsibilities relating to officer and director compensation, succession planning for senior management, development and retention of senior management, and such other duties as directed by the Board, (ii) to advise the Board with respect to Board composition, procedures and committees, (iii) to lead the Board in its annual review of the Board's performance and (iv) to identify and recommend to the Board individuals qualified to be nominated for election to the Board and to be members and Chairpersons of the Board committees.
Director Nomination Policies
The Committee is responsible for reviewing any shareholder proposals to nominate Board candidates. Shareholders may submit names of persons to be considered for nomination, and the Committee will consider such persons in the same way it evaluates other individuals for nomination as a new director. For the Company's policies regarding shareholder requests for nominations, see the section entitled "Shareholder Proposals" in this Proxy Statement. None of the current nominees were nominated by a shareholder.
Annually, the Committee follows a process designed to consider the re-election of existing directors and, if applicable, to seek individuals qualified to become new board members for recommendation to the Board to fill any vacancies. In assessing the qualification of a candidate, the Committee generally adheres to the following guidelines:
The Committee believes that having directors with relevant experience in business and industry, finance and other areas, and, in particular, experience with regard to exploration and production of natural gas and oil, financial reporting, risk management and business strategy, is beneficial to the Board as a whole. Directors with such backgrounds can provide a useful perspective on significant risks and competitive advantages and an understanding of the challenges the Company faces. The Committee monitors the mix of skills and experience of directors and Committee members to assess
whether the Board has the appropriate tools to perform its oversight function effectively. With respect to nominating existing directors, the Committee reviews relevant information available to it and assesses their continued ability and willingness to serve as a director. The Committee also assesses each person's contribution in light of the mix of skills and experience the Committee deems appropriate for the Board.
With respect to considering nominations of new directors, including nominations by shareholders, the Committee conducts a thorough search to identify candidates based upon criteria the Committee deems appropriate and considers the mix of skills and experience necessary to complement existing Board members. The Committee reviews selected candidates and makes a recommendation to the Board. The Committee may also seek input from other Board members or senior management when identifying candidates. The Committee has not adopted a formal policy with regard to the consideration of diversity in identifying director nominees.
The Compensation and Nominating Committee, acting pursuant to its written charter, a copy of which is available on our website at http://www.kodiakog.com, is responsible for setting executive compensation levels and executive and overall compensation policies. It is also responsible for reviewing and approving any executive benefit plans, making awards under the Company's equity plans to executive officers and directors and performing such other duties delegated to it by the Board. The charter of the Compensation and Nominating Committee does not have express authority to delegate its authority to any subcommittee or other group. See "Compensation Discussion and Analysis" for additional discussion regarding the process and procedures of the Compensation and Nominating Committee with respect to compensation.
The Board does not have a policy regarding the separation of the roles of Chief Executive Officer and Chairman of the Board, as the Board believes it is in the best interests of the Company to make that determination based on the position and direction of the Company and the membership of the Board. During 2011, the Board decided that it was in the best interests of the Company to allow Lynn Peterson to serve as both the Chief Executive Officer and Chairman of the Board.
The Board believes that combining the Chairman and Chief Executive Officer positions is currently the most effective leadership structure for the Company given Mr. Peterson's in-depth knowledge of the Company's business and industry and his ability to formulate and implement strategic initiatives. As Chief Executive Officer, Mr. Peterson is also intimately involved in the day-to-day operations of the Company and is thus in a position to elevate the most critical business issues for consideration by the Board. In addition, having a combined Chairman and Chief Executive Officer enables the Company to speak with a unified voice to shareholders and other constituencies. The Board believes that the combination of the Chairman and Chief Executive Officer roles as part of a governance structure that includes key board oversight responsibilities by directors, provides an effective balance for the management of the Company in the best interests of the Company's shareholders.
While Company management is charged with the day-to-day management of risks the Company faces, the Audit Committee, pursuant to its charter, is responsible for oversight of risk management. Specifically, the Audit Committee reviews and assesses the adequacy of the Company's risk management policies and procedures with regard to identification of the Company's principal risks, both financial and non-financial, and reviews updates on these risks from the Chief Executive Officer. The Audit Committee also reviews and assesses the adequacy of the implementation of appropriate
systems to mitigate and manage the principal risks. In addition, the Audit Committee is charged with the responsibility of evaluating related party transactions and conflicts of interest. The Audit Committee reports to the Board of Directors regarding the foregoing matters, and the Board of Directors ultimately approves any changes in corporate policies, including those pertaining to risk management.
The Board leadership structure promotes effective oversight of the company's risk management for the same reasons that the structure is most effective for the Company in general, that is, by providing the Chief Executive Officer and other members of senior management with the responsibility to assess and manage the Company's day-to-day risk exposure and providing the Board, and specifically the Audit Committee of the Board, with the responsibility to oversee these efforts of management.
The Compensation Committee has reviewed its compensation programs for executives and for non-executives and believes that compensation is structured in a way that does not create risks that would be reasonably likely to have a material, adverse effect on the Company. The Compensation Committee believes it has designed the overall compensation program in such a way as to deter excessive risk taking, to encourage executives to focus on the long-term success of the Company and to align the interests of executives with those of shareholders by:
There were no compensation committee or board interlocks among the members of our Board during 2011.
Our Compensation and Nominating Committee charter provides that the Compensation and Nominating Committee is to recommend to the Board of Directors matters related to director compensation. The 2011 director compensation package for non-employee directors consisted of annual cash compensation and equity-based awards in the form of shares of restricted stock and cash awards, each under the 2007 Stock Incentive Plan, as amended. The value of the cash awards was based on the closing price of one share of the Company's common stock on the vesting date.
Directors who also chair a committee receive additional cash compensation for their service as a chairperson. For the 2011 fiscal year, Herrick Lidstone, Jr. and William Krysiak received additional cash compensation for his role as chairperson of the Compensation and Nominating Committee and chairperson of the Audit Committee, respectively. No additional compensation was paid to any director for attending meetings. No employee of the Company is entitled to compensation for service as a director.
The following table provides information related to the compensation of our non-employee directors during fiscal year 2011.
The Board has adopted a Code of Business Conduct and Ethics, the full text of which can be found on our website at http://www.kodiakog.com. Any shareholder may request a hard copy, free of charge, of the Company's Code of Business Conduct and Ethics by making such request in writing to the Company.
Neither Kodiak nor any of its property is currently subject to any material legal proceedings or other adverse regulatory proceedings. We do not currently know of any legal proceedings against us involving our directors, executive officers or shareholders of more than 5% of our voting stock.
The Board believes that the principal objective of the Company is to generate economic returns with the goal of maximizing shareholder value. This will be accomplished by the effective discharge of the Board's responsibilities concerning strategic planning, appointment and oversight of management, succession planning, risk identification and management, environmental oversight and overseeing financial and corporate issues. The majority of the members of the Board are independent directors, and the primary responsibility for certain matters is delegated to committees composed entirely of independent directors.
While the Board is responsible for management of the business of the Company by law, this is generally carried out by proxy through the Company's chief executive officer, who is appointed by the Board and charged with the day-to-day leadership and management of the Company. The Board approves the goals of the business, the objectives and policies within which it is managed, and then steps back and evaluates management's performance.
Section 16(a) of the Exchange Act requires the Company's officers and directors and persons who own more than 10% of a registered class of the Company's equity securities, to file reports of ownership and changes in ownership on Forms 3, 4 and 5 with the SEC. Officers, directors and such 10% shareholders are required to furnish the Company with copies of all Forms 3, 4 and 5 they file.
Based solely on a review of the reports received by the SEC, furnished to the Company, or written representations from reporting persons that all reportable transactions were reported, the Company believes that, during the fiscal year ended December 31, 2011, the Company's officers, directors and greater than ten percent owners timely filed all reports they were required to file under Section 16(a), except that three reports, covering a total of four transactions were filed late. Messrs. Henderson and Branting each filed one late report, with each report covering one transaction relating to a stock grant, and Mr. Knutson filed one late report covering two transactions related to an option exercise and related sale.
In accordance with our Audit Committee Charter, our Audit Committee is responsible for reviewing, approving and overseeing all related party transactions. Our Code of Business Conduct and Ethics sets forth our written policy regarding related party transactions. Specifically, our Code of Business Conduct and Ethics provides that our directors, officers and employees should not be involved in any activity that creates or gives the appearance of a conflict of interest between their personal interests and the interests of the Company. In particular, our Code of Business Conduct states that,
without the specific permission of our Board of Directors (including contracts approved by our Board of Directors), no director, officer or employee, or a member of his or her family shall:
Directors, officers, and employees must immediately notify the Chair of our Audit Committee of the existence of any actual or potential conflict of interest. The circumstances will be reviewed for a decision on whether a conflict of interest is present, and if so, what course of action is to be taken. The Company had no reportable related party transactions during 2011. Further, during 2011, the Company had no transactions where the policies and procedures summarized above did not require review, approval, or ratification, or where such policies and procedures were not followed.
The Board of Directors has determined that the following directors qualify as independent under the applicable standards of the New York Stock Exchange, SEC rules and the National Instrument 52-101: Rodney D. Knutson, Herrick K. Lidstone, Jr. and William J. Krysiak.
The following contains a description of our 2011 compensation programs and objectives with respect to our Named Executive Officers identified in the Summary Compensation table (the "NEOs").
The year ended December 31, 2011 (referred to herein as "fiscal 2011") was an outstanding year for the Company. The Company experienced an approximate 45% growth in its stock price per share and achieved several key milestones, as follows:
Notably, the Company also achieved record financial results in the 2011 fiscal year. The table below summarizes the key Company financial and operational results for fiscal 2011 compared to fiscal 2010.
Consistent with our executive compensation program's emphasis on pay-for-performance, compensation awarded to the NEOs for fiscal 2011 reflected the Company's record financial and operational results and significant milestones achieved. Taking into account the foregoing factors, including that the Company exceeded all of the pre-established 2011 performance objectives, the following determinations were made with respect to the at-risk portion of the NEOs' 2011 compensation:
This Compensation Discussion and Analysis includes a discussion of the following:
The compensation package for our NEOs is composed of the following elements:
The Company's executive compensation program is designed to align the interests of the NEOs with shareholders by tying a significant portion of the NEOs' compensation to the Company's performance, as measured by a variety of objective factors during the applicable fiscal year. Under the program, the portion of compensation guaranteed to the NEOs for any fiscal year represents only a fraction of the total potential compensation. On average, only 26% of the value of the NEOs' aggregate 2011 target annual compensation was assured in the form of salary, whereas 74% was contingent on the Company's performance in the form of bonus incentives and equity awards. The following illustrates the foregoing pay mix:
The compensation review process for determining NEO compensation for the 2011 fiscal year occurred during the fourth quarter of 2010 with a presentation by the Chief Executive Officer to the
Compensation and Nominating Committee (referred to in this section as the "Compensation Committee") of the Company's current compensation philosophies and programs. The role of the Chief Executive Officer is to provide the Compensation Committee with perspectives on the business context to assist the Compensation Committee in making its decisions. The Chief Executive Officer also discusses with the Compensation Committee the compensation of the other NEOs. After such discussions, the Chief Executive Officer generally does not participate further in Compensation Committee deliberations or determinations regarding NEO compensation. The Compensation Committee makes all final decisions concerning NEO compensation. Compensation decisions are generally based upon an analysis of competitive benchmarking data and the performance of the Company overall and, at the sole discretion of the Compensation Committee, may also be based upon other considerations, such as the individual's performance and the individual's influence on the performance of the Company.
As part of its evaluation of NEO compensation, the Compensation Committee utilizes outside consulting services. For the analysis of fiscal 2011 executive compensation, the Compensation Committee retained Arlen L. Brammer, P.C. ("Brammer"). The Compensation Committee utilized a report prepared by Brammer to determine the appropriate salary, and the appropriate potential for bonus incentives and equity awards. When developing the consultant's report, the Compensation Committee had instructed Brammer to conduct a review utilizing peer group data and to make recommendations with respect to compensation levels. The peer group utilized by Brammer based on input from the Compensation Committee consisted of oil and gas exploration and production companies with a total asset size of between $300 million to $865 million and was comprised of the following companies:
In addition to benchmarking against an industry peer group, the Compensation Committee believes it is appropriate to consider other principles of compensation, and not accept "benchmarking" data as the sole basis for setting compensation levels. Thus, while the Compensation Committee has considered peer group data as described herein, it has also applied other compensation principles, including internal equity, when determining executive compensation.
The CEO's 2011 total potential compensation ranged from 1.4 to 1.7 times that of the total potential compensation of the other NEOs. The spread between the CEO's compensation and that of the other NEOs represents the Compensation Committee's recognition of its satisfaction with Mr. Peterson's leadership as reflected by the Company's performance in recent years. With regard to termination/change of control benefits, the Compensation Committee ultimately determined that it was appropriate to set all such benefits at equivalent levels for the CEO, EVP of Business Development and CFO due to their seniority as officers. However, as Messrs. Branting and Cunningham were newly appointed officers in 2011, their respective termination/change of control benefits were set at lower levels. The application of internal equity consideration to the various components of compensation is discussed in more detail in the applicable sections below.
The compensation package for our NEOs is specifically designed to achieve three compensation objectives:
The compensation package achieves the goal of attracting and retaining key talent in a highly competitive oil and gas environment through a total compensation package that pays at or above market levels, as described in more detail below. The compensation package achieves the goal of aligning the interests of management and the Company's shareholders by linking the size of NEO bonus incentive awards and the equity-based long-term incentive awards, to the successful performance of the Company, and in turn, to the creation of shareholder value. The compensation package achieves the goal of providing our executives with reasonable security through the provision of moderate termination and change of control benefits, thereby promoting the NEO's focus on enhancing shareholder value without undue concern about job security, while avoiding excessively liberal provisions that might motivate unnecessary risk taking.
Following is a discussion of the 2011 compensation decisions with respect to Mr. Peterson, our CEO, Mr. Henderson, our CFO, Mr. Catlin, our EVP of Business Development, Dr. Branting, our EVP of Operations, and Mr. Cunningham, our EVP of Exploration. Messrs. Branting and Cunningham are long-term Kodiak employees who were recently promoted in 2011 to NEO rank, and are considered by the CEO and the Board to be integral parts of the executive team.
When establishing the CEO's base salary for the 2011 fiscal year, the Compensation Committee concluded that the then-current salary rate of the CEO was near the recommended mid-point of the peer group data. As a result, the Compensation Committee did not alter the base salary of the CEO from the 2010 levels. The then-current salary rate of the EVP of Business Development was also determined to be near the mid-point, as adjusted to reflect his somewhat reduced time commitment to the Company. The Company determined to increase the salary of Mr. Henderson from $200,000 (amount annualized from the $150,000 paid for services from April 1, 2010 to December 31, 2010) to $250,000, which approximated the targeted mid-point of the peer group data and was equal to Mr. Catlin's salary.
As Messrs. Branting and Cunningham were elevated to the NEO level during the middle of 2011, the Compensation Committee elected to defer any changes in their respective base salaries until the determination of the fiscal 2012 NEO salaries. Accordingly, through the end of the 2011 fiscal year, Messrs. Branting and Cunningham continued to receive the salary at which they were paid prior to becoming NEOs (i.e., a salary of $250,000 each).
Annual Incentive Bonuses
The bonus incentive award potential for 2011 remained unchanged from 2010 at 100% of each NEO's base pay, based upon the Brammer report's conclusion that such amounts were consistent with the peer group and appropriate. However, the Compensation Committee determined to adopt a more objective approach to determining bonus payouts based on pre-established objective standards of Company performance. In contrast, in prior years, the payout of the NEO bonuses was determined in hindsight based upon the Compensation Committee's subjective determination of corporate performance. The Compensation Committee changed this approach for 2011 NEO bonuses due to its view that pre-established goals serve to (1) provide visibility and clarity with respect to the compensation system, including to both the executives and shareholders, (2) incentivize the executives throughout the year and (3) focus the executives' attention on the objectives that are critical to the success of the Company and the growth of shareholder value.
A discussion of the specific corporate objectives to which the 2011 bonus payout was tied, together with a discussion of the attainment of the objectives, is set forth below under the heading "2011 Corporate Objectives." As discussed therein, 100% of the 2011 objectives were achieved and each NEO received his maximum 2011 potential bonus. Such bonuses were paid, in part, in shares of common stock and in part, in cash. The allocation for each NEO was based upon his existing holdings of Company stock and his respective tax and financial planning considerations communicated to the Compensation Committee. The NEOs thus received the following bonus payouts:
2011 Long-Term Equity-Based Incentive Awards
For the 2011 compensation period, the Compensation Committee departed from its historical pattern of granting stock options to our NEOs and instead made tandem grants of restricted stock units ("RSUs") and performance awards ("PAs"). The change from stock options to RSUs was made primarily because the Compensation Committee believes that the value of RSUs to executives is more direct and visible than that of stock options, and because RSUs generally require fewer shares than stock options to deliver comparable value to executives. RSUs are also considered more effective as a retention tool given that they have a more identifiable value. With RSUs, if the performance goals are met, then the executive is assured of receiving some economic value even if the stock price declines or stays constant (as value is realized upon vesting). This is important where the stock price can be impacted by factors beyond the executives' control or influence. The PAs were awarded to provide the executives with a cash payment that could be used to pay the taxes due in connection with the vesting of RSUs, and to avoid the need to liquidate the shares in order to satisfy the tax withholding. Upon their respective future vesting dates, the remaining 2011 PAs are expected to be paid in cash based upon the value of the Company's shares of common stock as of the vesting date, although the Compensation Committee reserves the right, in its sole discretion, to pay out the PAs through the issuance of shares of common stock of the Company.
Commencing with the 2011 compensation period, the equity-based awards are no longer solely subject to a one-year performance period. Rather, to the extent that the 2011 corporate objectives are
satisfied, only a portion will vest at the end of the performance period and the remainder will vest ratably over the following three year period, provided the NEO continues to provide requisite services to the Company on the scheduled vesting dates. The addition of this time-based feature was made so that the NEO equity-based awards not only serve to motivate the NEOs, but also to retain their services. This change was also largely attributable to the change from stock options to RSUs and tandem PAs. The future value of the RSUs and PAs that are eligible for vesting in subsequent years, provided the NEO continues to provide requisite services to the Company, versus the uncertainty of the value of stock options that will vest in the future, made the combination of performance vesting in the first year followed by time-based vesting in subsequent years a more powerful motivator for NEOs to remain with the Company for the duration of the vesting period.
With respect to Messrs. Peterson and Catlin, the Compensation Committee determined to award that number of RSUs and PAs approximately equal in value to the 2010 stock option grants. The Compensation Committee believed that, due to the increased value of an RSU and PA to the officers relative to a stock option (as a result of there being no exercise price with respect to a RSU or PA), one RSU plus one PA was approximately equal in value to four options. As such, the Compensation Committee determined to award Messrs. Peterson and Catlin that amount of RSUs and PAs that, in the aggregate, approximated 25% of the number of stock options awarded in the prior year. The Compensation Committee then determined to grant Mr. Henderson the same number of RSUs and PAs as were awarded to Mr. Catlin, due to the Compensation Committee's view that Mr. Henderson's and Mr. Catlin's level of contributions to the Company for the 2011 fiscal year were expected to be substantially equal. Because Messrs. Branting and Cunningham were elevated to the NEO level in the middle of 2011, the number of RSUs and PAs awarded to them was determined by the CEO in connection with the annual awards made to all other non-NEO employees. The amount of such awards was based predominantly on internal equity and historical grant considerations.
As discussed under the next heading, due to the Company's attainment of all of the pre-established 2011 corporate objectives, as well as the outstanding 2011 performance of the Company, 100% of the 2011 RSUs and PAs were determined earned, with only 25% vested at the time of such determination and the remaining 75% subject to ratable vesting over a three year period. Effectively, therefore, the one year performance period plus the following three year time-based vesting period results in a four year vesting cycle. The Compensation Committee believes that a four year vesting schedule is appropriate to secure the long-term commitment of each NEO.
2011 Corporate Objectives
For the 2011 compensation period, the Compensation Committee determined to change the performance period from the twelve month period ending December 31 to the twelve month period ending September 30. This change was made so that the Compensation Committee can make timely decisions on annual NEO compensation prior to the end of the fiscal year, while retaining the benefit of having a full twelve month performance period to review. The 2011 corporate objectives to which
the payout of the NEO bonuses and the vesting of the RSUs/PAs were tied, as well as the actual results of corporate performance with respect to such objectives, follows:
The achievement of the 2011 corporate objectives resulted in an initial 70% of the NEO 2011 bonuses and RSUs/PAs being earned, with the remaining 30% subject to the Compensation Committee's discretion. The Compensation Committee determined to exercise its discretion such that the full amount of the remaining 30% of the annual bonus incentives and RSUs/PAs were earned, based upon the performance factors detailed above, and the exemplary performance of the Company overall, including that, for the full 2011 fiscal year:
As a result, 25% of the earned RSUs and PAs vested on December 15, 2011 in accordance with terms of the awards, and, provided the NEO continues to provide requisite services to the Company on the scheduled vesting dates, an additional 25% of the earned RSUs and PAs will vest on each of November 15, 2012, November 15, 2013 and November 15, 2014.
As part of its evaluation of fiscal 2012 NEO compensation, the Compensation Committee retained Denver Compensation & Benefits, LLC ("Denver CAB") in the fourth quarter of 2011. The Compensation Committee utilized a report prepared by Denver CAB to evaluate whether the salaries for the NEOs were in line with compensation paid at other similar companies and to determine the appropriate bonus and equity award potential, as well as the most appropriate and competitive plan design for the bonus and equity awards. The Compensation Committee had instructed Denver CAB to conduct a review utilizing peer group data and to make recommendations with respect to compensation
levels. The peer group utilized by Denver CAB, based on input from the Compensation Committee, consisted of oil and gas exploration and production companies with a total asset size of between $55 million and $3.785 billion, revenue between approximately $19 million and $854.75 million, market capitalization between approximately $223 million and $4.27 billion, and one-year stock appreciation between approximately -10% and 365%, and was comprised of the following companies:
Although the Company ranked in the 31st percentile of the peer group for total assets and the 23rd percentile for net income among the selected peer group, the Company's success is evidenced by the fact that the Company ranked in the 64th percentile for 1-year revenue growth, 64th percentile for market capitalization, 89th percentile for 1-year stock price appreciation, and 72nd percentile for 3-year stock appreciation among the select peer group. Further, the Company's market capitalization had grown from $1.14 billion to $2.388 billion, i.e., or 109%, during the 2011 fiscal year. Given the Company's extraordinary growth over the last several years, the Company felt it was important to include companies in the peer group that are reflective of the Company's strategic goals and long-term outlook for Company performance.
Changes to Base Salary
The Compensation Committee believes that Kodiak's 2011 success could not have been achieved without the significant contributions and effort put forth by the executive team. Therefore, the annual base salaries for Messrs. Henderson, Branting and Cunningham were increased by 10%, from $250,000 in 2011 to $275,000 for 2012, effective January 1, 2012. This increase places each of these NEOs above the peer group median based on the compensation data from 2010. The Compensation Committee believed this to be appropriate due to the seniority of the NEOs in the oil and gas industry and their significant and substantially equal contribution to the success of the Company. In addition, the Compensation Committee believes that the Company would not have achieved the growth and success that it has to date had it not been for the effort and dedication of the CEO. As such, the Compensation Committee set the annual base salary for Mr. Peterson at approximately the 75th percentile of the peer group, with a salary increase of 25% (from $350,000 in 2011 to $437,500 for 2012, effective January 1, 2012). Pursuant to Mr. Catlin's desire to somewhat reduce the amount of his time devoted to the Company, the annual base salary for Mr. Catlin was reduced to $200,000 for 2012, effective January 1, 2012.
2012 Corporate Objectives
For the 2012 compensation period, the Compensation Committee reduced the number of objective performance metrics used to determine the payout of the at-risk compensation (i.e., annual bonus and equity awards) from five to three. Net Worth was removed as a performance metric in light of the Company's frequent capital raises. Due to its inherent overlap with the EBITDA performance metric, the Income performance metric was also eliminated. Finally, the Committee eliminated its ability to
discretionally award the final 30% of the incentive awards in order to satisfy certain requirements under Internal Revenue Code Section 162(m).
As part of the compensation benchmarking findings, Denver CAB recommended, and the Compensation Committee agreed, that threshold, target and maximum payouts should be established relative to the market with the expectation that target awards will be consistent with market performance. Payouts are intended and expected to correlate to relative peer group performance (i.e., threshold performance will pay out below the median, target performance will payout near the market median, and maximum performance will pay out above the market median).
The 2012 corporate objectives to which the payout of the NEO bonuses are subject, and to which the vesting of the RSUs are tied, are as follows:
The Compensation Committee selected the foregoing particular measures because they are key indicators of Company performance, are easy to track and are communicated to shareholders on a quarterly basis through the Company's earnings press release and conference call.
Changes to Annual Incentive Bonuses
The target bonus potential for 2012 remained at 100% of base salary; however, the maximum bonus potential was increased from 100% of each NEO's base pay in 2011 to 200% of each NEO's base pay for 2012, as an acknowledgment of the extraordinary historic performance, and to continue to motivate performance even after the annual performance targets are achieved. Thus, if the target performance level is achieved, each NEO will receive a bonus equal to 100% of his salary and if the maximum level is achieved, 200% of his salary will be awarded. The objective is to correlate the potential bonus amounts to peer performance, with a 100% bonus payout approximately in-line with the peer group median, and a 200% bonus payout equaling an amount significantly above the median to correlate with superior performance. Performance levels achieved between the threshold, target and maximum levels will result in proportional bonus payouts. A discussion of the specific objectives to which the 2012 bonus payout is tied is set forth above under the heading "2012 Corporate Objectives".
Changes to Long-Term Equity-Based Incentive Awards
For the 2012 compensation period, the Compensation Committee modified the type of annual equity-based incentive awards granted to NEOs in that it awarded stand-alone RSUs, rather than a combination of RSUs and PAs (as was the case in 2011). As discussed above, the PAs were awarded in the prior year in order to provide the NEO with cash to satisfy the taxes associated with the RSU grants. However, since the RSUs may be "net settled" pursuant to which the executive may surrender shares to the Company in an amount sufficient to cover the associated tax withholding requirements,
the Compensation Committee did not believe the PAs to be a necessary element of the compensation mix. Accordingly, the Compensation Committee decided to eliminate PAs in 2012.
The vesting schedule established in 2011 will continue with respect to the equity-based awards granted in 2012, in that the vesting of the equity-based awards is no longer solely tied to performance-based conditions. Rather, to the extent that the 2012 corporate objectives are satisfied, only a portion will vest upon the completion of that performance period and the remainder will vest ratably over the following three year period, provided the NEO continues to provide requisite services to the Company on the scheduled vesting dates.
The Compensation Committee made the following determinations with regard to the value of the 2012 RSUs to be awarded to each NEO:
Consistent with the foregoing considerations, the Compensation Committee determined that, in the event that the following number of RSUs will be earned in the event actual performance achieves the maximum, target or threshold performance levels, respectively:
Performance levels achieved in between the threshold, target and maximum levels will result in a proportionate number of RSUs being earned.
To the extent the RSUs are earned based upon the Company's actual performance, the resulting RSUs will then vest in accordance with the following time-based vesting schedule, provided the NEO continues to provide requisite services to the Company on the scheduled vesting dates:
Termination/Change of Control Benefits under New Employment Agreements
During 2011, the Company entered into new employment agreements with each of the NEOs. The Company has provided severance arrangements to the NEOs primarily to motivate the NEO to operate in the best interest of the Company, rather than in a manner potentially self-serving to secure employment. The Company has entered into change-in-control agreements with the NEOs because it believes that the occurrence, or potential occurrence, of a change-in-control transaction would create uncertainty and disruption during a critical time for the Company.
In setting the benefits payable under the new employment agreements in connection with a change of control or in the event an NEO were to be terminated without cause or resigned for good reason, the Compensation Committee noted that the peer group companies varied widely on these benefits, ranging from 1 times base salary to 3 times the sum of base salary plus bonus. Based on the review of the pay practices of peer companies, the views informally expressed to the Company by institutional advisory firms, and the general desire to avoid a windfall to executives in these events, the Compensation Committee determined that it was reasonable and appropriate to set the termination benefits for the CEO, EVP of Business Development and CFO at the levels set forth under the heading "Potential Payments Upon Termination/Change of Control". With respect to Messrs. Branting and Cunningham, the Compensation Committee determined to establish their respective termination/change of control values at lower levels than that of the other three NEOs, due to the fact that Messrs. Branting and Cunningham were new executive officers in 2011 (see aforementioned heading for disclosure of the specific amounts and terms for each NEO).
At the June 2011 Annual Meeting, more than 96% of votes cast indicated approval of the advisory Say-on-Pay proposal in connection with 2010 NEO compensation. The Compensation Committee believes that the vote outcome is an indication that shareholders generally approve of the structure of executive compensation at the Company and, therefore, the Compensation Committee structured executive compensation for 2011 in a way that is generally consistent with 2010. Unless the Board modifies its policy on the frequency of future "say-on-pay" advisory votes, shareholders will have an opportunity annually to cast an advisory vote in connection with executive compensation.
Effective January 1, 2008, the Company began providing retirement benefits to all employees, including the NEOs, under the terms of a qualified defined-contribution 401(k) retirement plan. Eligible employees may make voluntary contributions not exceeding statutory limitations to the plan. The Company matches 100% of employee contributions up to 3% of the employee's salary and 50% of an additional 2% of employee contributions. Employees are vested 100% for all contributions upon participation. Potential retirement benefits do not factor into the Compensation Committee's annual compensation decision process with respect to the NEOs.
The Company's current policy regarding hedging and monetization transactions is embodied in the Company's insider trading policy, which provides that the Company strongly discourages insiders from engaging in certain forms of hedging or monetization transactions, such as zero-cost collars and forward sale contracts. Any insider wishing to enter into such an arrangement must first pre-clear the proposed transaction with the Company's compliance officer under its insider trading policy. Any request for pre-clearance of a hedging or similar arrangement must be submitted to the compliance officer at least two weeks prior to the proposed execution of documents evidencing the proposed transaction and must set forth a justification for the proposed transaction.
Pending guidance from the SEC regarding the applicable provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Compensation Committee has not yet implemented any "claw-back" policies that would allow the Company to recoup incentive compensation payments in the event of material negative restatement of the Company's reported financial or operating results. We will also continue to periodically review best practices and re-evaluate our position with respect to such matters.
The Company does not currently have a stock ownership requirement with respect to its directors and officers or any other service providers.
The Compensation Committee has reviewed and discussed with management the Company's Compensation Discussion and Analysis included herein. Based on such review and discussions, the Compensation Committee has recommended to the Board of Directors that the Compensation Discussion and Analysis be included in the Company's Annual Report on Form 10-K for the year ended December 31, 2011 and the Company's 2012 Proxy Statement.
Submitted by the following members of the Compensation Committee of the Board of Directors:
A summary of the compensation paid to our NEOs for each of the 2009, 2010 and 2011 fiscal years is set forth below. Additional information on the components of the total compensation package is discussed in the Compensation Discussion and Analysis.
The following table provides information related to grants of plan-based awards to our NEOs in respect of the 2011 fiscal year.
The following table provides information related to the outstanding stock option awards and stock awards held by each of our NEOs at December 31, 2011.
The following table provides information regarding stock that vested and stock options that were exercised by our NEOs during 2011. Option award value realized is calculated by subtracting the aggregate exercise price of the options exercised from the aggregate market value of the shares of common stock acquired on the date of exercise. Stock award value is calculated by multiplying the number of shares of restricted stock units vested by the market value of the underlying shares on the vesting date.
For a brief description of the material features of our 2007 Stock Incentive Plan, as amended, please see footnote 11 to the audited financial statements for the fiscal year ended 2011 filed on our original Form 10-K filing for the fiscal year ended December 31, 2011.
During 2011, effective January 1, 2011, we entered into new employment agreements with each of our NEOs. A summary of the termination and change of control benefits under these agreements follows.
In the event of a termination without "cause," or in the event an NEO resigns for "good reason," the Company must pay severance compensation to Messrs. Peterson, Catlin and Henderson in an amount equal to 18 months of his then-current respective base salary, and must pay Messrs. Branting and Cunningham an amount equal to 6 months of his then-current respective base salary. In such event, all unvested incentive compensation previously granted to the NEO will immediately terminate, subject only to the provisions of any applicable award agreement relating to post-termination exercise of stock options.
"Cause" will be determined in the sole discretion of the Company, or in certain cases, the Compensation Committee, and means that the NEO: (i) has materially failed or refused to satisfactorily perform his assigned duties and job responsibilities, (ii) has willfully engaged in conduct that he knew or should have known would be materially injurious to the Company, (iii) has committed an act of fraud, embezzlement or a willful and material breach of a fiduciary duty to the Company, (iv) has breached certain provisions of his employment agreement, (v) has been convicted of (or pleaded no contest to) any crime that (A) is a felony, (B) involves fraud or dishonesty or (C) impugns the character or reputation of the NEO or the Company, or (vi) has violated or caused the Company to violate any law that is harmful to the business reputation of the Company.
The following conditions will constitute "good reason": (i) the Company's material breach of the employment agreement or any other material written agreement between the NEO and the Company; (ii) the assignment to the NEO (without the NEO's consent) of any duties that are substantially inconsistent with or materially diminish the NEO's position, (iii) a requirement that the NEO (without the NEO's consent) be based at any office or location more than 50 miles from the NEO's primary work location immediately prior to a "change of control", not including reasonable travel by the NEO consistent with the travel obligations of similar executives holding similar positions with similar responsibilities; or (iv) the NEO's refusal to renew his employment agreement at the time it would otherwise expire, provided that at such time the NEO was willing to renew the employment agreement and was able to continue providing services.
Upon any termination of the NEO's employment on account of death or "disability" (as defined in the employment agreements), the Company must pay Messrs. Peterson, Catlin and Henderson an amount equal to 18 months of his then-current respective base salary, and must pay Messrs. Branting and Cunningham an amount equal to 6 months of his then-current respective base salary. Further, each NEO's outstanding stock options and restricted stock will immediately become fully vested and no longer subject to any restrictions on ownership or exercise. With respect to other forms of incentive compensation, including, but not limited to, restricted stock units and performance awards, the terms of the applicable award agreement will govern vesting. With respect to unvested incentive compensation not granted under an equity-based plan, the Company, or in certain cases, the Compensation Committee, shall, subject to certain limitations, determine whether to vest or provide any payment or compensation on account thereof.
If, within 12 months following a "change of control", any of Messrs. Peterson, Catlin or Henderson is terminated or if he resigns for "good reason," the Company will be obligated to pay the respective NEO a lump sum payment equal to his then-current base salary for a period of 24 months plus an amount equal to the greater of his most recent annual cash bonus or the average cash bonus paid to him under his current employment agreement and prior employment agreements. If, within 12 months following a "change of control", either of Messrs. Branting or Cunningham is terminated or if he resigns for "good reason," the Company will be obligated to pay the respective NEO a lump sum payment equal to his then-current base salary for a period of 6 months plus an amount equal to the greater of his most recent annual cash bonus or the average cash bonus paid to him under his current employment agreement and prior employment agreements.
Immediately upon the occurrence of a "change of control," all of the NEOs' equity-based incentive compensation will immediately vest irrespective of whether his employment continues or is terminated, subject to limitations, if any, arising from Section 409A of the Code.
A "change of control" means any of the following:
(i) Any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act") becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of Company representing more than 50% of the total voting power represented by Company's then outstanding voting securities;
(ii) A merger or consolidation of Company whether or not approved by the Board, other than a merger or consolidation that would result in the voting securities of Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted or into voting securities of the surviving entity) at least 50% of the total voting power represented by the voting securities of Company or such surviving entity (or the parent of any such surviving entity) outstanding immediately after such merger or consolidation, or a change in the ownership of all or substantially all of Company's assets to a person not related (within the meaning of income tax Regulations Section 1.409A-3(i)(5)(vii)(b)) to the Company; or
(iii) The replacement during any 12-month period of a majority of the members of the Board with directors whose appointment or election was not endorsed by a majority of the members before the date of the appointment or election.
All such termination benefits (except in the case of death of NEO) are subject to the timely execution and delivery of a release agreement in favor of employer, the Company and their respective affiliates. The Compensation Committee reevaluated these termination/change of control benefits relative to its 2011 peer group and determined them to be consistent with market practices.
Potential Cost of Termination Payments in the Event of Termination
The table below sets forth the potential cost to us of the compensation to which each NEO would have been entitled under his employment agreement, had his employment been terminated effective at the end of the day on December 31, 2011 or if there had been a change of control (with or without termination) as of December 31, 2011.
The Company did not reprice any stock options during the fiscal years ended December 31, 2010 or 2011.
The following table sets forth certain information regarding the beneficial ownership of shares of our common stock as of April 15, 2012 by:
Unless otherwise indicated, the shareholders listed possess sole voting and investment power with respect to the shares shown. Our directors and executive officers do not have different voting rights from other shareholders.
We have no knowledge of any other arrangements, including any pledge by any person of our securities, the operation of which may at a subsequent date result in a change of control of our company.
In accordance with Section 14A of the Securities Exchange Act of 1934, as amended, and Section 951 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the following proposal, commonly known as a "Say on Pay" proposal, gives our shareholders the opportunity to vote to approve or not approve, on an advisory basis, the compensation of our NEOs. This vote is not intended to address any specific item of compensation, but rather the overall compensation of our NEOs and our compensation philosophy, policies and practices, as disclosed under the "Compensation Discussion and Analysis" section of this Proxy Statement.
Our executive compensation program is designed to provide a competitive level of compensation necessary to attract and retain talented and experienced executives and to motivate them to achieve short-term and long-term corporate goals that enhance shareholder value. In order to align executive pay with both the Company's financial performance and the creation of sustainable shareholder value, a significant portion of compensation paid to our NEOs is allocated to performance-based, short-term and long-term incentive programs to make executive pay dependent on the Company's performance (or "at-risk"). In addition, as an executive officer's responsibility and ability to affect the financial results of the Company increases, the portion of his or her total compensation deemed "at-risk" increases. Shareholders are urged to read the "Compensation Discussion and Analysis" section of this Proxy Statement, which more thoroughly discusses how our compensation policies and procedures implement our compensation philosophy.
We are asking our shareholders to indicate their support for our NEO compensation as described in this Proxy Statement by voting "FOR" the following resolution:
RESOLVED, that the compensation paid to the named executive officers, as disclosed in the Company's 2012 Proxy Statement pursuant to the SEC's executive compensation disclosure rules (which disclosure includes the Compensation Discussion and Analysis, the compensation tables and the narrative discussion that accompanies the compensation tables), is hereby approved.
While we intend to carefully consider the voting results of this proposal, the final vote is advisory in nature and therefore not binding on us, our Board of Directors or the Compensation Committee. Our Board of Directors and Compensation Committee value the opinions of all of our shareholders
and will consider the outcome of this vote when making future compensation decisions for our NEOs. It is currently expected that shareholders will be given an opportunity to cast an advisory vote on this topic annually, with the next opportunity occurring in connection with the Company's annual meeting in 2013.
The Board recommends a vote FOR the adoption of the above resolution indicating approval of the compensation of the Company's NEOs.
The Audit Committee has selected the accounting firm of Ernst & Young LLP to serve as our independent registered public accounting firm for the 2012 fiscal year. We are asking our shareholders to ratify the selection of Ernst & Young LLP as our independent registered public accounting firm. Although ratification is not required by our by-laws or otherwise, the Board is submitting the selection of Ernst & Young LLP to our shareholders for ratification because we value our shareholders' views on the Company's independent registered public accounting firm and as a matter of good corporate practice. If our shareholders fail to ratify the selection, it will be considered as a direction to the Board and the Audit Committee to consider the selection of a different firm. Even if the selection is ratified, the Audit Committee in its discretion may select a different independent registered public accounting firm, subject to ratification by the Board, at any time during the year if it determines that such a change would be in the best interests of the Company and our shareholders. To the Company's knowledge, a representative from Ernst & Young LLP will not be present at the Annual Meeting to take questions, although the firm will be permitted to make a statement if it so desires.
On March 30, 2011, the Audit Committee of the Board approved the engagement of Ernst & Young LLP as the Company's independent registered public accounting firm for the fiscal year ended December 31, 2011, with the engagement to be effective on April 4, 2011. As a result, effective March 30, 2011, the Company dismissed its former independent registered public accounting firm, Hein & Associates LLP.
Hein & Associates LLP's reports on the Company's financial statements for the fiscal years ending December 31, 2010 and 2009 contained no adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles. Hein & Associates LLP's reports on the effectiveness of the Company's internal control over financial reporting as of December 31, 2010 and December 31, 2009 did not contain any adverse opinion or disclaimer of opinion, nor were such reports qualified or modified as to uncertainty, audit scope or accounting principles.
During the Company's two most recent fiscal years and the subsequent interim period prior to the date of this report, there were no: (a) disagreements between the Company and Hein & Associates LLP on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Hein & Associates LLP, would have caused Hein & Associates LLP to make reference to the subject matter of the disagreement in its reports on the financial statements for such years; or (b) "reportable events" as that term is defined in Item 304(a)(1)(v) of Regulation S-K.
During the Company's two most recent fiscal years and the subsequent interim period prior to the date of this report, the Company did not consult with Ernst & Young LLP regarding matters or events set forth in Item 304(a)(2)(i) or (ii) of Regulation S-K.
The aggregate fees billed in 2010 by the Company's previous principal accountant, Hein & Associates LLP, and the aggregate fees billed in 2011 by the Company's current principal accountant, Ernst & Young LLP, are as follows:
The Audit Committee Charter provides that the Audit Committee is responsible for the appointment, compensation, retention and oversight of the independent public accountants, and pre-approves all audit services and permissible non-audit services to be provided to the Company by the independent public accountants. The Audit Committee may, in its discretion, delegate the authority to pre-approve all audit services and permissible non-audit services to the Chairman of the Audit Committee provided the Chairman reports any delegated pre-approvals to the Audit Committee at the next meeting thereof. The Audit Committee has not, however, adopted any specific policies and procedures for the engagement of non-audit services. For 2010 and 2011, all of the services related to amounts billed by the Company's external accountants were pre-approved by the Audit Committee.
The Audit Committee reviewed and discussed with management and the Company's independent auditors the audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2011. In addition, the Audit Committee has discussed with the Company's independent auditors the matters required to be discussed by Statement on Auditing Standards No. 61 (Communication with Audit Committees), as modified by Statement on Auditing Standards No. 90 (Audit Committee Communications). The Audit Committee has also received the written disclosures and the letter from the Company's independent auditors required by Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committees) and has discussed with the Company's independent auditors that audit firm's independence from the Company and its management. Based on the review and discussions, the Audit Committee recommended to the Board that the audited financial statements be included in the Annual Report on Form 10-K for the year ended December 31, 2011, for filing with the SEC.
Audit Committee of the Board
The Board recommends a vote FOR the ratification of the selection of Ernst & Young LLP as the Company's independent registered public accounting firm for the fiscal year ending December 31, 2012.
Proposals of shareholders that are intended for inclusion in our proxy statement relating to the 2013 Annual Meeting must be received by us at our office at 1625 Broadway, Suite 250, Denver, Colorado 80202, no later than January 16, 2013, which corresponds to the date that is 120 calendar days before the anniversary date on which our proxy statement was released to shareholders in connection with this year's Annual Meeting. If the date is changed by more than 30 calendar days from the anniversary date of this year's Annual Meeting, then the deadline to submit a proposal to be considered for inclusion in next year's proxy statement and form of proxy, including a proposal to nominate a person for election to the Board, is a reasonable time before we begin to print and mail proxy materials. Such proposals must satisfy the conditions established by the SEC, including, but not limited to, Rule 14a-8 promulgated under the Exchange Act in order to be included in our proxy statement for that meeting.
Shareholder proposals that are not intended to be included in our proxy materials for our 2013 Annual Meeting but that are intended to be presented by the shareholder from the floor must be received at our offices at 1625 Broadway, Suite 250, Denver, Colorado 80202 no later than April 1, 2013, which corresponds to the date that is 45 calendar days before the anniversary date on which our proxy statement was released to shareholders in connection with this year's Annual Meeting. If the date of our 2013 Annual Meeting is changed by more than 30 calendar days from the anniversary date of this year's Annual Meeting, then the deadline is a reasonable time before we send our proxy materials for that meeting.
Shareholders must submit written proposals, in accordance with the foregoing procedures, to the following address:
Oil & Gas Corp.
As of the date of this Proxy Statement, management does not know of any other matters that will come before the Annual Meeting. However, if any other matters are properly brought before the Annual Meeting, the persons appointed in the accompanying proxy card intend to vote the shares represented thereby in accordance with their best judgment.
Order of the Board of Directors,
Please promptly sign and return the enclosed proxy card, or, if you are a non-registered/beneficial owner, please follow the instructions on your voting instruction form. If you decide to attend the Annual Meeting, you may, if you wish, revoke the proxy and vote your shares in person.