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Quest Resource DEF 14A 2006 Table of Contents
UNITED STATES SCHEDULE 14A Proxy Statement Pursuant to Section 14(a) of the Securities
Quest Resource Corporation
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy
Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
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QUEST
RESOURCE CORPORATION
9520 N. May Avenue, Suite 300 Oklahoma City, Oklahoma 73120 (405) 488-1304
To Our Stockholders:
You are cordially invited to attend the 2006 Annual Meeting of
stockholders of Quest Resource Corporation (the
“Company”) to be held on May 31, 2006, at
11:00 a.m., Central Time, at The Oklahoma City Marriott,
located at 3233 Northwest Expressway, Oklahoma City, OK, in the
Rose Rock meeting room, to consider and vote upon the following
proposals:
1. To elect six Directors to the Board of Directors as
follows: (a) two Class I Directors to serve a one-year
term ending at the 2007 Annual Meeting of Stockholders or until
their successors have been duly elected and qualified;
(b) two Class II Directors to serve a two-year term
ending at the 2008 Annual Meeting of Stockholders or until their
successors have been duly elected and qualified; and
(c) two Class III Directors to serve a three-year term
ending at the 2009 Annual Meeting of Stockholders or until their
successors have been duly elected and qualified;
2. To consider and vote upon a proposal to amend the
Company’s Restated Articles of Incorporation to decrease
the number of authorized shares of common stock from 380,000,000
to 200,000,000;
3. To consider and vote upon a proposal to approve the
Company’s 2005 Omnibus Stock Award Plan;
4. To consider and vote upon a proposal to approve the
Company’s Management Annual Incentive Plan; and
5. To consider and transact such other business that may
properly come before the Annual Meeting or any adjournment
thereof.
The Board of Directors has fixed the close of business on
April 28, 2006 as the record date for the determination of
stockholders entitled to receive notice of and to vote at the
Annual Meeting and adjournments thereof.
Please complete, date, sign and return the enclosed proxy as
promptly as possible in order to ensure your representation at
the Annual Meeting and to ensure the presence of a quorum at the
Annual Meeting. A self-addressed envelope is enclosed for these
purposes. If you attend the meeting, you may vote personally on
all matters, and in that event, the proxy will not be voted.
This Notice and the Proxy Statement are first being distributed
to stockholders on or about May 3, 2006.
By Order of the Board of Directors
David E. Grose
Corporate Secretary
May 3, 2006
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PROXY
STATEMENT
FOR
ANNUAL MEETING OF
STOCKHOLDERS
to be held May 31,
2006
This proxy statement is being furnished to the stockholders of
Quest Resource Corporation, a Nevada corporation (the
“Company,” “we” or “us”), in
connection with the solicitation of proxies by our Board of
Directors for use at the Annual Meeting of Stockholders to be
held at The Oklahoma City Marriott, located at 3233 Northwest
Expressway, Oklahoma City, OK, in the Rose Rock meeting room on
May 31, 2006, commencing at 11:00 a.m. Central
time and at any adjournment of the Annual Meeting. This proxy
statement and the accompanying form of proxy are first being
mailed or given to the stockholders on or about May 3, 2006.
The enclosed proxy may be revoked at any time before it is voted
by (a) filing or transmitting an instrument or transmission
revoking it to the Corporate Secretary of the Company,
(b) executing a proxy with a later date and delivering such
later proxy to the Corporate Secretary of the Company or to
another person appointed to count stockholder votes prior to the
Annual Meeting or (c) attending the Annual Meeting and
voting in person. Unless the proxy is revoked or is received in
a form that renders it invalid, the shares represented by it
will be voted in accordance with the instructions contained
therein.
Our Board of Directors is soliciting proxies in order to provide
every stockholder with an opportunity to vote on all matters
scheduled to come before the Annual Meeting and to be able to
transact business at the meeting. Whether or not you are able to
attend the Annual Meeting, you are urged to sign, date and
return the proxy in the enclosed envelope. Upon execution and
return of the enclosed proxy, the shares represented by it will
be voted by the persons designated therein as proxies in
accordance with the stockholder’s directions. With respect
to the proposals described in this proxy statement, the enclosed
proxy card, if executed and returned, will be voted as directed
on the proxy or, in the absence of such direction, FOR
each of the proposals. If any other matters properly come
before the meeting, the enclosed proxy will be voted by the
proxy holders in accordance with their best judgment.
On April 28, 2006, the record date for determining
stockholders entitled to vote at the Annual Meeting and any
adjournments thereof, we had approximately
22,072,383 shares of common stock, par value
$0.001 per share (the “Common Stock”) outstanding
and entitled to vote. No shares of preferred stock are
outstanding.
One-third of the outstanding shares of Common Stock entitled to
vote, represented in person or by proxy, is necessary to
constitute a quorum at the Annual Meeting. In deciding all
questions, a holder of Common Stock is entitled to one vote, in
person or by proxy, for each share held in his name on the
record date. There are no cumulative voting rights. With respect
to the proposal to elect directors, directors are elected by a
plurality of the votes cast by stockholders, and the six
nominees who receive the highest number of affirmative votes by
the holders of shares entitled to vote will be elected. With
respect to the proposal to amend the Company’s Restated
Articles of Incorporation, the affirmative vote of the holders
of a majority of the shares entitled to vote will be required
for passage. With respect to the other proposals, and all other
matters voted on at the Annual Meeting, the affirmative vote of
the holders of a majority of the shares present, in person or by
proxy, and entitled to vote at the Annual Meeting will be
required for passage.
For the purpose of determining whether the stockholders have
approved a proposal, or any other matter voted on at the Annual
Meeting, other than for the election of directors, abstentions
are treated as shares present or represented and voting, so
abstaining has the same effect as a negative vote (in other
words, a vote “against” the proposal). On certain
routine matters, brokers may, at their discretion, vote shares
they hold in “street name” on behalf of beneficial
owners who have not returned voting instructions to the brokers.
Routine matters include the
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election of directors (Proposal No. 1). In instances
where brokers are prohibited from exercising discretionary
authority, brokers will not vote the shares of beneficial owners
who fail to provide instruction (so-called “broker
non-votes”). These shares are not included in the vote
totals and, therefore, have no effect on the vote. At the 2006
Annual Meeting, we believe brokers will be prohibited from
exercising discretionary authority with respect to approving the
amendment to the Articles of Incorporation
(Proposal No. 2), the 2005 Omnibus Stock Award Plan
(Proposal No. 3) and the Management Annual Incentive
Plan (Proposal No. 4). If a quorum is not present, in
person or by proxy, the meeting may adjourn from time to time
until a quorum is obtained; provided, however, that the board of
directors must fix a new record date if the meeting is adjourned
to a date more than 60 days later than the original meeting
date.
We will bear the cost of the solicitation of proxies, which will
be principally conducted by mail. We will not solicit proxies
personally, by telephone, internet or facsimile. We, however,
may make a request by telephone, facsimile, or mail strictly
limited to confirming the stockholder’s receipt of the
proxy statement and form of proxy and requesting that the
stockholder sign and return the proxy solicited by this proxy
statement. We do not expect to pay compensation to any party
other than employees (and then only their regular salaries plus
expenses) for the solicitation of proxies, but may reimburse
brokers, custodians, nominees and fiduciaries for reasonable
out-of-pocket
expenses in forwarding solicitation material and proxies to the
beneficial owners.
Two or more stockholders of record sharing the same address will
each receive a complete set of the proxy voting materials
(Annual Report, Annual Report on
Form 10-K,
Proxy Card, and Proxy Statement). Services that deliver our
proxy voting materials to stockholders that hold our stock
through a bank, broker or other beneficial holder of record may
deliver to multiple stockholders sharing the same address only
one set of our Annual Report, Annual Report on
Form 10-K,
and Proxy Statement, but separate proxy cards for each
stockholder. Upon written or oral request, we will promptly
deliver a separate copy of the Annual Report, Annual Report on
Form 10-K,
and/or Proxy
Statement to any stockholder at a shared address to which a
single copy was delivered. Stockholders may notify us of their
requests by writing to Corporate Secretary, Quest Resource
Corporation, 9520 North May Avenue, Suite 300, Oklahoma
City, Oklahoma 73120 or by calling
(405) 488-1304.
The Nominating Committee of the Board of Directors has
recommended, and the Board of Directors has nominated, for
election the current six members of the Board of Directors. Each
proxy solicited hereby will be so voted unless you specify
otherwise in the proxy. Directors will be elected by a plurality
of the votes cast at the Annual Meeting.
In October 2005, our Board of Directors was increased from three
members to six members. In accordance with our Restated Articles
of Incorporation, the Board of Directors was automatically
divided into three classes of Directors, designated as
Class I, Class II and Class III. Each class is
elected to serve a three-year term. In order to implement this
classification, the nominees as Class I Directors will be
elected for a one-year term ending at the Annual Meeting of the
Stockholders in 2007, the nominees as Class II Directors
will be elected for a two-year term ending at the Annual Meeting
of the Stockholders in 2008, and the nominees as Class III
Directors will be elected for a three-year term ending at the
Annual Meeting of the Stockholders in 2009.
The Board of Directors believes that we could benefit by
expanding the size of the Board of Directors to seven and adding
an additional qualified director. The Nominating Committee is in
the process of evaluating candidates to fill this additional
directorship. However, as of the date of this proxy statement,
no candidate has been approved by the Board of Directors as a
nominee. At such time as a qualified candidate has been approved
by the Nominating Committee and the Board of Directors, the
Board of Directors intends to increase the size of the Board to
seven and to appoint the candidate to fill the newly created
directorship as provided in our bylaws. The director appointed
by the Board of Directors would serve only until the next annual
meeting of stockholders, regardless of the class to which he or
she is appointed.
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Our Directors and Executive Officers are as follows:
Mr. Cash has been active in the oil and gas exploration and
development business for over 25 years. Mr. Cash has
been the Chairman of the Board since November 2002 and has been
Chief Executive Officer since September 2004. From November 2002
until September 2004, he was Co-Chief Executive Officer and from
November 2002 until June 2004, he was Chief Financial Officer.
From 1980 to 1986, Mr. Cash worked for Bodard &
Hale Drilling Company while pursuing a petroleum engineering
degree at Oklahoma State University. During this period,
Mr. Cash drilled several hundred wells throughout Oklahoma.
In 1987, Mr. Cash formed STP and directed that company in
the identification and realization of numerous successful oil,
gas and CBM exploration projects. A long-time resident of
Oklahoma, Mr. Cash maintains an active role in several
charitable organizations.
Mr. Kite is the Chief Executive Officer of Boothbay Royalty
Company, based in Oklahoma City, Oklahoma. Boothbay Royalty
Company was founded in 1977 as an independent investment company
with its primary concentration in the field of oil &
gas exploration and production. Mr. Kite spent several
years in the commercial banking industry with an emphasis in
credit and loan review prior to his involvement in the oil and
gas industry. Mr. Kite presently is a director of The All
Souls’ Anglican Foundation and Bigelow Laboratory for Ocean
Science. Mr. Kite earned a bachelor’s of business
administration in finance from the University of Oklahoma.
Mr. White is a Certified Public Accountant and has
19 years of independent exploration experience with
expertise in strategic planning, capital formation and investor
relations, information technology and risk management.
Mr. White served as a consultant for the Company from
September 2003 until May 2004. Prior to that time, he was
Executive VP Corporate Development/Strategic Planning for Louis
Dreyfus Natural Gas from 1990 to 2001 and spent seven years
during the 1980’s with Bogert Oil Company/Bogert Funds,
Inc. as a Manager, Executive VP and Controller. Mr. White
received a Master of Science in Accounting in 1980 and a B.S. in
Accounting in 1979 from Oklahoma State University.
Mr. Irani is the Chief Executive Officer of RKI
Exploration & Production, LLC. He has 26 years of
extensive oil and gas experience. From 2001 to 2005,
Mr. Irani was Senior Vice President and General Manager in
charge of Dominion Resources, Inc.’s western
U.S. business division. He joined Louis Dreyfus Natural Gas
Corporation in 1991 as its Vice President of Engineering and
Exploration until the company’s 2001 merger with Dominion.
Prior to that, he managed and directed Woods Petroleum
Corporation’s development drilling and acquisition
projects. Mr. Irani serves on several oil and gas industry
related boards, including the Oklahoma Independent Petroleum
Association, the Oklahoma Energy Resources Board, and the
Interstate Oil and Gas Compact Commission. Mr. Irani earned
a B.S. from the University of Bombay, a bachelors and masters
degree in Petroleum Engineering from the University of Oklahoma,
and a masters degree in Business Administration from Oklahoma
City University.
Mr. Garrison brings expertise in public company activities
and issues. Mr. Garrison served as our Treasurer from 1998
to September 2001. Mr. Garrison has been a Certified Public
Accountant in public practice providing financial management and
accounting services to a variety of businesses for over twenty
years. Since July 2004, Mr. Garrison has been the Chief
Financial Officer of ICOP Digital, Inc. Mr. Garrison
presently is also a director of Empire Energy Corporation.
Mr. Garrison holds a bachelor’s degree in Accounting
from Kansas State University.
Mr. Rateau is the Vice President of Business Development
and Energy Management & Services of Alcoa Primary
Metals, Energy Division and has been at Alcoa Primary Metals
since 1996. Before that, Mr. Rateau held a number of
managerial positions with National Steel Corporation from 1981
to 1996. He brings expertise in business acquisitions and
divestitures, capital budgets and project management, and
applied research of complex technology
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and processes. Mr. Rateau holds an M.B.A. from Michigan
State University and received a B.S. in Industrial Engineering
from West Virginia University.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE “FOR”
THE ELECTION OF MESSRS. GARRISON AND RATEAU AS CLASS I
DIRECTORS, MESSRS. WHITE AND IRANI AS CLASS II DIRECTORS,
AND MESSRS. CASH AND KITE AS CLASS III DIRECTORS OF THE
COMPANY. UNLESS MARKED TO THE CONTRARY, PROXIES RECEIVED BY THE
COMPANY WILL BE VOTED FOR THE ELECTION OF THE SIX NOMINEES TO
THEIR RESPECTIVE DIRECTOR CLASSES.
Our Restated Articles of Incorporation currently authorize the
issuance of up to 380,000,000 shares of Common Stock. The
Board of Directors has approved and recommends that the
stockholders approve an amendment to the Restated Articles of
Incorporation decreasing the number of shares of Common Stock we
may issue from 380,000,000 to 200,000,000 (the
“Amendment”). The Amendment would not change the
number of authorized shares of preferred stock, which is
currently 50,000,000 shares. The Amendment would not alter
the number of shares presently issued or change the relative
rights of holders of the issued and outstanding Common Stock.
The Amendment would amend Section 1, Article IV of our
Restated Articles of Incorporation to read as follows:
Section
1. Classes and
Shares Authorized. The authorized capital
stock of the Corporation shall be 200,000,000 shares of
Common Stock, $.001 par value, and 50,000,000 shares
of Preferred Stock, $.001 par value.
As of April 28, 2006, 22,072,383 shares of Common
Stock were issued and outstanding and 2,200,000 unissued shares
were reserved for issuance under our equity compensation plans,
leaving 355,727,617 shares of Common Stock unissued and
unreserved. The Board of Directors believes that the currently
authorized Common Stock remaining available for issuance is
greater than the amount we expect to be required in the
foreseeable future for such purposes as a stock dividend,
raising additional capital, acquiring other businesses, or
providing equity incentives to employees and officers or for
other corporate purposes. In addition, in connection with the
issuance of approximately 15.8 million shares of Common
Stock in a private transaction on November 14, 2005, we
agreed with the initial purchaser/placement agent to seek the
approval of our stockholders to reduce the number of authorized
shares from 380,000,000 to 200,000,000.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE “FOR”
THE APPROVAL OF THE AMENDMENT TO THE RESTATED ARTICLES OF
INCORPORATION REDUCING THE TOTAL NUMBER OF AUTHORIZED
SHARES OF COMMON STOCK TO 200,000,000. UNLESS MARKED TO THE
CONTRARY, PROXIES RECEIVED BY THE COMPANY WILL BE VOTED FOR THE
APPROVAL OF THE AMENDMENT.
PROPOSAL NO. 3 — APPROVAL
OF 2005 OMNIBUS STOCK AWARD PLAN
We believe that equity compensation aligns the interests of
management and employees with the interests of other
stockholders. Accordingly, our Board of Directors adopted the
2005 Omnibus Stock Award Plan (the “Omnibus Plan”) on
October 14, 2005. The Omnibus Plan provides for grants of
non-qualified stock options, restricted shares, bonus shares,
deferred shares, stock appreciation rights, performance units
and performance shares. The Omnibus Plan also permits the grant
of incentive stock options (“ISOs”). The objectives of
the Omnibus Plan are to strengthen key employees’ and
non-employee directors’ commitment to our success, to
stimulate key employees’ and non-employee directors’
efforts on our behalf and to help us attract new employees with
the education, skills and experience we need and retain existing
key employees.
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If the Omnibus Plan is not approved at the Annual Meeting of the
stockholders, no future awards will be made under the Omnibus
Plan. The grant of options to acquire 250,000 shares of
Common Stock to non-employee directors described under
“Executive Compensation — Compensation of
Directors” and the October 2005 stock bonus awards
described below are not subject to stockholder approval and are
not being submitted to the stockholders for approval. However,
such awards will count towards the maximum number of shares
issuable pursuant to the Omnibus Plan. A copy of the Omnibus
Plan is attached as Appendix A to this proxy statement.
The following description of the material features of the
Omnibus Plan is qualified in its entirety by reference to the
provisions of the Omnibus Plan set forth in Appendix A.
Any of our employees or any employee of our majority owned
subsidiaries and our non-employee directors will be eligible to
receive awards under the Omnibus Plan. Such eligible employees
include our officers or officers of any majority owned
subsidiary. As of March 31, 2006, there were five executive
officers, approximately 300 employees other than executive
officers and five non-employee directors who are eligible to
receive awards. Except as described below under
“— October 2005 Stock Awards Under the Omnibus
Plan” and “Executive
Compensation — Compensation of Directors”
(which awards and stock options are not being submitted to the
stockholders for approval) and except for the stock portion of
any bonuses to be paid under the Management Annual Incentive
Plan described in Proposal No. 4, no determination has
been made as to which of our employees will receive grants under
the Omnibus Plan, and, therefore, the benefits to be allocated
to any individual or to any group of employees are not otherwise
presently determinable.
The Omnibus Plan places limits on the maximum amount of awards
that may be granted to any employee in any five year period.
Under the Omnibus Plan, no employee may receive awards of stock
options, stock appreciation rights, restricted stock, bonus
shares, performance units, performance shares or deferred shares
that cover in the aggregate more than 500,000 shares in any
five year period.
Non-employee directors may not be granted awards that are
incentive stock options.
The Omnibus Plan will be administered by the Board of Directors
or the Compensation Committee of the Board of Directors (the
“Committee”). The Board of Directors or the Committee
will select the eligible employees and non-employee directors to
whom awards will be granted and will set the terms of such
awards, including any performance goals applicable to annual and
long-term incentive awards. The Board of Directors or the
Committee has the authority to permit or require the deferral of
payment of awards. The Board of Directors or the Committee may
delegate its authority under the Omnibus Plan to our officers,
subject to guidelines prescribed by the Board of Directors or
the Committee, but only with respect to employees who are not
subject to Section 16 of the Exchange Act or
Section 162(m) of the Internal Revenue Code of 1986, as
amended (the “Code”).
The Omnibus Plan provides for up to 2.2 million shares of
Common Stock to be used for awards. There are currently
outstanding awards with respect to 426,000 shares of Common
Stock. These awards are not subject to stockholder approval. As
a result, there are only 1,774,000 shares remaining
available for grant under the Omnibus Plan (plus any portion of
these awards that become eligible for regrant pursuant to the
next sentence). The shares may be newly issued shares and to the
extent that any award under the Omnibus Plan is exercised,
cashed out, terminates, expires or is forfeited without payment
being made in the form of Common Stock, the shares subject to
such award that were not so paid will again be available for
distribution under the Omnibus Plan. However, any shares
withheld for the purpose of satisfying any tax withholding
obligation will be counted against the authorized limit and not
be available for distributions. If a stock appreciation right
award or a similar award based on the spread value of common
stock is exercised, only the number of shares of Common Stock
issued, if any, will be considered delivered for the purpose of
determining availability of shares for delivery under the
Omnibus Plan. Unless otherwise determined by the Committee,
stock options may be exercised by payment in cash or tendering
shares of Common Stock to us in full or partial payment of the
exercise price.
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The number of shares of Common Stock authorized for awards is
subject to adjustment for changes in capitalization,
reorganizations, mergers, stock splits, and other corporate
transactions as the Board of Directors or the Committee
determines to require an equitable adjustment. The Omnibus Plan
will remain in effect until all the shares available have been
used to pay awards, subject to the right of the Board of
Directors to amend or terminate the Omnibus Plan at any time.
The Board of Directors or the Committee will select the grantees
and set the term of each award, which may not be more than ten
years. The Board of Directors or the Committee has the power to
determine the terms of the awards granted, including the number
of shares subject to each award, the form of consideration
payable upon exercise, the period in which the award may be
exercised after termination of employment, and all other
matters. The exercise price of an option and the strike price of
a stock appreciation right must be at least the fair market
value of a share of Common Stock as of the grant date, unless
the award is replacing an award granted by an entity that is
acquired by us or one of our subsidiaries.
The Board of Directors or the Committee will also set the
vesting conditions of the award, except that vesting will be
accelerated if, within one year after we undergo a “change
of control,” a grantee’s employment or services is
terminated by us or one of our majority owned subsidiaries other
than for “cause” or the grantee terminates employment
for a “good reason” (e.g., a material diminution in
compensation or status or a required move of over 50 miles).
Awards granted under the Omnibus Plan are not generally
transferable by the grantee except in the event of the
employee’s death or unless otherwise required by law or
provided in an award agreement. An award agreement may provide
for the transfer of an award in limited circumstances to certain
members of the grantee’s family or a trust or trusts
established for the benefit of such a family member. Any such
transfer, if permitted under the award agreement, cannot be for
consideration, other than nominal consideration. Other terms and
conditions of each award will be set forth in award agreements,
which can be amended by the Board of Directors or the Committee.
Except as otherwise described below under
“— October 2005 Stock Awards Under the Omnibus
Plan” and “Executive
Compensation — Compensation of Directors,”
the number and type of awards that will be granted under the
Omnibus Plan is not determinable at this time as the Board of
Directors or Committee will make these determinations in its
sole discretion or, in the case of bonuses payable under the
Management Annual Incentive Plan for 2006, the amount of the
award, and the percentage that will be payable in the form of
stock, will depend on our performance during 2006.
Performance unit and performance share awards may be granted
under the Omnibus Plan. Such awards will be earned only if
corporate, business unit or individual performance objectives
over performance cycles, established by or under the direction
of the Board of Directors or the Committee, are met. The
performance objectives may vary from participant to participant,
group to group and period to period, and may be based on
internal or external requirements, and will be based on
satisfaction of performance objectives for one or more of the
following: earnings per share, net income, return on equity, pro
forma net income, return on designated assets, return on
revenues, fair market value (i.e., market price) per share, book
value per share, debt reduction or such other criteria approved
by the Board of Directors or the Committee and the stockholders.
Awards may be paid in the form of cash, Common Stock or any
combination thereof, as determined by the Board of Directors or
the Committee.
Restricted shares of Common Stock may also be awarded. The
restricted shares will vest and become transferable upon the
satisfaction of conditions set forth in the respective
restricted share award agreement. Restricted share awards may be
forfeited if, for example, the recipient’s employment
terminates before the award vests.
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The Board of Directors or the Committee may grant shares of
Common Stock to participants from
time-to-time
as a bonus. Such shares may be paid on a current basis or may be
deferred and paid in the future. The Board of Directors or the
Committee may impose such conditions or restrictions on any such
deferred shares as it may deem advisable including time-vesting
restrictions and deferred payment features.
The Omnibus Plan will permit the grant of ISOs, which qualify
for special tax treatment, to eligible employees, and
nonqualified stock options to eligible employees and
non-employee directors. The exercise price for any stock option
will not be less than the fair market value of a share of Common
Stock on the date of grant. No stock option may be exercised
more than ten years after the date of grant.
Stock Appreciation Rights (“SARs”) may be granted
either singly (freestanding SARs) or in combination with
underlying stock options (tandem SARs). SARs entitle the holder
upon exercise to receive an amount in common stock equal in
value to the excess of the fair market value of the shares
covered by such right over the grant price. The grant price for
SARs will not be less than the fair market value of the Common
Stock on the SARs’ date of grant. The payment upon a SAR
exercise may be settled in whole shares of equivalent value,
cash or a combination thereof. Fractional shares will be paid in
cash.
The Omnibus Plan provides that, if, within the one-year period
beginning on the date of a Change of Control (as defined in the
Omnibus Plan) an employee separates from service with us or a
majority owned subsidiary other than due to us terminating the
employee’s employment for cause or the employee resigning
for good reason (e.g., a material diminution in compensation or
status or a required move of over 50 miles), then, all
stock options and SARs will become fully vested and immediately
exercisable, the restrictions applicable to outstanding
restricted stock, deferred shares, and other stock-based awards
will lapse, and, unless otherwise determined by the Board of
Directors or the Committee, all deferred shares will be settled,
and outstanding performance awards will be vested and paid out
on a prorated basis, based on the maximum award opportunity of
such awards and the number of months elapsed compared with the
total number of months in the performance cycle. The Board of
Directors or the Committee may also make certain adjustments and
substitutions in connection with a Change of Control or similar
transactions or events as described under
“— Shares Reserved for Awards.”
Based on current provisions of the Code and the existing
regulations thereunder, the anticipated U.S. federal income
tax consequences of stock options and SARs granted under the
Omnibus Plan are as described below. The following discussion is
not intended to be a complete discussion of applicable law and
is based on the U.S. federal income tax laws as in effect
on the date hereof:
Non-Qualified Stock Options. An
employee receiving a non-qualified option does not recognize
taxable income on the date of grant of the non-qualified option,
provided that the non-qualified option does not have a readily
ascertainable fair market value at the time it is granted. In
general, the employee must recognize ordinary income at the time
of exercise of the non-qualified option in the amount of the
difference between the fair market value of the shares of Common
Stock on the date of exercise and the option price. The ordinary
income recognized will constitute compensation for which tax
withholding generally will be required. The amount of ordinary
income recognized by an employee will be deductible by us in the
year that the employee recognizes the income if we comply with
the applicable withholding requirement.
Shares of Common Stock acquired upon the exercise of a
non-qualified option will have a tax basis equal to their fair
market value on the exercise date or other relevant date on
which ordinary income is recognized, and the holding period for
the Common Stock generally will begin on the date of exercise or
such other relevant date. Upon
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subsequent disposition of the Common Stock, the employee will
recognize long-term capital gain or loss if the employee has
held the Common Stock for more than one year prior to
disposition, or short-term capital gain or loss if the employee
has held the Common Stock for one year or less.
If an employee pays the exercise price, in whole or in part,
with previously acquired Common Stock, the employee will
recognize ordinary income in the amount by which the fair market
value of the shares of Common Stock received exceeds the
exercise price. The employee will not recognize gain or loss
upon delivering the previously acquired Common Stock to us.
Common Stock received by an employee, equal in number to the
previously acquired shares of Common Stock exchanged therefore,
will have the same basis and holding period for long-term
capital gain purposes as the previously acquired Common Stock.
Common Stock received by an employee in excess of the number of
such previously acquired shares of Common Stock will have a
basis equal to the fair market value of the additional shares of
Common Stock as of the date ordinary income is recognized. The
holding period for the additional Common Stock will commence as
of the date of exercise or such other relevant date.
Incentive Stock Options. As addressed
above, ISOs will be granted under the Omnibus Plan if, and only
if, the Omnibus Plan is approved by the stockholders. ISOs are
defined by Section 422 of the Code.
An employee who is granted an ISO does not recognize taxable
income either on the date of grant or on the date of exercise.
Upon the exercise of an ISO, the difference between the fair
market value of the Common Stock received and the option price
is, however, a tax preference item potentially subject to the
alternative minimum tax.
Upon disposition of shares of Common Stock acquired from the
exercise of an ISO, long-term capital gain or loss is generally
recognized in an amount equal to the difference between the
amount realized on the sale or disposition and the exercise
price. However, if the employee disposes of the Common Stock
within two years of the date of grant or within one year of the
date of the transfer of the shares of Common Stock to the
employee (a “Disqualifying Disposition”), then the
employee will recognize ordinary income, as opposed to capital
gain, at the time of disposition. In general, the amount of
ordinary income recognized will be equal to the lesser of
(a) the amount of gain realized on the disposition, or
(b) the difference between the fair market value of the
Common Stock received on the date of exercise and the exercise
price. Any remaining gain or loss is treated as a short-term or
long-term capital gain or loss, depending on the period of time
the Common Stock has been held. We are not entitled to a tax
deduction upon either the exercise of an ISO or the disposition
of Common Stock acquired pursuant to the exercise of an ISO,
except to the extent that the employee recognizes ordinary
income in a Disqualifying Disposition. For alternative minimum
taxable income purposes, on the later sale or other disposition
of the Common Stock, generally only the difference between the
fair market value of the Common Stock on the exercise date and
the amount realized on the sale or disposition is includable in
alternative minimum taxable income.
If an employee pays the exercise price, in whole or in part,
with previously acquired Common Stock, the exchange should not
affect the ISO tax treatment of the exercise. Upon the exchange,
and except as otherwise described herein, no gain or loss is
recognized by the employee upon delivering previously acquired
shares of Common Stock to us as payment of the exercise price.
The shares of Common Stock received by the employee, equal in
number to the previously acquired Common Stock exchanged
therefore, will have the same basis and holding period for
long-term capital gain purposes as the previously acquired
Common Stock. The employee, however, will not be able to utilize
the prior holding period for the purpose of satisfying the ISO
statutory holding period requirements. Common Stock received by
the employee in excess of the number of previously acquired
Common Stock will have a basis of zero and a holding period
which commences as of the date the Common Stock are transferred
to the employee upon exercise of the ISO. If the exercise of any
ISO is effected using Common Stock previously acquired through
the exercise of an ISO, the exchange of the previously acquired
Common Stock will be considered a disposition of the Common
Stock for the purpose of determining whether a Disqualifying
Disposition has occurred.
Stock Appreciation Rights. To the
extent that the requirements of the Code are met, there are no
immediate tax consequences to an employee when a SAR is granted.
When an employee exercises the right to the appreciation in fair
market value of shares represented by a SAR, payments made in
shares of Common Stock are normally includable in the
employee’s gross income for regular income tax purposes. We
will be entitled to deduct the same
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amount as a business expense in the same year. The includable
amount and corresponding deduction each equal the fair market
value of the Common Stock payable on the date of exercise.
Restricted Stock. The recognition of
income from an award of restricted stock for federal income tax
purposes depends on the restrictions imposed on the shares.
Generally, taxation will be deferred until the first taxable
year the common shares are no longer subject to substantial risk
of forfeiture or the common shares are freely transferable. At
the time the restrictions lapse, the grantee will recognize
ordinary income equal to the then fair market value of the
shares. The grantee may, however, make an election to include
the value of the shares in gross income in the year such
restricted shares are granted despite such restrictions.
Generally, we will be entitled to deduct the fair market value
of the shares transferred to the grantee as a business expense
in the year the grantee includes the compensation in income.
Deferred Shares. Generally, the
grantee will not recognize ordinary income until common shares
become payable under the deferred share award, even if the award
vests in an earlier year. We will generally be entitled to
deduct the amount the grantee includes in income as a business
expense in the year of payment.
Other Stock-Based Performance Awards.
Any cash payments or the fair market value of any common shares
or other property the grantee receives in connection with other
stock-based awards, incentive awards, or as unrestricted
payments equivalent to dividends on unfunded awards or on
restricted stock are includable in income in the year received
or made available to the grantee without substantial limitations
or restrictions. Generally, we will be entitled to deduct the
amount the grantee includes in income as a business expense in
the year of payment.
Deferred Compensation. Any deferrals
made under the Omnibus Plan, including awards granted under the
plan that are considered to be deferred compensation, must
satisfy the requirements of Section 409A of the Code to
avoid adverse tax consequences to participating employees. These
requirements include limitations on election timing,
acceleration of payments, and distributions. We intend to
structure any deferrals and awards under the Omnibus Plan to
meet the applicable tax law requirements.
Other Tax Consequences. State tax
consequences may in some cases differ from those described
above. Awards under the Omnibus Plan will in some instances be
made to employees who are subject to tax in jurisdictions other
than the United States and may result in tax consequences
differing from those described above.
The Omnibus Plan was effective October 14, 2005, and will
remain in effect, subject to the right of the Board of Directors
to amend or terminate the Omnibus Plan (subject to certain
limitations set forth in the Omnibus Plan), at any time until
all shares subject to it shall have been purchased or acquired
according to the Omnibus Plan’s provisions. Any awards
granted before the Omnibus Plan is terminated may extend beyond
the expiration date.
The Board of Directors may at any time alter, amend, suspend or
terminate the Omnibus Plan in whole or in part without the
approval of the stockholders, except to the extent the Board of
Directors determines it is desirable (i) to obtain approval
of the stockholders, (ii) to retain eligibility for
exemption from the limitations of Section 162(m) of the
Code, (iii) to have the available the ability for stock
options to qualify as ISOs, (iv) to comply with the
requirements for listing on any exchange where our shares are
listed, or (v) for any other purpose the Board of Directors
deems appropriate. No termination, amendment or modification of
the Omnibus Plan may adversely affect in any material way any
award previously granted under the Omnibus Plan, without the
written consent of the grantee of such award.
On October 14, 2005, our Board of Directors approved grants
of 176,000 bonus shares of Common Stock to certain of our
officers, subject to certain conditions. Two of our executive
officers received a portion of these grants. Our Chief Financial
Officer, David Grose, will receive (i) 16,000 bonus shares
on January 1, 2007, regardless of whether he is employed by
us on such date, (ii) an additional 16,000 bonus shares on
January 1, 2007, provided he is employed (and has at all
times from the date of the agreement been employed) by us on
June 1, 2006, and (iii) 16,000 bonus shares on
June 1, 2007, provided he is employed (and has at all times
from the date of the agreement been employed) by us on
June 1, 2007. Richard Marlin, Executive Vice President of
Engineering, will receive (i) 12,000
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bonus shares on January 1, 2007, provided he is employed
(and has at all times from the date of the agreement been
employed) by us on April 4, 2006, (ii) 12,000 bonus
shares on April 4, 2007, provided he is employed (and has
at all times from the date of the agreement been employed) by us
on April 4, 2007, and (iii) 12,000 bonus shares on
April 4, 2008 provided he is employed (and has at all times
from the date of the agreement been employed) by us on
April 4, 2008.
See also “Executive
Compensation — Compensation of Directors”
for a description of stock options granted to our non-employee
directors under the Omnibus Plan.
These grants are not subject to stockholder approval and will
remain in effect if the stockholders do not approve the Omnibus
Plan.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THE
APPROVAL OF THE 2005 OMNIBUS STOCK AWARD PLAN. UNLESS MARKED TO
THE CONTRARY, PROXIES RECEIVED BY THE COMPANY WILL BE VOTED FOR
THE APPROVAL OF THE OMNIBUS PLAN.
PROPOSAL NO. 4 — APPROVAL
OF MANAGEMENT ANNUAL INCENTIVE PLAN
Our Board of Directors recommends approval of the Quest Resource
Corporation Management Annual Incentive Plan (the
“Incentive Plan”). The Incentive Plan is designed to
qualify bonuses paid under the Incentive Plan as “qualified
performance-based compensation” for purposes of
Section 162(m) of the Code. This enables us to exclude
compensation payable under the Incentive Plan from the deduction
limitations of Section 162(m), which generally precludes a
deduction for compensation paid to a public company’s chief
executive officer and next four highest compensated executive
officers employed with the public company on the last day of the
company’s tax year to the extent compensation for a taxable
year to any such individual exceeds $1 million. The
purposes of the Incentive Plan are to promote our success; to
provide designated executive officers with an opportunity to
receive incentive compensation dependent upon that success; to
attract, retain and motivate such individuals; and to provide
awards that are “qualified performance-based”
compensation under Section 162(m).
Our Board of Directors has determined that it is appropriate and
in the best interests of the stockholders to maximize the tax
deductibility of amounts payable under the Incentive Plan. Our
Board of Directors has determined, by resolution adopted on
March 21, 2006, to submit the plan to stockholders for
their approval at this year’s Annual Meeting. If the
stockholders approve the Incentive Plan, all amounts paid to
employees and executive officers pursuant to the plan in
forthcoming periods, beginning in 2007, will be fully
tax-deductible to the Company, generating substantial after-tax
savings. It is not anticipated that any executive officer will
receive compensation in excess of $1 million for 2006. A
copy of the Incentive Plan is attached as Appendix B to
this proxy statement.
The following general description of material features of the
Incentive Plan is qualified in its entirety by reference to the
provisions of the Incentive Plan set forth in Appendix B.
Only our executive officers and key employees who are selected
by the Compensation Committee (the “Committee”) of our
Board of Directors are eligible to participate in the Incentive
Plan. Prior to or at the time performance objectives are
established for the performance period (the “Incentive
Period”), which is generally a fiscal year, the Committee
will designate in writing which executive officers and key
employees among those who may be eligible to participate in the
Incentive Plan will be eligible participants for each Incentive
Period. For 2006, all of our executive officers and
management-level employees (approximately fifteen persons as of
March 31, 2006) are eligible to participate.
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The Board of Directors reserves the right to amend or terminate
the Incentive Plan in whole or in part at any time. However,
unless otherwise prohibited by applicable law, any amendment
required to conform the Incentive Plan to the requirements of
Section 162(m) of the Code may be made by the Committee. No
amendment may increase the maximum award payable under the
Incentive Plan without stockholder approval or otherwise be
effective without stockholder approval if such approval is
necessary so that awards will be “qualified
performance-based compensation” under Section 162(m)
of the Code.
The Incentive Plan must be administered by a committee or
subcommittee of our Board of Directors designated by it to
administer the Incentive Plan that consists of not less than two
directors, each of whom is intended to be an “outside
director” within the meaning of Section 162(m) of the
Code. The Committee will have full power and authority to
administer and interpret the provisions of the Incentive Plan
and to adopt such rules, regulations, agreements, guidelines and
instruments for the administration of the Incentive Plan. The
Committee may rely on opinions, reports or statements of our
officers or employees and of our counsel, public accountants and
other professional or expert persons. The Incentive Plan shall
be administered by our Chief Financial Officer and Human
Resource Manager, subject to the control and supervision of the
Chief Executive Officer and the Board of Directors.
Section 162(m) of the Code provides that a publicly-traded
company will not be able to deduct for federal income tax
purposes any compensation in excess of $1 million paid by
it in any one year to any “covered employee” of the
company, subject to certain exemptions. “Covered
employees” are essentially the individuals who were, at the
end of the fiscal year, our Chief Executive Officer and our four
other most highly compensated executive officers, i.e., the
officers listed in the Summary Compensation Table in this proxy
statement. The annual compensation that is counted under
Section 162(m) for purposes of the $1 million limit
includes, among other things, base salary and cash bonuses.
However, various forms of compensation are exempt from
Section 162(m)’s general limitation on deductible
compensation, including performance-based compensation paid
under stockholder-approved plans that meet certain criteria. The
Incentive Plan meets these criteria.
Within the first 90 days of each Incentive Period, the
Committee will establish one or more performance goals, a
specific target objective or objectives with respect to such
performance goals and an objective formula, or method for
computing the amount of bonus compensation payable to each
participant under the Incentive Plan if the performance goals
are attained. Such goals, objectives and compensation formulae
or methods must be established such that the outcome of the goal
or objective is substantially uncertain at the time the
Committee actually establishes the goal or objective.
Incentive goals will be based upon one or more of the following
business criteria for the Company as a whole or any of its
subsidiaries, operating divisions or other operating units:
total stockholder return, earnings before interest, taxes,
depreciation and amortization, pre-tax operating income,
earnings per share, return on equity, return on invested capital
or assets, cost reductions and savings, return on sales, lease
operating expense, pipeline operating expense, production,
reserve replacement, finding and development costs or
productivity improvements. Target award levels are approved by
the Committee and set as a percentage of the participant’s
base salary. Additionally, to the extent consistent with the
goal of providing for deductibility under Section 162(m) of
the Code, performance goals may be based upon a
participant’s attainment of personal objectives with
respect to any of the foregoing performance goals: negotiating
transactions and sales, business unit/department performance,
profit margins, reduction of certain accounts receivable or
achievement of subsidiary or departmental budgets or developing
long-term business goals.
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As soon as practicable after the end of each Incentive Period,
the Committee will calculate the amount of each
participant’s bonus for such Incentive Period based upon
the achievement of performance goals or specific target
objectives. The Committee will have no discretion to increase
the amount of any participant’s bonus as so determined, but
may reduce the amount or totally eliminate such bonus if it
determines, in its absolute and sole discretion, that such a
reduction or elimination is appropriate in order to reflect the
participant’s performance or unanticipated factors. No
participant’s bonus will exceed the lesser of 200% of the
participant’s base annual salary or $1,000,000.
Approved bonus awards will be payable by us in cash (or in
shares of our Common Stock pursuant to the Omnibus Plan if the
Omnibus Plan is approved at the Annual Meeting) to each
participant, or to his estate in the event of his death, as soon
as practicable after the end of each Incentive Period. To the
extent shares of Common Stock are issued under the Omnibus Plan,
such issued shares will be subject to both the annual award
limitation set forth in “— Determination of Bonus
Awards” above and any share limitation(s) in the Omnibus
Plan.
A bonus award that would otherwise be payable to a participant
who is not employed by us or one of our subsidiaries on the last
day of an Incentive Period will be prorated, or not paid, in
accordance with rules and regulations adopted by the Committee
for the administration of the Incentive Plan.
The Incentive Plan will be submitted to the stockholders for
reapproval if the business criteria stated above in
“— Incentive Objectives” are materially
changed and, in any event, will be submitted to be reapproved by
stockholders after five years since the last time stockholder
approval was received.
No person shall have any legal claim to be granted an award
under the Incentive Plan and the Committee shall have no
obligation to treat participants uniformly. Bonuses awarded
under the Incentive Plan shall be payable from our general
assets and no participant shall have any claim with respect to
any of our specific assets.
Neither the Incentive Plan nor any action taken under the
Incentive Plan will be construed as giving any employee the
right to be retained in our employ or any subsidiary or to
maintain any participant’s compensation at any level.
The Incentive Plan will put a significant portion of total
compensation at risk by linking potential annual compensation to
our achievement of specific performance goals during the year,
which creates a direct connection between the participant’s
pay and our financial performance. The goals established by our
Compensation Committee for 2006 will include:
Each of these six performance goals are equally weighted for all
participants in the Incentive Plan. The Incentive Plan provides
for bonuses to be paid in the form of a predetermined mixture of
cash and Common Stock that varies depending upon the level of
bonus (with higher bonus awards being paid with a greater
percentage of Common Stock).
Each executive officer and key employee has a target bonus
percentage expressed as a percentage of base salary based on his
or her level of responsibility, with bonuses ranging from a low
of approximately 15% of base salary to 42% of base salary for
the Chief Executive Officer (if performance is 100% of target).
The annual incentive program includes minimum performance
thresholds required to earn any incentive compensation, as well
as
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maximum payouts geared towards rewarding extraordinary
performance; thus, actual awards can range from 0% (if
performance is below 60% of target) to 99% of base salary for
the Chief Executive Officer (if performance is 150% of target).
Based on current salaries, the following table lists the maximum
bonus amounts payable under the 2006 performance goals set by
the Compensation Committee to certain individuals.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THE
APPROVAL OF THE MANAGEMENT ANNUAL INCENTIVE PLAN. UNLESS MARKED
TO THE CONTRARY, PROXIES RECEIVED BY THE COMPANY WILL BE VOTED
FOR THE APPROVAL OF THE MANAGEMENT ANNUAL INCENTIVE PLAN.
EXECUTIVE
COMPENSATION
Summary
Compensation Table
The table below sets forth information concerning the annual and
long-term compensation paid to or earned by the Chief Executive
Officer and each of the other persons who were serving as an
executive officer on December 31, 2005 and who earned more
than $100,000 in salary and bonus during the 12 month
period ended December 31, 2005.
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No options were granted by us to executive officers during the
year ended December 31, 2005.
No options were exercised during the year ended
December 31, 2005 by our executive officers named in the
Summary Compensation Table.
As of December 31, 2005, none of the executive officers
named in the Summary Compensation Table had any unexercised
options.
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The table below sets forth information concerning compensation
plans under which equity securities are authorized for issuance
as of the fiscal year ended December 31, 2005.
Historically, our directors did not receive any compensation for
serving as a director, although we did reimburse directors for
expenses incurred in connection with attendance at meetings of
the Board of Directors. In connection with the expansion of the
size of the Board of Directors and the appointment of three new
non-employee directors in October 2005 as part of a
recapitalization, all of our non-employee directors will receive
the following compensation:
Mr. Garrison received 10,000 restricted shares of our
common stock for serving on the audit committee for the period
from June 6, 2003 to May 31, 2005. In connection with
the expansion of the Board of Directors, we intend to increase
the size of the existing audit committee from one to three
members and to establish compensation and nominating committees
consisting solely of independent directors. The Board of
Directors has not yet determined the amount of additional
compensation, if any, to be paid to the members of these
committees for their service on such committees.
As of October 14, 2005, we entered into employment
agreements with each of Mr. Cash and Mr. Grose. Under
the terms of the agreements, Mr. Cash will receive an
annual salary of $400,000 and Mr. Grose will receive an
annual salary of $275,000. Mr. Cash and Mr. Grose are
each also entitled to participate in any incentive bonus plan or
program
and/or stock
option plan that is established by the Compensation Committee
for our senior executive
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officers. The term of each of the agreements will expire upon
notice of termination delivered by either us or Mr. Cash or
Mr. Grose, as applicable. Mr. Cash or Mr. Grose
must provide us with 30 days prior notice of termination.
We may terminate either Mr. Cash or Mr. Grose for
cause without prior notice. If we terminate either Mr. Cash
or Mr. Grose without cause, we must pay him severance pay
equal to 12 months salary (to be paid in equal
installments), provided that he does not compete with us during
the time that he is receiving severance payments and signs a
general release of claims in favor of us. Under the employment
agreements, “cause” is defined to include, but is not
limited to, the following: (i) any act or omission by
Mr. Cash or Mr. Grose that constitutes gross
negligence or willful misconduct; (ii) theft, dishonest
acts or breach of fiduciary duty that materially enrich
Mr. Cash or Mr. Grose or materially damage us or
conviction of a felony, (iii) any conflict of interest,
except those consented to in writing by us; (iv) any
material failure by Mr. Cash or Mr. Grose to observe
our work rules, policies or procedures that is not cured after
10 days’ written notice; (v) bad faith refusal by
Mr. Cash or Mr. Grose to carry out reasonable
instruction that is not cured after 10 days’ written
notice; or (vi) any material breach of their employment
agreements. The agreements require Mr. Cash and
Mr. Grose to not disclose or use confidential information
(except in the ordinary course of performing his duties for us).
In cases of termination for cause or voluntary termination,
Mr. Cash or Mr. Grose, as appropriate, may not solicit
customers, business prospects or employees for a period of one
year following his termination of employment. The agreements
also prohibit Mr. Cash and Mr. Grose from engaging in
any act, which creates a conflict of interest with us.
The Board of Directors held five meetings during 2005 and acted
by unanimous consent eight times. Our policy for director
attendance at Board of Directors meetings is that directors are
expected to regularly attend meetings of the Board of Directors
and of those committees on which a director may sit, with the
understanding that on occasion a director may be unable to
attend a meeting. Each director is required to attend the annual
meeting of the Board of Directors and is encouraged to attend
the Annual Meeting of the stockholders. All directors attended
the 2005 Annual Meeting of the stockholders. Each director
attended at least 75% of the total number of meetings held by
the Board of Directors (during the period for which he was a
director) and at least 75% of the total number of meetings held
by all board committees on which he served (during the periods
for which he was a member). The Board of Directors has
established an Audit Committee, Nominating Committee and
Compensation Committee.
For most of 2005, Mr. Garrison was the sole member of the
Audit Committee. Since the Audit Committee only had one member,
it did not have any formal meetings during 2005. In December
2005, the Audit Committee was expanded to three members. The
following three directors are members of the Audit Committee:
John Garrison, Chair, Ronnie Irani and Jon Rateau. The Board of
Directors has determined that each of the Audit Committee
members are independent, as that term is defined under the
enhanced independence standards for audit committee members in
the Securities Exchange Act of 1934 and rules thereunder, as
amended, as incorporated into the listing standards of The
Nasdaq National Market. The Board of Directors has determined
that Mr. Garrison is an “audit committee financial
expert”, as that term is defined in the rules promulgated
by the Securities and Exchange Commission pursuant to the
Sarbanes-Oxley Act of 2002. The functions of the Audit Committee
are described under “Audit Committee Report” below. A
copy of our Audit Committee’s charter is attached as
Appendix C hereto.
The Compensation Committee was established in December 2005 and
did not meet in 2005. The purpose of the Compensation Committee
is to make determinations and recommendations to the Board of
Directors with respect to salaries, bonuses, stock options and
other benefits payable to our Chief Executive Officer and other
executive officers. Messrs. Rateau, Kite and Irani are the
current members of the Compensation Committee. The Board of
Directors has determined that all the members of the
Compensation Committee are independent as defined under the
general independence standards of the listing rules of The
Nasdaq National Market.
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The Compensation Committee performs its functions and
responsibilities pursuant to a written charter adopted by our
Board of Directors in December 2005, which is published on our
Internet website at www.qrcp.net under the heading Corporate
Governance Policies.
The Nominating Committee was formed in December 2005 and did not
meet in 2005. The following directors are members of the
Nominating Committee: Messrs. Kite, Garrison and Irani. The
Board of Directors has determined that each member of the
Nominating Committee is independent under the listing standards
of The Nasdaq National Market. Our Nominating Committee’s
charter describes the committee’s responsibilities,
including developing corporate governance guidelines and
seeking, screening and recommending director candidates for
nomination by the Board of Directors. Our Corporate Governance
Guidelines contain information regarding the selection,
qualification and criteria for director nominees and the
composition of the Board of Directors. Both documents are
published on our Internet website at www.qrcp.net under the
heading Corporate Governance Policies. The Nominating Committee
evaluates all director candidates in accordance with the
director qualification standards described in the Corporate
Governance Guidelines.
The Nominating Committee considers candidates for Board
membership suggested by its members and other Board members, as
well as management and stockholders.
Once the Nominating Committee has identified a prospective
nominee candidate, the Committee makes an initial determination
as to whether to conduct a full evaluation of the candidate.
This initial determination is based on the information provided
to the Nominating Committee with the recommendation of the
prospective candidate, as well as the Nominating
Committee’s own knowledge of the candidate. This
information may be supplemented by inquiries to the person
making the recommendation or others. The preliminary
determination is based primarily on the need for additional
Board members to fill vacancies or expand the size of the Board
of Directors and the likelihood that the prospective nominee can
satisfy the criteria and qualifications described below. If the
Nominating Committee determines, in consultation with the
Chairman of the Board and other Board members as appropriate,
that additional consideration is warranted, the Nominating
Committee then evaluates the prospective nominees against the
criteria and qualifications set out in the Nominating
Committee’s Charter. Such criteria and qualifications
include:
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However, as determining the specific qualifications or criteria
against which to evaluate the fitness or eligibility of
potential director candidates is necessarily dynamic and an
evolving process, the Board of Directors believes that it is not
always in our best interests or our stockholders to attempt to
create an exhaustive list of such qualifications or criteria.
Appropriate flexibility is needed to evaluate all relevant facts
and circumstances in the context of our needs and the needs of
the Board of Directors at a particular point in time.
The Nominating Committee also considers such other relevant
factors as it deems appropriate, including the current
composition of the Board of Directors, the balance of management
and independent directors, the need for Audit Committee
expertise and the evaluations of other prospective nominees. In
determining whether to recommend a director for re-election, the
Nominating Committee also considers the director’s past
attendance at meetings and participation in and contributions to
the activities of the Board of Directors. In connection with
this evaluation, the Nominating Committee determines whether to
interview the prospective nominee, and if warranted, one or more
members of the Nominating Committee, and others as appropriate,
interview prospective nominees in person or by telephone. After
completing this evaluation and interview, the Nominating
Committee makes a recommendation to the full Board of Directors
as to the persons who should be nominated by the Board, and the
Board of Directors determines the nominees after considering the
recommendation and report of the Nominating Committee.
In addition, nominees and new directors who serve as a member of
our Audit Committee are not permitted to serve on the audit
committee of more than two other boards of public companies.
The Board of Directors values the contributions of directors
whose years of service have given them insight into us and our
operations and believes term limits are not necessary. Directors
shall not be nominated for election to the Board of Directors
after their 72nd birthday, although the full Board may
nominate candidates over the age of 72 for special circumstances.
Our board of directors has adopted a Code of Business Conduct
and Ethics that is applicable to all of our directors, officers
and employees, including our principal executive officer, our
principal financial officer and our principal accounting
officer. A copy of our Code of Business Conduct and Ethics is
available on our internet website at www.qrcp.net under the
heading Corporate Governance Policies.
COMPENSATION
COMMITTEE REPORT
In December 2005, the Board of Directors of Quest Resource
Corporation established a Compensation Committee
(“Committee”). The Committee is responsible for
reviewing and approving all aspects of compensation for our
Chief Executive Officer (“CEO”) and other senior
executives. In meeting this responsibility, the Committee’s
policy is to ensure that senior executive compensation complies
with all applicable rules and regulations and designed to
achieve four primary objectives:
The charter followed by the Committee in discharging these
responsibilities is available to any interested party at the
Company’s website at www.qrcp.net.
The Committee consists of three directors, each of whom meets
(i) the independence requirements of the listing standards
of the Nasdaq Stock Market, Inc., (ii) the definition of
non-employee director under
Rule 16b-3
promulgated under Section 16 of the Securities Exchange Act
of 1934, as amended, and (iii) the definition of
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outside director under the regulations promulgated under
Section 162(m) of the Internal Revenue Code of 1986, as
amended. The Board appoints the Committee members. The Committee
then recommends, and the Board designates, one member of the
Committee as chairperson. The Board has the power to remove a
Committee member for any reason.
The Committee has the authority to consult with independent
compensation consulting firms as it deems necessary from time to
time to: assist the Committee in formulating Quest’s
compensation policies; provide advice to the Committee
concerning specific compensation packages and appropriate levels
of executive and Board of Director compensation; provide advice
about competitive levels of compensation; and review and
recommend changes in the compensation system and programs of
Quest.
Since the Committee was not formed until the end of 2005, the
following discussion reflects the compensation philosophy and
practices to be followed by the Committee in the future.
Our compensation philosophy is to manage senior executive total
compensation at the median level relative to companies with
which we compete for talent. The Committee will compare
compensation levels with a selected cross-industry group of
other natural gas and oil exploration and production companies
of similar size.
Each year, the Committee will ask management to present a
proposed compensation plan for the Plan Year, along with
supporting and competitive market data. The Committee will then
meet without members of the management to review the proposal
and establish the compensation plan. The Committee monitors the
performance of our CEO and other senior executives throughout
the year against the targets set for each performance measure.
At the end of the Plan Year, the Committee meets in an executive
session to review the final results compared to the established
performance goals before determining the CEO and other senior
executives’ compensation levels for the Plan Year. During
this meeting, the Committee also establishes the executive
compensation plan for the upcoming Plan Year.
Annual compensation for senior executives will be comprised of
two components: base salary and an annual bonus award consisting
of both cash and stock awards. Each is explained more fully
below.
BASE SALARY: Base salaries for all senior
executives will be set at levels that are comparable to similar
positions at other companies with whom we compare for
compensation purposes. These other companies comprise the
Performance Peer Group. While surveys will be conducted
annually, it is intended that salaries will only be adjusted as
needed based on the results of our market surveys. This is in
line with the philosophy that above median compensation
opportunity should come from the variable portion of the
compensation package.
ANNUAL BONUS AWARDS: Annual bonus awards for
senior executives are provided to reward value creation by
providing competitive incentives for the achievement of annual
financial and operating performance goals. By providing
market-competitive target awards, the plan supports the
attraction and retention of senior executive talent critical to
achieving the strategic business objectives of Quest. Bearing in
mind these considerations, the Committee has established the
Management Annual Incentive Plan, subject to stockholder
approval. (See
“Proposal No. 3 — Approval of
Management Annual Incentive Plan” for a discussion of the
Management Annual Incentive Plan and the performance goals that
have been established for 2006.)
The proposed 2006 plan establishes target award levels as a
percentage of the participant’s base salary. The
percentages vary based on organizational responsibilities and
market-compilation bonus levels based on industry data. Approved
annual bonus awards will consist of both cash awards and share
awards of the Company’s common stock issued pursuant to the
Company’s Omnibus Stock Award Plan.
After the end of the Plan Year, the Committee will determine to
what extent the Company and the participants have achieved the
performance goals. The Committee will calculate and certify in
writing the amount of each participant’s bonus based upon
the performance goals and computation formulae set forth in the
Management Annual Incentive Plan. The Committee shall have no
discretion to increase the amount of any senior executive’s
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bonus as so determined, but may reduce the amount of or totally
eliminate such bonus, if it determines, in its absolute and sole
discretion that such reduction or elimination is appropriate in
order to reflect the senior executives’ performance or
unanticipated factors.
The Committee will meet annually, in private, to review the
Chief Executive Officer’s performance. The Committee will
use this performance evaluation in considering the CEO’s
compensation. The CEO participates in the same programs and
receives compensation based on the same factors as the other
senior executives. However, the CEO’s overall compensation
reflects a greater degree of policy and decision-making
authority and a higher level of responsibility with respect to
the strategic direction and financial and operational results of
the Company. As a result, the compensation of the Company’s
CEO will be largely dependent upon the overall performance of
the Company and enhancement of stockholder value, as well as
past performance.
2005 BASE SALARY: In October 2005 (in
connection with a private placement of our common stock and
prior to the formation of the Compensation Committee) our Board
of Directors concluded, based on the base salary information of
the CEOs in the Peer Group Companies and the advice of its
advisors, that Mr. Cash’s annual salary be increased
to $400,000.
2005 ANNUAL BONUS AWARD: For 2005,
Mr. Cash received a cash bonus of $4,200, consisting of a
Christmas bonus and company-wide production performance bonus.
As a result of the Committee’s review of competitive
practices, it was concluded that the incentive opportunity for
Mr. Cash should be increased. Mr. Cash successfully
led us through a re-capitalization and positioned the Company
for significant growth in the coming years. Mr. Cash will
participate in the Management Annual Incentive Plan that has
been established for 2006, subject to stockholder approval.
As noted above, our compensation policy is based upon a
pay-for-performance
philosophy. U.S. federal tax laws (Section 162(m) of
the Internal Revenue Code of 1986, as amended) impose a
limitation on the Company’s U.S. income tax
deductibility of senior executive compensation, unless it is
“performance-based” under the tax rules. The
Company’s executive performance awards programs are being
submitted to the stockholders at the 2006 annual meeting for
approval and, subject to obtaining stockholder approval, are
designed to comply with the requirements of Section 162(m).
These policies do not preclude the Committee from making
payments or awards where appropriate to retain and provide
incentives to key executives, whether or not they may qualify
for such deductibility.
Respectfully submitted by the members of the Compensation
Committee of the Board of Directors:
Jon H. Rateau, Chairman
Ronnie K. Irani James B. Kite
The Audit Committee of the Board is responsible for providing
independent objective oversight of our accounting functions and
internal controls. The Audit Committee is composed of three
independent directors and act under a written charter adopted
and approved by the Board of Directors on December 29,
2005. The members of the Audit Committee are independent as
defined by the National Association of Securities Dealers’
listing standards and as required by the Sarbanes-Oxley Act of
2002 (“Act”). After a full review and analysis, the
Board of Directors determined that the members of the Audit
Committee are independent within the meaning of
Rules 4200(a)(15) and 4350(d) of the National Association
of Securities Dealers’ listing standards and the rules and
regulations of the Securities and Exchange Commission (the
“SEC”), as such requirements are defined as of the
mailing date of this proxy statement. The Board of Directors has
also determined that at Mr. Garrison is an “audit
committee financial
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expert” (as defined by SEC rules and regulations). For an
overview of Mr. Garrison’s qualifications, see the
section entitled
“Proposal No. 1 — Election of
Directors” above.
As set forth in the Audit Committee Charter, the Audit Committee
is appointed by the Board of Directors to perform, among others,
the following duties and responsibilities:
The Audit Committee reviewed and discussed our audited financial
statements with management. The Audit Committee also discussed
with the independent accountants the matters required to be
discussed by Statement on Auditing Standards No. 61
(Communications with Audit Committees). Our independent
registered public accounting firm also provided to the Audit
Committee the written disclosures and the letter required by
Independence Standards Board Standard No. 1 (Independence
Discussions with Audit Committees), and the Audit Committee
discussed with the independent registered public accounting firm
that firm’s independence.
The members of the Audit Committee rely without independent
verification on the information provided to them and on the
representations made by management and the Independent
Registered Public Accounting firm. Accordingly, the Audit
Committee’s oversight does not provide an independent basis
to determine that management has maintained appropriate
accounting and financial reporting principles or appropriate
internal controls and procedures designed to assure compliance
with accounting standards and applicable laws and regulations.
Furthermore, the Audit Committee’s considerations and
discussions referred to above do not assure that the audit of
our financial statements have been carried out in accordance
with the Standards of the Public Company Accounting Oversight
Board (United States), that the financial statements are
presented in accordance with generally accepted accounting
principles, or that our Independent Registered Public Accounting
Firm is in fact “independent”.
Based on the reports and discussions described in this report,
and subject to the limitations on the role and responsibilities
of the Audit Committee referred to above and in the Charter, the
Audit Committee recommended to the Board of Directors that the
audited financial statements be included in our Annual Report on
Form 10-K
for the year ended December 31, 2005 filed with the SEC.
John C. Garrison
Jon Rateau
Ronnie Irani
The independent registered public accounting firm of Murrell,
Hall, McIntosh & Co., PLLP performed the audit for the
fiscal year ending December 31, 2005.
The Audit Committee has determined to continue the services of
Murrell, Hall, McIntosh & Co., PLLP for the current
fiscal year ending December 31, 2006. Such services will
include the audit of our financial statements for the fiscal
year ending on such date and other appropriate accounting
services.
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A member of Murrell, Hall, McIntosh & Co., PLLP is
expected to attend the Annual Meeting and will have the
opportunity to make a statement if desired. It is also expected
that such member will be available to respond to appropriate
questions from the stockholders.
The following table lists fees paid to Murrell, Hall,
McIntosh & Co., PPLP, for services rendered in the
seven-month transition period ended December 31, 2004 and
for the year ended December 31, 2005.
The Audit Committee has concluded the provision of the non-audit
services listed above as “Audit-Related Fees” and
“Tax Fees” is compatible with maintaining the
auditors’ independence.
All services to be performed by the independent public
accountants must be pre-approved by the Audit Committee, which
has chosen not to adopt any pre-approval policies for enumerated
services and situations, but instead has retained the sole
authority for such approvals.
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The following graph compares the performance of our Common Stock
to our SIC code index and to the Nasdaq market index for the
past five years. The graph assumes the investment of $100 on
December 31, 2000 and the reinvestment of all dividends.
The graph shows the value of the investment at the end of each
year.
Assumes $100 invested on Jan. 1, 2001. Assumes dividend
reinvested. Fiscal year ending Dec. 31, 2005.
Section 16(a) of the Exchange Act requires our directors
and executive officers, and persons who own more than 10% of a
registered class of our equity securities, to file with the SEC
initial reports of ownership and reports of changes in ownership
of our equity securities. Directors, executive officers and
greater than 10% stockholders are required by SEC regulations to
furnish us with copies of all Section 16(a) forms they file.
To our knowledge, based solely on a review of
Forms 3, 4, 5 and amendments thereto furnished to us
and written representations that no other reports were required,
during and for the fiscal year ended December 31, 2005, all
Section 16(a) filing requirements applicable to our
directors, executive officers and greater than 10% beneficial
owners were complied with, except for the following:
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of March 28,
2006 concerning the shares of common stock beneficially owned by
(a) each person known by us, solely by reason of our
examination of Schedule 13D and 13G
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filings made with the SEC and by information voluntarily
provided to us by certain stockholders, to be the beneficial
owner of 5% or more of our outstanding common stock,
(b) each of the directors and nominees for election as a
director, (c) each of the executive officers named in the
summary compensation table under “Executive
Compensation” and (d) all current directors and
executive officers as a group. If a person or entity listed in
the following table is the beneficial owner of less than one
percent of our common stock outstanding, this fact is indicated
by an asterisk in the table. The percentages of ownership and
the number of shares beneficially owned are disproportionate due
to joint beneficial ownership making the notes following the
table essential for a complete understanding of our ownership
structure.
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The Board of Directors knows of no other business which may come
before the Annual Meeting. If, however, any other matters are
properly presented to the Annual Meeting, it is the intention of
the persons named in the accompanying proxy to vote, or
otherwise act, in accordance with their judgment on such matters.
A stockholder who wishes to recommend a prospective nominee for
the Board of Directors for the 2007 Annual Meeting of the
stockholders should provide notice in accordance with
Article VIII of our Restated Articles of Incorporation and
Section 4 of Article II of our Second Amended and
Restated Bylaws. In particular, the stockholder must deliver
notice to our corporate secretary not less than 14 days nor
more than 50 day prior to the meeting, except that if less
than 21 days notice of the date of the meeting is given to
our stockholders, then notice by a stockholder must be received
no later than the seventh day following date the on which such
notice of the meeting was mailed to our stockholders. The notice
should be sent to Quest Resource Corporation,
9520 N. May Avenue, Suite 300, Oklahoma City, OK
73120, attention: Corporate Secretary. Our Secretary will
forward the information to the members of the Nominating
Committee, who will consider whether to nominate any person
nominated by a
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stockholder pursuant to the provisions of the proxy rules, our
bylaws, our Nominating Committee Charter, our Corporate
Governance Guidelines and the director selection procedures
established by the Nominating Committee.
The stockholder’s notice must set forth as to each person
whom the stockholder proposes to nominate for election or
reelection as a director:
The stockholder’s notice must also set forth the following
information about the stockholder giving the notice:
We may require any proposed nominee to furnish such other
information as may reasonably be required by us to determine the
eligibility of the proposed nominee to serve as a director.
A stockholder proposal may be considered at our 2007 Annual
Meeting of stockholders only if it meets the requirements set
forth in Section 5 of Article II of our Second Amended
and Restated Bylaws. In particular, the stockholder must deliver
notice of such proposal to our principal executive offices not
less than 50 days nor more than 75 days prior to the
meeting; provided, however, that in the event that less than
65 days’ notice or prior public disclosure of the date
of the meeting is given or made to stockholders, notice by the
stockholder must be so received no later than the close of
business on the 15th day following the day on which such
notice of the date of the meeting was mailed or such public
disclosure was made, whichever first occurs.
The notice also must contain the following information:
(a) as to each matter the stockholder proposes to bring
before the meeting, a brief description of the business desired
to be brought before the meeting and the reasons for conducting
such business at the meeting, and (b) as to the stockholder
giving the notice (i) the name and record address of the
stockholder, (ii) the number of shares of Common Stock
which are beneficially owned by the stockholder and
(iii) any material interest of the stockholder in such
business.
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Stockholders may contact an individual director, including the
Chairman of the Board of Directors and the chairman of any
committee of the Board of Directors, the Board of Directors as a
group or a specified committee or group, including the
independent directors as a group, by sending a letter to the
attention of the appropriate person (c/o the Chief Financial
Officer), which may be marked as confidential, addressed to our
corporate secretary at 9520 North May Avenue, Suite 300,
Oklahoma City, Oklahoma 73120. All communications received by
the corporate secretary will forwarded promptly to the
appropriate person(s).
By Order of the Board of Directors
DAVID E. GROSE
Corporate Secretary
PLEASE COMPLETE AND RETURN YOUR PROXY CARD PROMPTLY IN THE
ENCLOSED ENVELOPE.
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APPENDIX A
Quest
Resource Corporation
2005 Omnibus Stock
Award Plan
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QUEST
RESOURCE CORPORATION.
2005 Omnibus Stock Award Plan
1.1. Establishment of the
Plan. Quest Resource Corporation, a Nevada
corporation (the “Company”), hereby establishes an
incentive compensation plan to be known as the Quest Resource
2005 Omnibus Stock Award Plan (the “Plan”). The Plan
was adopted by the Board of Directors of the Company (the
“Board”), on October 14, 2005. Subject to
Section 1.4, the Plan is effective as of October 14,
2005 (the “Effective Date”).
1.2. Objectives of the
Plan. The Plan is intended to allow employees
and Non-Employee Directors of the Company and its Subsidiaries
to acquire or increase equity ownership in the Company, or to be
compensated under the Plan based on growth in the Company’s
equity value, thereby strengthening their commitment to the
success of the Company and stimulating their efforts on behalf
of the Company, and to assist the Company and its Subsidiaries
in attracting new employees and retaining existing employees.
The Plan is also intended to optimize the profitability and
growth of the Company through incentives which are consistent
with the Company’s goals; to provide incentives for
excellence in individual performance; and to promote teamwork.
All Awards made under the Plan shall give effect to the 2.5:1
reverse stock split effective October 31, 2005.
1.3. Duration of the
Plan. The Plan shall commence on the
Effective Date and shall remain in effect, subject to
Section 1.4 and the right of the Board to amend or
terminate the Plan at any time pursuant to Article 13
hereof, until all Shares subject to it shall have been purchased
or acquired according to the Plan’s provisions.
1.4. Shareholder Approval and Effect
Thereof. The Company will submit the Plan to
the shareholders of the Company for approval within twelve
months of the Effective Date. If the Company’s shareholders
do not approve the Plan (i) no Awards shall be granted
subsequent to such vote, and (ii) all Awards granted
hereunder other than the Initial Awards shall be forfeited by
each Grantee and become null and void; the Initial Awards,
however, shall survive according to the terms and conditions of
such Awards and the Plan.
Whenever used in the Plan, the following terms shall have the
meanings set forth below:
2.1. “Article” means an
Article of the Plan.
2.2. “Award” means Options,
Restricted Shares, Bonus Shares, Deferred Shares, SARs,
Performance Units or Performance Shares granted under the Plan.
2.3. “Award Agreement” means
a written agreement by which an Award is evidenced.
2.4. “Beneficial Owner” has
the meaning specified in
Rule 13d-3
of the SEC under the Exchange Act.
2.5. “Board” has the meaning
set forth in Section 1.1.
2.6. “Bonus Shares” means
Shares that are awarded to a Grantee without cost and without
restrictions in recognition of past performance (whether
determined by reference to another employee benefit plan of the
Company or otherwise) or as an incentive to become an employee
of the Company or a Subsidiary.
2.7. “Cause” means, unless
otherwise defined in an Award Agreement,
(a) a Grantee’s conviction of, plea of guilty to, or
plea of nolo contendere to a felony or other crime that involves
fraud or dishonesty,
(b) any willful action or omission by a Grantee which would
constitute grounds for immediate dismissal under the employment
policies of the Company or the Subsidiary by which Grantee is
employed, including but not limited to intoxication with alcohol
or illegal drugs while on the premises of the Company or any
Subsidiary, or violation of sexual harassment laws or the
internal sexual harassment policy of the Company or the
Subsidiary by which Grantee is employed,
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(c) a Grantee’s habitual neglect of duties, including
but not limited to repeated absences from work without
reasonable excuse, or
(d) a Grantee’s willful and intentional material
misconduct in the performance of his duties that results in
financial detriment to the Company or any Subsidiary;
provided, however, that for purposes of clauses (b),
(c) and (d), Cause shall not include any one or more of the
following: bad judgment, negligence or any act or omission
believed by the Grantee in good faith to have been in or not
opposed to the interest of the Company (without intent of the
Grantee to gain, directly or indirectly, a profit to which the
Grantee was not legally entitled). A Grantee who agrees to
resign from his affiliation with the Company or a Subsidiary in
lieu of being terminated for Cause may be deemed to have been
terminated for Cause for purposes of this Plan.
2.8. “Change of Control”
means, unless otherwise defined in an Award Agreement, any one
or more of the following:
(a) any Person other than (i) a Subsidiary,
(ii) any employee benefit plan (or any related trust) of
the Company or any of its Subsidiaries or (iii) any
Excluded Person, becomes the Beneficial Owner of 35% or more of
the common shares of the Company or of Voting Securities
representing 35% or more of the combined voting power of the
Company (such a person or group, a “35%
Owner”), except that (i) no Change of Control
shall be deemed to have occurred solely by reason of such
beneficial ownership by a corporation with respect to which both
more than 60% of the common shares of such corporation and
Voting Securities representing more than 60% of the aggregate
voting power of such corporation are then owned, directly or
indirectly, by the persons who were the direct or indirect
owners of the common shares and Voting Securities of the Company
immediately before such acquisition in substantially the same
proportions as their ownership, immediately before such
acquisition, of the common shares and Voting Securities of the
Company, as the case may be and (ii) such corporation shall
not be deemed a 35% Owner; or
(b) the Incumbent Directors (determined using the Effective
Date as the baseline date) cease for any reason to constitute at
least a majority of the directors of the Company then
serving; or
(c) the consummation by the Company (whether directly
involving the Company or indirectly involving the Company
through one or more intermediaries) of a merger, reorganization,
consolidation, or similar transaction, or the sale or other
disposition of all or substantially all (at least 40%) of the
consolidated assets of the Company or a plan of liquidation of
the Company (any of the foregoing transactions, a
“Reorganization Transaction”) which is not an
Exempt Reorganization Transaction.
The definition of “Change of Control” may be amended
at any time prior to the occurrence of a Change of Control, and
such amended definition shall be applied to all Awards granted
under the Plan whether or not outstanding at the time such
definition is amended, without requiring the consent of any
Grantee. Notwithstanding the occurrence of any of the foregoing
events, (a) a Change of Control shall be deemed not to have
occurred with respect to any Section 16 Person if such
Section 16 Person is, by agreement (written or otherwise),
a participant on such Section 16 Person’s own behalf
in a transaction which causes the Change of Control to occur and
(b) a Change of Control shall not occur with respect to a
Grantee if, in advance of such event, the Grantee agrees in
writing that such event shall not constitute a Change of Control.
2.9. “Change of Control
Period” has the meaning set forth in
Section 5.6(c).
2.10. “Change of Control
Value” means the Fair Market Value of a Share on
the date of a Change of Control.
2.11. “Code” means the
Internal Revenue Code of 1986, as amended from time to time, and
regulations and rulings thereunder. References to a particular
section of the Code include references to successor provisions
of the Code or any successor statute.
2.12. “Company” has the
meaning set forth in Section 1.1.
2.13. “Deferred Shares” means
Shares that are awarded to a Grantee on a deferred basis
pursuant to Section 10.2
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2.14. “Disabled” or
“Disability” means an individual
(i) is unable to engage in any substantial gainful activity
by reason of any medically determinable physical or mental
impairment which can be expected to result in death or can be
expected to last for a continuous period of not less than twelve
(12) months or (ii) is, by reason of any medically
determinable physical or mental impairment which can be expected
to result in death or can be expected to last for a continuous
period of not less than twelve (12) months, receiving
income replacement benefits for a period of not less than
3 months under a Company-sponsored accident and health
plan. Notwithstanding the foregoing, with respect to an
Incentive Stock Option, “Disability” means a permanent
and total disability, within the meaning of Code
Section 22(e)(3), as determined by the Board in good faith,
upon receipt of medical advice from one or more individuals,
selected by the Board, who are qualified to give professional
medical advice.
2.15. “Effective Date” has
the meaning set forth in Section 1.1.
2.16. “Eligible Person” means
any employee (including any officer) of the Company or any
Subsidiary, including any such employee who is on an approved
leave of absence or has been subject to a disability which does
not qualify as a Disability and any Non-Employee Director.
2.17. “Exchange Act” means
the Securities Exchange Act of 1934, as amended. References to a
particular section of the Exchange Act include references to
successor provisions.
2.18. “Excluded Person” means
any Person who, along with such Person’s Affiliates and
Associates (as such terms are defined in
Rule 12b-2
of the General Rules and Regulations under the Exchange Act) is
the Beneficial Owner of 15% or more of the Shares outstanding as
of the Effective Date.
2.19. “Exempt Reorganization
Transaction” means a Reorganization Transaction
which (i) results in the Persons who were the direct or
indirect owners of the outstanding common shares and Voting
Securities of the Company immediately before such Reorganization
Transaction becoming, immediately after the consummation of such
Reorganization Transaction, the direct or indirect owners of
both more than 60% of the then-outstanding common shares of the
Surviving Corporation and Voting Securities representing more
than 60% of the aggregate voting power of the Surviving
Corporation, in substantially the same respective proportions as
such Persons’ ownership of the common shares and Voting
Securities of the Company immediately before such Reorganization
Transaction, or (ii) after such transaction, more than 50%
of the members of the board of directors of the Surviving
Corporation were Incumbent Directors at the time of the
Board’s approval of the agreement providing for the
Reorganization Transaction or other action of the Board
approving the transaction (or whose election or nomination was
approved by a vote of at least two-thirds of the members who
were members of the Board at that time).
2.20. “Fair Market Value”
means (A) with respect to any property other than Shares,
the fair market value of such property determined by such
methods or procedures as shall be established from time to time
by the Board, and (B) with respect to Shares that are
readily tradable on an established securities market (within the
meaning of Treasury Regulations § 1.897-1(m)) the
closing price for a Share on the Grant Date and if there is no
closing price on such date, the closing price for a Share on the
last trading day before the Grant Date and (C) with respect
to Shares not readily tradable on an established securities
market, the value determined by the reasonable application of a
reasonable valuation method applying those factors and
principles set forth in Treasury Regulations
1.409A-1(b)(5)(iv)(B).
2.21. “Freestanding SAR”
means any SAR that is granted independently of any Option.
2.22. “Good Reason” means any
action by the Company or the Subsidiary employing a Grantee
which results in any of the following without the Grantee’s
consent: (a) a material diminution or other material
adverse change in the Grantee’s position, authority or
duties, (b) requiring the Grantee to be based at any office
or location more than 50 miles from the location where he
or she was previously based; (c) a material diminution in
the Grantee’s compensation in the aggregate, other than a
diminution applicable to all similarly situated employees. A
Grantee shall not have Good Reason to terminate his or her
position unless, (1) within 60 days following the
event or circumstance set forth above in (a), (b) or (c),
the Grantee notifies the Company of such event or circumstance,
(2) the Grantee gives the Company 30 days to correct
the event or circumstance, and (3) the Company does not
correct, in all material respects, such event or circumstance.
2.23. “Grant Date” has the
meaning set forth in Section 5.2.
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2.24. “Grantee” means an
individual who has been granted an Award.
2.25. “Including” or
“includes” mean “including, without
limitation,” or “includes, without limitation”,
respectively.
2.26. “Incumbent Directors”
means, as of any specified baseline date, individuals then
serving as members of the Board who were members of the Board as
of the date immediately preceding such baseline date;
provided that any subsequently-appointed or elected
member of the Board whose election, or nomination for election
by shareholders of the Company or the Surviving Corporation, as
applicable, was approved by a vote or written consent of a
majority of the directors then comprising the Incumbent
Directors shall also thereafter be considered an Incumbent
Director, unless the initial assumption of office of such
subsequently-elected or appointed director was in connection
with (i) an actual or threatened election contest,
including a consent solicitation, relating to the election or
removal of one or more members of the Board, (ii) a
“tender offer” (as such term is used in
Section 14(d) of the Exchange Act), or (iii) a
proposed Reorganization Transaction.
2.27. “Initial Awards” means
those Awards set forth on Schedule 2.27 to this Plan.
2.28. “Non-Employee Director”
means a director of the Company who is not an officer or
employee of the Company or any of its affiliates. A
“Non-Employee Director” includes any director of the
Company who serves as a consultant to the Company or any of its
affiliates.
2.29. “Option” means an
option granted under Article 6 of the Plan, including an
incentive stock option.
2.30. “Option Price” means
the price at which a Share may be purchased by a Grantee
pursuant to an Option.
2.31. “Option Term” means the
period beginning on the Grant Date of an Option and ending on
the expiration date of such Option, as specified in the Award
Agreement for such Option and as may, consistent with the
provisions of the Plan, be extended from time to time by the
Board prior to the expiration date of such Option then in
effect; provided, however, that if the Board approves any
extension of an Award that extends the Award’s term or
exercise period to a date later than the later of the
15th day of the third month following the date at which, or
December 31 of the calendar year in which, the Award would
otherwise have expired if the Award had not been extended, based
on the terms of the Award at the original Grant Date, then the
Board shall also amend the Award to comply with Code
section 409A.
2.32. “Performance Period” has
the meaning set forth in Section 9.2.
2.33. “Performance Share” or
“Performance Unit” has the meaning set
forth in Article 9.
2.34. “Period of Restriction”
means the period during which the transfer of Restricted Shares
is limited in some way (based on the passage of time, the
achievement of performance goals, or upon the occurrence of
other events as determined by the Board) or the Share are
subject to a substantial risk of forfeiture, as provided in
Article 8.
2.35. “Person” shall have the
meaning ascribed to such term in Section 3(a)(9) of the
Exchange Act and used in Sections 13(d) and 14(d) thereof,
including a “group” as defined in Section 13(d)
thereof.
2.36. “Plan” has the meaning set
forth in Section 1.1.
2.37. “Plan Committee” has the
meaning set forth in Article 3.
2.38. “Reorganization
Transaction” has the meaning set forth in
Section 2.8(c).
2.39. “Restricted Shares”
means Shares that are subject to transfer restrictions and are
subject to forfeiture if conditions specified in the Award
Agreement applicable to such Shares are not satisfied.
2.40. “Rule 16b-3”
means
Rule 16b-3
promulgated by the SEC under the Exchange Act, together with any
successor rule, as in effect from time to time.
2.41. “SAR” means a stock
appreciation right and includes both Tandem SARs and
Freestanding SARs.
2.42. “SAR Term” means the
period beginning on the Grant Date of a SAR and ending on the
expiration date of such SAR, as specified in the Award Agreement
for such SAR and as may, consistent with the provisions of the
Plan, be extended from time to time by the Board prior to the
expiration date of such SAR then in effect.
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2.43. “SEC” means the United
States Securities and Exchange Commission, or any successor
thereto.
2.44. “Section” means, unless
the context otherwise requires, a Section of the Plan.
2.45. “Section 16
Person” means a person who is subject to
obligations under Section 16 of the Exchange Act with
respect to transactions involving equity securities of the
Company.
2.46. “Share” means a common
share, $.001 par value, of the Company.
2.47. “Subsidiary” means with
respect to any Person (a) any corporation of which more
than 50% of the Voting Securities are at the time, directly or
indirectly, owned by such Person, and (b) any partnership
or limited liability company in which such Person has a direct
or indirect interest (whether in the form of voting power or
participation in profits or capital contribution) of more than
50%. Solely with respect to a grant of an incentive stock option
under the requirements of Section 422 of the Code,
“Subsidiary” means a “subsidiary
corporation” as defined in Section 424(f) of the Code.
2.48. “Substitute Option” has the
meaning set forth in Section 6.3.
2.49. “Surviving Corporation”
means the corporation resulting from a Reorganization
Transaction or, if Voting Securities representing at least 50%
of the aggregate voting power of such resulting corporation are
directly or indirectly owned by another corporation, such other
corporation.
2.50. “Tandem SAR” means a
SAR that is granted in connection with, or related to, an
Option, and which requires forfeiture of the right to purchase
an equal number of Shares under the related Option upon the
exercise of such SAR; or alternatively, which requires the
cancellation of an equal amount of SARs upon the purchase of the
Shares subject to the Option.
2.51. “Tax Withholding” has the
meaning set forth in Section 14.1(a).
2.52. “Termination of
Affiliation” occurs on the first day on which an
individual is for any reason (a) no longer providing
services to the Company or any Subsidiary in the capacity of an
employee, (b) with respect to an individual who is an
employee of a Subsidiary, the first day on which such Subsidiary
ceases to be a Subsidiary, or (c) with respect to a
Non-Employee Director, no longer serving as a director of the
Company. A Termination of Affiliation shall have the same
meaning as a “separation from service” under Code
Section 409A(2)(A)(i) and the regulations issued
thereunder.
2.53. “Voting Securities” of a
corporation means securities of such corporation that are
entitled to vote generally in the election of directors, but not
including any other class of securities of such corporation that
may have voting power by reason of the occurrence of a
contingency.
3.1. Board and
Committee. Subject to Article 13, and to
Section 3.2, the Plan shall be administered by the Board,
or a committee of the Board appointed by the Board to administer
the Plan (“Plan Committee”). To the extent the Board
considers it desirable for transactions relating to Awards to be
eligible to qualify for an exemption under
Rule 16b-3,
the Plan Committee shall consist of two or more directors of the
Company, all of whom qualify as “non-employee directors
within the meaning of
Rule 16b-3.
To the extent the Board considers it desirable for compensation
delivered pursuant to Awards to be eligible to qualify for an
exemption from the limit on tax deductibility of compensation
under Section 162(m) of the Code, the Plan Committee shall
consist of two or more directors of the Company, all of whom
shall qualify as “outside directors” within the
meaning of Code Section 162(m). The number of members of
the Plan Committee shall from time to time be increased or
decreased, and shall be subject to such conditions, including,
but not limited to having exclusive authority to make certain
grants of Awards or to perform such other acts, in each case as
the Board deems appropriate to permit transactions in Shares
pursuant to the Plan to satisfy such conditions of
Rule 16b-3
or Code Section 162(m) as then in effect.
Any references herein to “Board” are, except as the
context requires otherwise, references to the Board or the Plan
Committee, as applicable.
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3.2. Powers of the
Board. Subject to the express provisions of
the Plan, the Board has full and final authority and sole
discretion as follows:
(a) taking into consideration the reasonable
recommendations of management, to determine when, to whom and in
what types and amounts Awards should be granted and the terms
and conditions applicable to each Award, including the Option
Price, the Option Term, the benefit payable under any SAR,
Performance Unit or Performance Share and whether or not
specific Awards shall be granted in connection with other
specific Awards, and if so whether they shall be exercisable
cumulatively with, or alternatively to, such other specific
Awards;
(b) to determine the amount, if any, that a Grantee shall
pay for Restricted Shares, whether and on what terms to permit
or require the payment of cash dividends thereon to be deferred,
when Restricted Shares (including Restricted Shares acquired
upon the exercise of an Option) shall be forfeited and whether
such shares shall be held in escrow;
(c) to construe and interpret the Plan and to make all
determinations necessary or advisable for the administration of
the Plan;
(d) to make, amend, and rescind rules relating to the Plan,
including rules with respect to the exercisability and
nonforfeitability of Awards upon the Termination of Affiliation
of a Grantee;
(e) to determine the terms and conditions of all Award
Agreements (which need not be identical) and, with the consent
of the Grantee, to amend any such Award Agreement at any time,
among other things, to permit transfers of such Awards to the
extent permitted by the Plan; provided that the consent
of the Grantee shall not be required for any amendment which
(A) does not adversely affect the rights of the Grantee, or
(B) is necessary or advisable (as determined by the Board)
to carry out the purpose of the Award as a result of any new or
change in existing applicable law;
(f) to cancel, with the consent of the Grantee, outstanding
Awards and to grant new Awards in substitution therefor;
(g) to accelerate the exercisability (including
exercisability within a period of less than six months after the
Grant Date) of, and to accelerate or waive any or all of the
terms and conditions applicable to, any Award or any group of
Awards for any reason and at any time, including in connection
with a Termination of Affiliation;
(h) subject to Section 5.3, to extend the time during
which any Award or group of Awards may be exercised;
(i) to delegate to any member of the Board or committee of
Board members such of its powers as it deems appropriate,
including the power to subdelegate, except that only a member of
the Board of Directors of the Company (or a committee thereof)
may grant Awards from time to time to specified categories of
Eligible Persons in amounts and on terms to be specified by the
Board; provided that no such grants shall be made other than by
the Board of Directors of the Company or the Plan Committee to
individuals who are then Section 16 Persons or other than
by the Plan Committee to individuals who are then or are deemed
likely to become a “covered employee” within the
meaning of Code Section 162(m);
(j) to delegate to officers, employees or independent
contractors of the Company matters involving the routine
administration of the Plan and which are not specifically
required by any provision of this Plan of to be performed by the
Board of Directors of the Company;
(k) to delegate its duties and responsibilities under the
Plan with respect to foreign Subsidiary plans, except its duties
and responsibilities with respect to Section 16 Persons,
and (A) the acts of such delegates shall be treated
hereunder as acts of the Board and (B) such delegates shall
report to the Board regarding the delegated duties and
responsibilities;
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(l) to impose such additional terms and conditions upon the
grant, exercise or retention of Awards as the Board may, before
or concurrently with the grant thereof, deem appropriate,
including limiting the percentage of Awards which may from time
to time be exercised by a Grantee; and
(m) to take any other action with respect to any matters
relating to the Plan for which it is responsible.
All determinations on any matter relating to the Plan or any
Award Agreement may be made in the sole and absolute discretion
of the Board, and all such determinations of the Board shall be
final, conclusive and binding on all Persons. No member of the
Board shall be liable for any action or determination made with
respect to the Plan or any Award.
4.1. Number of
Shares Available.
(a) Plan Limit. Subject to adjustment as
provided in Section 4.2, the number of Shares hereby
reserved for delivery under the Plan is 2,200,000 Shares.
If any Shares subject to an Award granted hereunder are
forfeited or an Award or any portion thereof otherwise
terminates or is settled without the issuance of Shares, or in
the case of SARs and Performance Units, without the payment of
cash, the Shares subject to such Award, to the extent of any
such forfeiture, termination or settlement, shall again be
available for grant under the Plan. The Board may from time to
time determine the appropriate methodology for calculating the
number of Shares issued pursuant to the Plan.
(b) Individual Limit. No Grantee may be
granted Options, SARs, Restricted Shares, Bonus Shares or
Deferred Shares, Performance Units or Performance Shares in
Shares, or in any combination thereof, relating to an aggregate
number of Shares under the Plan that exceeds 500,000 shares
in any
5-year
period. If a previously granted Option, SAR, Performance Unit,
or Performance Share is forfeited, canceled or repriced, such
forfeited, canceled or repriced Option, SAR, Performance Unit,
or Performance Share as the case may be, shall continue to be
counted against the maximum number of Shares, SARs, Performance
Units or Performance Shares that may be delivered to any Grantee
over the life of the Plan.
4.2. Adjustments in Authorized
Shares. In the event that the Board
determines that any dividend or other distribution (whether in
the form of cash, Shares, other securities, or other property),
recapitalization, share split, reverse share split, subdivision,
consolidation or reduction of capital, reorganization, merger,
scheme of arrangement, split-up, spin-off or combination
involving the Company or repurchase or exchange of Shares or
other rights to purchase Shares or other securities of the
Company, or other similar corporate transaction or event affects
the Shares such that any adjustment is determined by the Board
to be appropriate in order to prevent dilution or enlargement of
the benefits or potential benefits intended to be made available
under the Plan, then the Board shall, in such manner as it may
deem equitable, adjust any or all of (i) the number and
type of Shares (or other securities or property of the Company
or any Person that is a party to a Reorganization Transaction
with the Company) with respect to which Awards may be granted,
(ii) the number and type of Shares (or other securities or
property of the Company or any Person that is a party to a
Reorganization Transaction with the Company) subject to
outstanding Awards, and (iii) the grant or exercise price
with respect to any Award or, if deemed appropriate, make
provision for a cash payment to the holder of an outstanding
Award or the substitution of other property for Shares subject
to an outstanding Award; provided, that the number of Shares
subject to any Award denominated in Shares shall always be a
whole number. In the case of any substitution or adjustment
affecting an Option (including a “nonqualified stock
option”) such substitution or adjustments shall be made in
a manner that is in accordance with the substitution and
assumption rules set forth in Treasury Regulations 1.424.1 and
the applicable guidance relating to Code section 409A.
4.3. Available
Shares. Shares delivered in connection with
Awards may be newly issued Shares, Shares purchased by the
Company on the open market, or Shares issued from treasury.
Article 5. Eligibility
and General Conditions of Awards
5.1. Eligibility. The Board
may grant Awards to any Eligible Person, whether or not he or
she has previously received an Award; provided, however, that an
Eligible Person who is a Non-Employee Director may
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only be granted an Award that is an Option (excluding an
incentive stock option, Restricted Shares, Bonus Shares or
Deferred Shares.
5.2. Grant Date. The Grant
Date of an Award shall be the date on which the Board grants the
Award or such later date as specified by the Board (i) in
the Board’s resolutions or minutes addressing the Award
grants or (ii) in the Award Agreement.
5.3. Maximum Term. Subject
to the following proviso, the Option Term or other period during
which an Award may be outstanding shall not extend more than
10 years after the Grant Date, and shall be subject to
earlier termination as herein specified. After an Award has been
granted, the maximum term may only be extended in a manner which
complies with Code Section 409A.
5.4. Award Agreement. To the
extent not set forth in the Plan, the terms and conditions of
each Award (which need not be the same for each grant or for
each Grantee) shall be set forth in an Award Agreement.
5.5. Restrictions on Share
Transferability. The Board may include in the
Award Agreement such restrictions on any Shares acquired
pursuant to the exercise or vesting of an Award as it may deem
advisable, including restrictions under applicable federal
securities laws.
5.6. Termination of
Affiliation. Except as otherwise provided in
an Award Agreement (including an Award Agreement as amended by
the Board pursuant to Section 3.2), and subject to the
provisions of Section 13.1, the extent to which the Grantee
shall have the right to exercise, vest in, or receive payment in
respect of an Award following Termination of Affiliation shall
be determined in accordance with the following provisions of
this Section 5.6.
(a) For Cause. If a Grantee has a
Termination of Affiliation for Cause:
(i) the Grantee’s Restricted Shares and Deferred
Shares that are forfeitable immediately before such Termination
of Affiliation shall automatically be forfeited on such date,
subject in the case of Restricted Shares to the provisions of
Section 8.4 regarding repayment of certain amounts to the
Grantee;
(ii) the Grantee’s Deferred Shares that were vested
immediately before such Termination of Affiliation shall
promptly be settled by delivery to such Grantee of a number of
unrestricted Shares equal to the aggregate number of such vested
Deferred Shares, and
(iii) any unexercised Option or SAR, and any Performance
Share or Performance Unit with respect to which the Performance
Period has not ended immediately before such Termination of
Affiliation, shall terminate effective immediately upon such
Termination of Affiliation.
(b) On Account of Death or
Disability. If a Grantee has a Termination of
Affiliation on account of death or Disability:
(i) the Grantee’s Restricted Shares that were
forfeitable immediately before such Termination of Affiliation
shall thereupon become nonforfeitable;
(ii) the Grantee’s Deferred Shares that were
forfeitable immediately before such Termination of Affiliation
shall thereupon become nonforfeitable and the Company shall,
unless otherwise provided in an Award Agreement, promptly settle
all Deferred Shares, whether or not forfeitable, by delivery to
the Grantee (or, after his or her death, to his or her personal
representative or beneficiary designated in accordance with
Article 11) of a number of unrestricted Shares equal
to the aggregate number of the Grantee’s Deferred Shares;
(iii) any unexercised Option or SAR, whether or not
exercisable immediately before such Termination of Affiliation,
shall be fully exercisable and may be exercised, in whole or in
part, at any time up to one year after such Termination of
Affiliation (but only during the Option Term or SAR Term,
respectively) by the Grantee or, after his or her death, by
(A) his or her personal representative or the person to
whom the Option or SAR, as applicable, is transferred by will or
the applicable laws of descent and distribution, or (B) the
Grantee’s beneficiary designated in accordance with
Article 11; and
(iv) the benefit payable with respect to any Performance
Share or Performance Unit with respect to which the Performance
Period has not ended immediately before such Termination of
Affiliation on account of death
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or Disability shall be equal to the product of the Fair Market
Value of a Share as of the date of such Termination of
Affiliation or the value of the Performance Unit specified in
the Award Agreement (determined as of the date of such
Termination of Affiliation), as applicable, multiplied
successively by each of the following:
(A) a fraction, the numerator of which is the number of
months (including as a whole month any partial month) that have
elapsed since the beginning of such Performance Period until the
date of such Termination of Affiliation and the denominator of
which is the number of months (including as a whole month any
partial month) in the Performance Period; and
(B) a percentage determined by the Plan Committee that
would be earned under the terms of the applicable Award
Agreement assuming that the rate at which the performance goals
have been achieved as of the date of such Termination of
Affiliation would continue until the end of the Performance
Period, or, if the Board elects to compute the benefit after the
end of the Performance Period, the Performance percentage, as
determined by the Board, attained during the Performance Period.
(c) Change of Control Period. If a
Grantee has a Termination of Affiliation during the period
(“Change of Control Period”) commencing on a Change of
Control and ending on the first anniversary of the Change of
Control, which Termination of Affiliation is initiated by the
Company or a Subsidiary other than for Cause, or initiated by
the Grantee for Good Reason, then
(i) the Grantee’s Restricted Shares that were
forfeitable shall thereupon become nonforfeitable;
(ii) the Grantee’s Deferred Shares that were
forfeitable shall thereupon become nonforfeitable and the
Company shall immediately settle all Deferred Shares, whether or
not previously forfeitable, by delivery to such Grantee of a
number of unrestricted Shares equal to the aggregate number of
the Grantee’s Deferred Shares;
(iii) any unexercised Option or SAR, whether or not
exercisable on the date of such Termination of Affiliation,
shall thereupon be fully exercisable and may be exercised, in
whole or in part for ninety (90) days following such
Termination of Affiliation (but only during the Option Term or
SAR Term, respectively); and
(iv) the Company shall immediately pay to the Grantee, with
respect to any Performance Share or Performance Unit with
respect to which the Performance Period has not ended as of the
date of such Termination of Affiliation, a cash payment equal to
the product of (A) in the case of a Performance Share, the
Change of Control Value or (B) in the case of a Performance
Unit, the value of the Performance Unit specified in the Award
Agreement, as applicable, multiplied successively by each of the
following:
(A) a fraction, the numerator of which is the number of
whole and partial months that have elapsed between the beginning
of such Performance Period and the date of such Termination of
Affiliation and the denominator of which is the number of whole
and partial months in the Performance Period; and
(B) a percentage equal to a greater of (x) the target
percentage, if any, specified in the applicable Award Agreement
or (y) the maximum percentage, if any, that would be earned
under the terms of the applicable Award Agreement assuming that
the rate at which the performance goals have been achieved as of
the date of such Termination of Affiliation would continue until
the end of the Performance Period.
(d) Any Other Reason. If a Grantee
has a Termination of Affiliation for any reason other than for
Cause, death or Disability, and other than under the
circumstances described in Section 5.6(c), then:
(i) the Grantee’s Restricted Shares and Deferred
Shares, to the extent forfeitable immediately before such
Termination of Affiliation, shall thereupon automatically be
forfeited, subject in the case of Restricted Shares to the
provisions of Section 8.4 regarding repayment of certain
amounts to the Grantee;
(ii) the Grantee’s Deferred Shares that were not
forfeitable immediately before such Termination of Affiliation
shall promptly be settled by delivery to the Grantee of a number
of unrestricted Shares equal to the aggregate number of the
Grantee’s vested Deferred Shares;
(iii) any unexercised Option or SAR, to the extent
exercisable immediately before such Termination of Affiliation,
shall remain exercisable in whole or in part for ninety
(90) days after such Termination of
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Affiliation (but only during the Option Term or SAR Term,
respectively) by the Grantee or, after his or her death, by
(A) his or her personal representative or the person to
whom the Option or SAR, as applicable, is transferred by will or
the applicable laws of descent and distribution, or (B) the
Grantee’s beneficiary designated in accordance with
Article 11; and
(iv) any Performance Shares or Performance Units with
respect to which the Performance Period has not ended as of the
date of such Termination of Affiliation shall terminate
immediately upon such Termination of Affiliation.
5.7. Nontransferability of
Awards.
(a) Except as provided in Section 5.7(c) below, each
Award, and each right under any Award, shall be exercisable only
by the Grantee during the Grantee’s lifetime, or, if
permissible under applicable law, by the Grantee’s guardian
or legal representative.
(b) Except as provided in Section 5.7(c) below, no
Award (prior to the time, if applicable, Shares are issued in
respect of such Award), and no right under any Award, may be
assigned, alienated, pledged, attached, sold or otherwise
transferred or encumbered by a Grantee otherwise than by will or
by the laws of descent and distribution and any such purported
assignment, alienation, pledge, attachment, sale, transfer or
encumbrance shall be void and unenforceable against the Company
or any Subsidiary; provided, that the designation of a
beneficiary shall not constitute an assignment, alienation,
pledge, attachment, sale, transfer or encumbrance.
(c) To the extent and in the manner permitted by the Board,
and subject to such terms and conditions as may be prescribed by
the Board, a Grantee may transfer an Award to (a) a child,
stepchild, grandchild, parent, stepparent, grandparent, spouse,
former spouse, sibling, niece, nephew,
mother-in-law,
father-in-law,
son-in-law,
daughter-in-law,
brother-in-law,
or
sister-in-law
of the Grantee, (including adoptive relationships), (b) any
person sharing the Grantee’s household (other than a tenant
or employee), (c) a trust in which persons described in
(a) or (b) have more than 50% of the beneficial
interest, (d) a foundation in which persons described in
(a) or (b) or the Grantee own more than 50% of the
voting interests; provided such transfer is not for value. The
following shall not be considered transfers for value:
(i) a transfer under a domestic relations order in
settlement of marital property rights; and (ii) a transfer
to an entity in which more than 50% of the voting interests are
owned by persons described in (a) or (b) above or the
Grantee, in exchange for an interest in that entity.
6.1. Grant of
Options. Subject to the terms and provisions
of the Plan, Options may be granted to any Eligible Person in
such number, and upon such terms, and at any time and from time
to time as shall be determined by the Board. Without limiting
the generality of the foregoing, the Board may grant to any
Eligible Person, or permit any Eligible Person to elect to
receive, an Option in lieu of or in substitution for any other
compensation (whether payable currently or on a deferred basis,
and whether payable under this Plan or otherwise) which such
Eligible Person may be eligible to receive from the Company or a
Subsidiary, which Option may have a value (as determined by the
Board under Black-Scholes or any other option valuation method)
that is equal to or greater than the amount of such other
compensation.
6.2. Award Agreement. Each
Option grant shall be evidenced by an Award Agreement that shall
specify the Option Price, the Option Term, the number of shares
to which the Option pertains, the time or times at which such
Option shall be exercisable and such other provisions as the
Board shall determine.
6.3. Option Price. The
Option Price of an Option under this Plan shall be determined by
the Board, and shall be no less than 100% of the Fair Market
Value of a Share on the Grant Date; provided, however,
that any Option (“Substitute Option”) that is
(x) granted to a Grantee in connection with the acquisition
(“Acquisition”), however effected, by the Company of
another corporation or entity (“Acquired Entity”) or
the assets thereof, (y) associated with an option to
purchase shares of stock or other equity interest of the
Acquired Entity or an affiliate thereof (“Acquired Entity
Option”) held by such Grantee immediately prior to such
Acquisition, and (z) intended to preserve for the Grantee
the economic value of all or a portion of such Acquired Entity
Option, shall be granted such that such option substitution is
completed in conformity with the rules set forth in
Section 424(a) of the Code.
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6.4. Grant of Incentive Stock
Options.
(a) At the time of the grant of any Option to an Eligible
Person who is an employee of the Company or a Subsidiary, the
Board may designate that such option shall be made subject to
additional restrictions to permit it to qualify as an
“incentive stock option” under the requirements of
Section 422 of the Code. Any option designated as an
incentive stock option:
(i) shall not be granted to a person who owns shares
(including shares treated as owned under Section 424(d) of
the Code) possessing more than 10% of the total combined voting
power of all classes of shares of the Company;
(ii) shall be for a term of not more than 10 years
from the Grant Date, and shall be subject to earlier termination
as provided herein or in the applicable Award Agreement;
(iii) shall not have an aggregate Fair Market Value
(determined for each incentive stock option at its Grant Date)
of Shares with respect to which incentive stock options are
exercisable for the first time by such Grantee during any
calendar year (under the Plan and any other employee stock
option plan of the Grantee’s employer or any parent or
Subsidiary thereof (“Other Plans”)), determined in
accordance with the provisions of Section 422 of the Code,
which exceeds $100,000 (the “$100,000 Limit”);
(iv) shall, if the aggregate Fair Market Value of a Share
(determined on the Grant Date) with respect to the portion of
such grant which is exercisable for the first time during any
calendar year (“Current Grant”) and all incentive
stock options previously granted under the Plan and any Other
Plans which are exercisable for the first time during a calendar
year (“Prior Grants”) would exceed the $100,000 Limit,
be exercisable as follows:
(A) the portion of the Current Grant which would, when
added to any Prior Grants, be exercisable with respect to Shares
which would have an aggregate Fair Market Value (determined as
of the respective Grant Date for such options) in excess of the
$100,000 Limit shall, notwithstanding the terms of the Current
Grant, be exercisable for the first time by the Grantee in the
first subsequent calendar year or years in which it could be
exercisable for the first time by the Grantee when added to all
Prior Grants without exceeding the $100,000 Limit; and
(B) if, viewed as of the date of the Current Grant, any
portion of a Current Grant could not be exercised under the
preceding provisions of this Subsection (iv) during
any calendar year commencing with the calendar year in which it
is first exercisable through and including the last calendar
year in which it may by its terms be exercised, such portion of
the Current Grant shall not be an incentive stock option, but
shall be exercisable as a separate Option at such date or dates
as are provided in the Current Grant;
(v) shall be granted within 10 years from the earlier
of the date the Plan is adopted or the date the Plan is approved
by the shareholders of the Company;
(vi) shall require the Grantee to notify the Board of any
disposition of any Shares issued pursuant to the exercise of the
incentive stock option under the circumstances described in
Section 421(b) of the Code (relating to certain
disqualifying dispositions), within 10 days of such
disposition; and
(vii) shall by its terms not be assignable or transferable
other than by will or the laws of descent and distribution and
may be exercised, during the Grantee’s lifetime, only by
the Grantee; provided, however, that the Grantee may, to the
extent provided in the Plan in any manner specified by the
Board, designate in writing a beneficiary to exercise such
incentive stock option after the Grantee’s death.
Notwithstanding the foregoing, the Board may, without the
consent of the Grantee, at any time before the exercise of an
option (whether or not an incentive stock option), take any
action necessary to prevent such option from being treated as an
incentive stock option.
6.5. Exercise of
Options. Options shall be exercised by the
delivery of a written notice of exercise to the Company or its
designee, setting forth the number of Shares with respect to
which the Option is to be exercised, accompanied by full payment
for the Shares made by cash, personal check or wire transfer or,
subject to the approval of the Board pursuant to procedures
approved by the Board,
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(a) through the sale of the Shares acquired on exercise of
the Option through a broker-dealer to whom the Grantee has
submitted an irrevocable notice of exercise and irrevocable
instructions to deliver promptly to the Company the amount of
sale or loan proceeds sufficient to pay for such Shares,
together with, if requested by the Company, the amount of
federal, state, local or foreign withholding taxes payable by
Grantee by reason of such exercise,
(b) through simultaneous sale through a broker of Shares
acquired on exercise, as permitted under Regulation T of
the Federal Reserve Board, or
(c) by delivery to the Company of certificates representing
the number of Shares then owned by the Grantee, the Fair Market
Value of which equals the purchase price of the Shares purchased
in connection with the Option exercise, properly endorsed for
transfer to the Company; provided however, that Shares used for
this purpose must have been held by the Grantee for such minimum
period of time as may be established from time to time by the
Board; and provided further that the Fair Market Value of any
Shares delivered in payment of the purchase price upon exercise
of the Options shall be the Fair Market Value as of the exercise
date, which shall be the date of delivery of the certificates
for the Stock used as payment of the exercise price. For
purposes of this Section 6.5(c), in lieu of actually
surrendering to the Company the stock certificates representing
the number of Shares then owned by the Grantee, the Board may,
in its discretion permit the Grantee to submit to the Company a
statement affirming ownership by the Grantee of such number of
Shares and request that such Shares, although not actually
surrendered, be deemed to have been surrendered by the Grantee
as payment of the exercise price.
7.1. Grant of SARs. Subject
to the terms and conditions of this Plan, SARs may be granted to
any Eligible Person at any time and from time to time as shall
be determined by the Board in its sole discretion. The Board may
grant Freestanding SARs or Tandem SARs, or any combination
thereof.
(a) Number of Shares. The Board
shall have complete discretion to determine the number of SARs
granted to any Grantee, subject to the limitations imposed in
this Plan and by applicable law.
(b) Exercise Price and Other
Terms. All SARs shall be granted with an
exercise price no less than the Fair Market Value of the
underlying Shares of Stock on the SARs’ Grant Date. The
Board, subject to the provisions of this Plan, shall have
complete discretion to determine the terms and conditions of
SARs granted under this Plan. The exercise price per Share of
Tandem SARs shall equal the exercise price per Share of the
related Option.
7.2. SAR Award
Agreement. Each SAR granted under the Plan
shall be evidenced by a written SAR Award Agreement which shall
be entered into by the Company and the Grantee to whom the SAR
is granted and which shall specify the exercise price per share,
the SAR Term, the conditions of exercise, and such other terms
and conditions as the Board in its sole discretion shall
determine.
7.3. Exercise of SARs. SARs
shall be exercised by the delivery of a written notice of
exercise to the Company or its designee, setting forth the
number of Shares over which the SAR is to be exercised. Tandem
SARs (a) may be exercised with respect to all or part of
the Shares subject to the related Option upon the surrender of
the right to exercise the equivalent portion of the related
Option; (b) may be exercised only with respect to the
Shares for which its related Option is then exercisable; and
(c) may be exercised only when the Fair Market Value of the
Shares subject to the Option exceeds the Option Price of the
Option. The value of the payment with respect to the Tandem SAR
may be no more than 100% of the difference between the Option
Price of the underlying Option and the Fair Market Value of the
Shares subject to the underlying Option at the time the Tandem
SAR is exercised.
7.4. Expiration of SARs. A
SAR granted under this Plan shall expire on the date set forth
in the SAR Award Agreement, which date shall be determined by
the Board in its sole discretion. Unless otherwise specifically
provided for in the SAR Award agreement, a Tandem SAR granted
under this Plan shall be exercisable at such time or times and
only to the extent that the related Option is exercisable. The
Tandem SAR shall terminate and no longer be exercisable upon the
termination or exercise of the related Options, except that
Tandem SARs granted with
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respect to less than the full number of shares covered by a
related Option shall not be reduced until the exercise or
termination of the related Option exceeds the number of Shares
not covered by the SARs.
7.5. Payment of SAR
Amount. Upon exercise of a SAR, a Grantee
shall be entitled to receive payment from the Company in an
amount determined by multiplying (i) the positive
difference between the Fair Market Value of a Share on the date
of exercise over the exercise price per Share by (ii) the
number of Shares with respect to which the SAR is exercised. The
payment upon a SAR exercise shall, at the Committee’s
discretion, be paid (i) in whole Shares of equivalent
value, (ii) in cash, or (iii) some combination
thereof. Any value attributable to a fractional Share shall be
paid in cash.
8.1. Grant of Restricted
Shares. Subject to the terms and provisions
of the Plan, the Board, at any time and from time to time, may
grant Restricted Shares to any Eligible Person in such amounts
as the Board shall determine.
8.2. Award Agreement. Each
grant of Restricted Shares shall be evidenced by an Award
Agreement, which shall specify the Period(s) of Restriction, the
number of Restricted Shares granted, and such other provisions
as the Board shall determine. The Board may impose such
conditions or restrictions on any Restricted Shares as it may
deem advisable, including restrictions based upon the
achievement of specific performance goals (Company-wide,
divisional, Subsidiary or individual), time-based restrictions
on vesting or restrictions under applicable securities laws.
8.3. Consideration. The
Board shall determine the amount, if any, that a Grantee shall
pay for Restricted Shares. Such payment shall be made in full by
the Grantee before the delivery of the shares and in any event
no later than 10 business days after the Grant Date for such
shares.
8.4. Effect of
Forfeiture. If Restricted Shares are
forfeited, and if the Grantee was required to pay for such
shares or acquired such Restricted Shares upon the exercise of
an Option, the Grantee shall be deemed to have resold such
Restricted Shares to the Company at a price equal to the lesser
of (x) the amount paid by the Grantee for such Restricted
Shares, or (y) the Fair Market Value of a Share on the date
of such forfeiture. The Company shall pay to the Grantee the
required amount as soon as is administratively practical. Such
Restricted Shares shall cease to be outstanding, and shall no
longer confer on the Grantee thereof any rights as a shareholder
of the Company, from and after the date of the event causing the
forfeiture, whether or not the Grantee accepts the
Company’s tender of payment for such Restricted Shares.
8.5. Escrow; Legends. The
Board may provide that the certificates for any Restricted
Shares (x) shall be held (together with a stock power
executed in blank by the Grantee) in escrow by the Secretary of
the Company until such Restricted Shares become nonforfeitable
or are forfeited or (y) shall bear an appropriate legend
restricting the transfer of such Restricted Shares. If any
Restricted Shares become nonforfeitable, the Company shall cause
certificates for such shares to be issued without such legend.
9.1. Grant of Performance Units and Performance
Shares. Subject to the terms of the Plan,
Performance Units or Performance Shares may be granted to any
Eligible Person in such amounts and upon such terms, and at any
time and from time to time, as the Board shall determine. Each
grant of Performance Units or Performance Shares shall be
evidenced by an Award Agreement which shall specify the terms
and conditions applicable to the Performance Units or
Performance Shares, as the Board determines.
9.2. Value/Performance
Goals. Each Performance Unit shall have an
initial value that is established by the Board at the time of
grant, that is equal to the Fair Market Value of a Share on the
Grant Date. The Board shall set performance goals which,
depending on the extent to which they are met, will determine
the number or value of Performance Units or Performance Shares
that will be paid to the Grantee. For purposes of this
Article 9, the time period during which the performance
goals must be met shall be called a “Performance
Period.” The Board shall have complete discretion to
establish the performance goals. Without limitation, the
performance goals may provide for a targeted level or levels of
achievement using one or more of the following measures:
(a) earnings per share, (b) net income,
(c) return on equity, (d) pro forma net income,
(e) return on designated assets, (f) return on
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revenues, (g) Fair Market Value per share, (i) book
value per share, (j) debt reduction, or (k) any
combination of the above, in the conjunctive or disjunctive, at
the discretion of the Board. Objective and measurable goals set
by a “management by objectives” process, and approved
by the Board may also be considered. Such goals may relate to
the satisfaction of external or internal requirements.
9.3. Payment of Performance Units and
Performance Shares. Subject to the terms of
this Plan, after the applicable Performance Period has ended,
the holder of Performance Units or Performance Shares shall be
entitled to receive a payment based on the number and value of
Performance Units or Performance Shares earned by the Grantee
over the Performance Period, determined as a function of the
extent to which the corresponding performance goals have been
achieved.
If a Grantee is promoted, demoted or transferred to a different
business unit of the Company during a Performance Period, then,
to the extent the Board determines appropriate, the Board may
adjust, change or eliminate the performance goals or the
applicable Performance Period as it deems appropriate in order
to make them appropriate and comparable to the initial
performance goals or Performance Period.
9.4. Form and Timing of Payment of Performance
Units and Performance Shares. Payment of
earned Performance Units or Performance Shares shall be made in
a lump sum following the close of the applicable Performance
Period. The Board may cause earned Performance Units or
Performance Shares to be paid in cash or in Shares (or in a
combination thereof) which have an aggregate Fair Market Value
equal to the value of the earned Performance Units or
Performance Shares at the close of the applicable Performance
Period. Such Shares may be granted subject to any restrictions
deemed appropriate by the Board. The form of payout of such
Awards shall be set forth in the Award Agreement pertaining to
the grant of the Award.
As determined by the Board, a Grantee may be entitled to receive
any dividends declared with respect to Shares which have been
earned in connection with grants of Performance Units or
Performance Shares but not yet distributed to the Grantee. In
addition, a Grantee may, as determined by the Board, be entitled
to exercise his or her voting rights with respect to such Shares.
10.1. Bonus Shares. Subject
to the terms of the Plan, the Board may grant Bonus Shares to
any Eligible Person, in such amount and upon such terms and at
any time and from time to time as shall be determined by the
Board.
10.2. Deferred
Shares. Subject to the terms and provisions
of the Plan, Deferred Shares may be granted to any Eligible
Person in such amounts and upon such terms, and at any time and
from time to time, as shall be determined by the Board. The
Board may impose such conditions or restrictions on any Deferred
Shares as it may deem advisable, including time-vesting
restrictions and deferred payment features. The Board may cause
the Company to establish a grantor trust to hold Shares subject
to Deferred Share Awards. Without limiting the generality of the
foregoing, the Board may grant to any Eligible Person, or permit
any Eligible Person to elect to receive, Deferred Shares in lieu
of or in substitution for any other compensation (whether
payable currently or on a deferred basis, and whether payable
under this Plan or otherwise) which such Eligible Person may be
eligible to receive from the Company or a Subsidiary. Any grant
of Deferred Shares shall comply with Section 409A of the
Code.
Each Grantee under the Plan may, from time to time, name any
beneficiary or beneficiaries (who may be named contingently or
successively) to whom any benefit under the Plan is to be paid
in case of the Grantee’s death before he or she receives
any or all of such benefit. Each such designation shall revoke
all prior designations by the same Grantee, shall be in a form
prescribed by the Company, and will be effective only when filed
by the Grantee in writing with the Company during the
Grantee’s lifetime. In the absence of any such designation,
benefits remaining unpaid at the Grantee’s death shall be
paid to the Grantee’s estate.
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12.1. Employment. Nothing in
the Plan shall interfere with or limit in any way the right of
the Company to terminate any Grantee’s employment at any
time, nor confer upon any Grantee the right to continue in the
employ of the Company.
12.2. Participation. No
employee shall have the right to be selected to receive an
Award, or, having been so selected, to be selected to receive a
future Award.
13.1. Amendment, Modification, and
Termination. Subject to the terms of the
Plan, the Board of Directors of the Company may at any time and
from time to time, alter, amend, suspend or terminate the Plan
in whole or in part without the approval of the Company’s
shareholders, except to the extent the Board of Directors of the
Company determines it is desirable to obtain approval of the
Company’s shareholders, to retain eligibility for exemption
from the limitations of Code Section 162(m), to have
available the ability for Options to qualify as ISOs, to comply
with the requirements for listing on any exchange where the
Company’s Shares are listed, or for any other purpose the
Board of Directors of the Company deems appropriate.
13.2. Adjustments Upon Certain Unusual or
Nonrecurring Events. The Board may make
adjustments in the terms and conditions of Awards in recognition
of unusual or nonrecurring events (including the events
described in Section 4.2) affecting the Company or the
financial statements of the Company or of changes in applicable
laws, regulations, or accounting principles, whenever the Board
determines that such adjustments are appropriate in order to
prevent dilution or enlargement of the benefits or potential
benefits intended to be made available under the Plan.
13.3. Awards Previously
Granted. Notwithstanding any other provision
of the Plan to the contrary (but subject to Section 2.7 and
Section 13.2), no termination, amendment or modification of
the Plan shall adversely affect in any material way any Award
previously granted under the Plan, without the written consent
of the Grantee of such Award.
14.1. Mandatory Tax
Withholding.
(a) Whenever under the Plan, Shares are to be delivered
upon exercise or payment of an Award, or upon Restricted Shares
becoming nonforfeitable, or any other event with respect to
rights and benefits hereunder, the Company shall be entitled to
require and may accommodate the Grantee’s request if so
requested, (x) that the Grantee remit an amount in cash
sufficient to satisfy the minimum federal, state, local and
foreign tax withholding requirements related thereto (“Tax
Withholding”), (y) the withholding of such Tax
Withholding from compensation otherwise due to the Grantee or
from any Shares or other payment due to the Grantee under the
Plan or (z) any combination of the foregoing.
(b) Any Grantee who makes a disqualifying disposition of an
incentive stock option (if incentive stock options are eligible
to be granted hereunder granted under the Plan or who makes an
election under Section 83(b) of the Code shall remit to the
Company an amount sufficient to satisfy all resulting Tax
Withholding; provided that, in lieu of or in addition to
the foregoing, the Company shall have the right to withhold such
Tax Withholding from compensation otherwise due to the Grantee
or from any Shares or other payment due to the Grantee under the
Plan.
14.2. Notification under Code
Section 83(b). If the Grantee, in
connection with the exercise of any Option, or the grant of
Restricted Shares, makes the election permitted under
Section 83(b) of the Code to include in such Grantee’s
gross income in the year of transfer the amounts specified in
Section 83(b) of the Code, then such Grantee shall notify
the Company of such election within 10 days of filing the
notice of the election with the Internal Revenue Service, in
addition to any filing and notification required pursuant to
regulations issued under Section 83(b) of the Code. The
Board may, in connection with the grant of an Award or at any
time thereafter prior to such an election being made, prohibit a
Grantee from making the election described above.
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15.1. Successors. All
obligations of the Company under the Plan with respect to Awards
granted hereunder shall be binding on any successor to the
Company, whether the existence of such successor is the result
of a direct or indirect purchase, merger, consolidation, or
otherwise of all or substantially all of the business or assets
of the Company.
15.2. Gender and
Number. Except where otherwise indicated by
the context, any masculine term used herein also shall include
the feminine; the plural shall include the singular and the
singular shall include the plural.
15.3. Severability. If any
part of the Plan is declared by any court or governmental
authority to be unlawful or invalid, such unlawfulness or
invalidity shall not invalidate any other part of the Plan. Any
Section or part of a Section so declared to be unlawful or
invalid shall, if possible, be construed in a manner which will
give effect to the terms of such Section or part of a Section to
the fullest extent possible while remaining lawful and valid.
15.4. Requirements of
Law. The granting of Awards and the issuance
of Shares under the Plan shall be subject to all applicable
laws, rules, and regulations, and to such approvals by any
governmental agencies or stock exchanges as may be required.
Notwithstanding any provision of the Plan or any Award, Grantees
shall not be entitled to exercise, or receive benefits under,
any Award, and the Company shall not be obligated to deliver any
Shares or other benefits to a Grantee, if such exercise or
delivery would constitute a violation by the Grantee or the
Company of any applicable law or regulation.
15.5. Securities Law
Compliance.
(a) If the Board deems it necessary to comply with any
applicable securities law, or the requirements of any stock
exchange upon which Shares may be listed, the Board may impose
any restriction on Shares acquired pursuant to Awards under the
Plan as it may deem advisable. All certificates for Shares
delivered under the Plan pursuant to any Award or the exercise
thereof shall be subject to such stop transfer orders and other
restrictions as the Board may deem advisable under the rules,
regulations and other requirements of the SEC, any stock
exchange upon which Shares are then listed, any applicable
securities law, and the Board may cause a legend or legends to
be placed on any such certificates to refer to such
restrictions. If so requested by the Company, the Grantee shall
represent to the Company in writing that he or she will not sell
or offer to sell any Shares unless a registration statement
shall be in effect with respect to such Shares under the
Securities Act of 1933 or unless he or she shall have furnished
to the Company evidence satisfactory to the Company that such
registration is not required.
(b) If the Board determines that the exercise of, or
delivery of benefits pursuant to, any Award would violate any
applicable provision of securities laws or the listing
requirements of any stock exchange upon which any of the
Company’s equity securities are then listed, then the Board
may postpone any such exercise or delivery, as applicable, but
the Company shall use all reasonable efforts to cause such
exercise or delivery to comply with all such provisions at the
earliest practicable date.
15.6. No Rights as a
Shareholder. A Grantee shall not have any
rights as a shareholder with respect to the Shares (other than
Restricted Shares) which may be deliverable upon exercise or
payment of such Award until such shares have been delivered to
him or her. Restricted Shares, whether held by a Grantee or in
escrow by the Secretary of the Company, shall confer on the
Grantee all rights of a shareholder of the Company, except as
otherwise provided in the Plan or Award Agreement. Unless
otherwise determined by the Board at the time of a grant of
Restricted Shares, any cash dividends that become payable on
Restricted Shares shall be deferred and, if the Board so
determines, reinvested in additional Restricted Shares. Except
as otherwise provided in an Award Agreement, any share dividends
and deferred cash dividends issued with respect to Restricted
Shares shall be subject to the same restrictions and other terms
as apply to the Restricted Shares with respect to which such
dividends are issued. The Board may provide for payment of
interest on deferred cash dividends.
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15.7. Nature of
Payments. Awards shall be special incentive
payments to the Grantee and shall not be taken into account in
computing the amount of salary or compensation of the Grantee
for purposes of determining any pension, retirement, death or
other benefit under (a) any pension, retirement,
profit-sharing, bonus, insurance or other employee benefit plan
of the Company or any Subsidiary or (b) any agreement
between (i) the Company or any Subsidiary and (ii) the
Grantee, except as such plan or agreement shall otherwise
expressly provide.
15.8. Governing Law. The
Plan and the rights of any Grantee receiving an Award thereunder
shall be construed and interpreted in accordance with and
governed by the laws of the State of Nevada without giving
effect to the principles of the conflict of laws to the contrary.
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ALL NUMBERS HAVE BEEN ADJUSTED TO GIVE EFFECT TO THE 2.5:1
REVERSE STOCK SPLIT EFFECTIVE OCTOBER 31, 2005
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MANAGEMENT ANNUAL INCENTIVE PLAN
(March 31, 2006)
The Quest Resource Corporation Management Annual Incentive Plan
(the “Incentive Plan”) is designed to reward value
creation by providing competitive incentives for the achievement
of annual financial performance goals. By providing
market-competitive target awards, the Plan supports the
attraction and retention of senior executive talent critical to
achieving the strategic business objectives of Quest Resource
Corporation (the “Corporation”). The Incentive Plan is
also intended to secure the full deductibility of bonus
compensation payable to the Corporation’s Chief Executive
Officer and the four highest compensated executive officers
(collectively the “Covered Employees”) whose
compensation is required to be reported in the
Corporation’s proxy statement and all compensation payable
hereunder to such persons is intended to qualify as
“performance-based compensation” as described in
Section 162(m)(4)(C) of the Internal Revenue Code of 1986,
as amended (the “Code”).
Only those executive officers and key employees of the
Corporation who are selected by the Compensation Committee (the
“Committee”) of the Corporation’s Board of
Directors (the “Board”) shall be eligible to
participate in the Incentive Plan. Prior to or at the time
performance objectives are established for an “Incentive
Period”, as defined below, the Committee will designate in
writing which executive officers and key employees among those
who may be eligible to participate in the Incentive Plan shall
in fact be participants for such Incentive Period.
The fiscal year of the Incentive Plan (the “Plan
Year”) shall be the fiscal year beginning on January 1 and
ending on December 31. The performance period (the
“Incentive Period”) with respect to which target
awards and bonuses may be payable under the Incentive Plan shall
generally be the Plan Year, provided that the Committee shall
have the authority to designate different Incentive Periods
under the Incentive Plan.
Within the first ninety (90) days of each Incentive Period
the Committee shall establish in writing, with respect to such
Incentive Period, one or more performance goals, a specific
target objective or objectives with respect to such performance
goals and an objective formula or method for computing the
amount of bonus compensation payable to each participant under
the Incentive Plan if the performance goals are attained.
Notwithstanding the foregoing sentence, for any Incentive
Period, such goals, objectives and compensation formulae or
methods must be (i) established within that number of days,
beginning on the first day of such Incentive Period, which is no
more than twenty-five percent (25%) of the total number of days
in such Incentive Period and (ii) established such that the
outcome of the goal or objective is substantially uncertain at
the time the Committee actually establishes the goal or
objective.
Incentive goals shall be based upon one or more of the following
business criteria for the Corporation as a whole or any of its
subsidiaries, operating divisions or other operating units:
total stockholder return, earnings before interest, taxes,
depreciation and amortization (“EBITDA”), pre-tax
operating income, earnings per share, return on equity, return
on invested capital or assets, cost reductions and savings,
return on sales, lease operating expense, pipeline operating
expense, finding and development costs, production, reserve
replacement, or productivity improvements. Target award levels
are approved by the Committee and set as a percentage of the
participant’s base salary. The percentages vary based on
organizational responsibilities and market-compilation bonus
levels based on industry data. In addition, to the extent
consistent with the goal of providing for deductibility under
Section 162(m) of the Code, performance goals may be based
upon a participant’s attainment of personal objectives with
respect to any of the foregoing performance goals: negotiating
transactions and sales, business unit/department performance,
profit margins, reduction of certain accounts receivable or
achievement of subsidiary or departmental budgets or developing
long-term business goals. Measurements of the Corporation’s
or a participant’s performance against the performance
goals established by the Committee shall be objectively
determinable and, to the extent they are expressed in standard
accounting terms, they shall be determined according to
generally accepted
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accounting principals (“GAAP”) as in existence on the
date on which the performance goals are established and without
regard to any changes in such principles after such date.
Individual incentive awards reflect a mix of the
Corporation’s and business unit/department performance
along with individual discretionary factors; the current actual
mix for each participant will be determined based upon
his/her role
and contribution to the organization.
Due to the possibility that the specific targets related to a
specific performance goal or objective may be confidential
commercial or business information, and the release of which to
the public may have an adverse affect on the Corporation, such
information has been intentionally omitted from the Plan as
confidential information.
As soon as practicable after the end of each Incentive Period,
the Committee shall certify in writing to what extent the
Corporation and the participants have achieved the performance
goals or goals for such Incentive Period, including the specific
target objective or objectives and the satisfaction of any other
material terms of the bonus award and the Committee shall
calculate the amount of each participant’s bonus for such
Incentive Period based upon the performance goals, objectives
and computation formulae or methods for such Incentive Period.
The Committee shall have no discretion to increase the amount of
any participant’s bonus as so determined, but may reduce
the amount of or totally eliminate such bonus, if it determines,
in its absolute and sole discretion, that such a reduction or
elimination is appropriate in order to reflect the
participant’s performance or unanticipated factors.
No participant’s bonus for any Plan Year shall exceed the
lesser of 200% of the participant’s base annual salary as
in effect as of the last day of such Plan Year or $1,000,000.
Approved bonus awards shall be payable by the Corporation in
cash or in shares of the Corporation’s common stock
pursuant to the Corporation’s Omnibus Stock Award Plan to
each participant, or to his estate in the event of his death, as
soon as practicable after the end of each Incentive Period and
after the Committee has certified in writing that the relevant
performance goals were achieved. To the extent shares of the
Corporation’s common stock are issued under the
Corporation’s Omnibus Stock Award Plan, such issued shares
shall be subject to both the annual award limitation set forth
above in Section 4 of this Plan and any share limitation(s)
in such Omnibus Stock Award Plan.
A bonus award that would otherwise be payable to a participant
who is not employed by the Corporation or one of its
subsidiaries on the last day of a Incentive Period shall be
prorated, or not paid, in accordance with rules and regulations
adopted by the Committee for the administration of the Incentive
Plan.
Unless otherwise permitted under Section 162(m) of the
Code, no bonus awards shall be paid under the Incentive Plan
unless and until the material terms (within the meaning of
Section 162(m)(4)(C) of the Code) of the Incentive Plan,
including the business criteria described above in
Section 3 of the Incentive Plan, are disclosed to the
Corporation’s stockholders and are approved by the
stockholders by a majority of votes cast in person or by proxy
(including abstentions to the extent abstentions are counted as
voting under applicable state law). The Incentive Plan will
submitted to the stockholders for reapproval if the business
criteria stated above in Section 3 are materially changed
and, in any event, will be submitted to be reapproved by
stockholders after five years since the last time stockholder
approval was received.
No person shall have any legal claim to be granted an award
under the Incentive Plan and the Committee shall have no
obligation to treat participants uniformly. Except as may be
otherwise required by law, bonus awards under the Incentive Plan
shall not be subject in any manner to anticipation, alienation,
sale, transfer, assignment, pledge, encumbrance, charge,
garnishment, execution, or levy of any kind, either voluntary or
involuntary. Bonuses awarded under the Incentive Plan shall be
payable from the general assets of the Corporation and no
participant shall have any claim with respect to any specific
assets of the Corporation.
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Neither the Incentive Plan nor any action taken under the
Incentive Plan shall be construed as giving any employee the
right to be retained in the employ of the Corporation or any
subsidiary or to maintain any participant’s compensation at
any level.
The Corporation or any of its subsidiaries may deduct from any
award any applicable withholding taxes or any amounts owed by
the executive of the Corporation or any of its subsidiaries.
All members of the Committee shall be persons who qualify as
“outside directors” as defined under
Section 162(m) of the Code. Until changed by the Board, the
Committee of the Board shall constitute the Committee hereunder.
The Committee shall have full power and authority to administer
and interpret the provisions of the Incentive Plan and to adopt
such rules, regulations, agreements, guidelines and instruments
for the administration of the Incentive Plan and for the conduct
of its business as the Committee deems necessary or advisable.
Except with respect to matters which under
Section 162(m)(4)(C) of the Code are required to be
determined in the sole and absolute discretion of the Committee,
the Committee shall have full power to delegate to any officer
or employee of the Corporation the authority to administer and
interpret the procedural aspects of the Incentive Plan, subject
to the Incentive Plan’s terms, including adopting and
enforcing rules to decide procedural and administrative issues.
The Committee may rely on opinions, reports or statements of
officers or employees of the Corporation or any subsidiary
thereof and of company counsel (inside or retained counsel),
public accountants and other professional or expert persons.
The Board reserves the right to amend or terminate the Incentive
Plan in whole or in part at any time. Unless otherwise
prohibited by applicable law, any amendment required to conform
the Incentive Plan to the requirements of Section 162(m) of
the Code may be made by the Committee. No amendment may be made
to the class of individuals who are eligible to participate in
the Incentive Plan, the performance criteria specified in
Section 3 or the maximum bonus payable to any participant
without stockholder approval unless stockholder approval is not
required in order for bonuses paid to Covered Employees to
constitute qualified performance-based compensation under
Section 162(m) of the Code.
No member of the Committee shall be liable for any action taken
or omitted to be taken or for any determination made by him or
her in good faith with respect to the Incentive Plan, and the
Corporation shall indemnify and hold harmless each member of the
Committee against any cost or expense (including counsel fees)
or liability (including any sum paid in settlement of a claim
with the approval of the Committee) arising out of any fact or
omission in connection with the administration or interpretation
of the Incentive Plan, unless arising out of such person’s
own fraud or bad faith.
The place of administration of the Incentive Plan shall be in
the State of Oklahoma and the validity, construction,
interpretation, administration and effect of the Incentive Plan
and the rules, regulations and rights relating to the Incentive
Plan, shall be determined solely in accordance with the laws of
the State of Oklahoma.
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APPENDIX
C
Quest
Resource Corporation
as amended, restated and adopted by
the Board of Directors of
Quest Resource Corporation
on December 29, 2005
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QUEST
RESOURCE CORPORATION
CHARTER
OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS
(Amended,
restated and adopted effective as of December 29, 2005)
The Audit Committee is appointed by the Board of Directors (the
“Board”) of Quest Resource Corporation and its
subsidiaries (collectively, the “Corporation”) to
assist the Board in fulfilling its oversight responsibilities.
The Audit Committee’s primary duties and responsibilities
are to:
The Audit Committee’s responsibilities include performance
of the duties required of an audit committee to the Board of
Directors of any of the Corporation’s subsidiaries
(collectively, the “Subsidiary Board”) to the extent
permitted and in the manner required by applicable law and
regulations.
The term “independent auditor” means any accounting
firm that has been engaged for the purpose of rendering or
issuing an audit report or related work or performing other
audit, review or attest services for the Corporation. All
“independent auditors” shall be “registered
public accounting firms” after the Public Company
Accounting Oversight Board has established registration
procedures therefor.
The Audit Committee has the authority to conduct any
investigation appropriate to fulfilling its responsibilities,
and it has direct access to the independent auditor as well as
anyone in the organization. The Audit Committee has the ability
to retain, at the Corporation’s expense, and without
seeking Board approval, any outside legal, accounting, or other
consultants or experts it deems necessary in the performance of
its duties and to determine the funding therefor.
The Audit Committee shall be comprised of three or more
directors as determined by the Board, each of whom shall be
independent directors. Each member of the Audit Committee shall
be considered independent if (i) the Board affirmatively
determines the member is not an “affiliated person”
and has no relationship with the Corporation or any of its
subsidiaries, which in the opinion of the Board would interfere
with the exercise of independent judgment of a director (either
directly or indirectly, such as being a partner, shareholder or
officer of an organization that has a relationship with the
Corporation or any of its subsidiaries) and (ii) the member
does not own
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or control 10% or more of the Corporation’s common stock.
Such relationships may include, among others, commercial,
industrial, banking, consulting, legal, accounting, charitable
and familial relationships.
An “affiliated person” is a person that directly, or
indirectly through one or more intermediaries, controls, or is
controlled by, or is under common control with, the Corporation
or any of its subsidiaries. A director will be deemed to be an
“affiliated person” if he or she is a director,
executive officer, partner, member, principal or designee of an
affiliate of the Corporation or any of its subsidiaries;
provided, however, that a director who is also a
director of a direct or indirect consolidated majority-owned
subsidiary of the Corporation will not be considered an
“affiliated person” if he or she otherwise meets the
independence requirements of this Charter for both the
Corporation and the subsidiary. A director will be deemed not to
be in control of the Corporation or any of its subsidiaries for
purposes of this Charter if the person: (i) is not the
beneficial owner, directly or indirectly, of more than 10% of
any class of equity securities of the Corporation or any of its
subsidiaries and (ii) is not an executive officer of the
Corporation or any of its subsidiaries. The term
“control” (including the terms
“controlling”, “controlled by” and under
“common control with”) means the possession, direct or
indirect, of the power to direct or cause the direction of the
management and policies of a person, whether through the
ownership of voting securities, by contract, or otherwise.
Each member of the Audit Committee shall also be free of any
relationship that, in the opinion of the Board, would interfere
with the exercise of independent judgment as a member of the
Audit Committee and shall satisfy the independent director
requirements of Rule 4200 of the Nasdaq Stock Market, Inc.
(“Nasdaq”) and the independent audit committee
requirements of Rule 4350 of Nasdaq and
Rule 10A-3
under the Securities Exchange Act of 1934. No person may be made
a member of the Audit Committee if his or her service on the
Audit Committee would violate any restriction on service imposed
by any rule or regulation of the SEC or any securities exchange
or market on which shares of the common stock of the Corporation
are traded.
All members of the Audit Committee shall have a working
knowledge of basic finance, accounting and auditing practices
and shall be capable of reading and understanding fundamental
financial statements, including a company’s balance sheet,
income statement and cash flow statement. At least annually, if
available, each member of the Audit Committee may attend a
seminar or a training class regarding improving and expanding
such member’s skills and ability as an Audit Committee
member.
At least one member of the Audit Committee shall be an
“Audit Committee Financial Expert” through either
(i) education and experience as a principal financial
officer, principal accounting officer, controller, public
accountant or auditor or experience in one or more positions
that involve the performance of similar functions;
(ii) experience actively supervising a principal financial
officer, principal accounting officer, controller, public
accountant, auditor or person performing similar functions, or
experience overseeing or assessing the performance of companies
or public accountants with respect to the preparation, auditing
or evaluation of financial statements; or (iii) other
relevant experience. An “Audit Committee Financial
Expert” is a person who possesses all of the following
attributes: (i) an understanding of financial statements
and generally accepted accounting principles; (ii) an
ability to assess the general application of such principles in
connection with the accounting for estimates, accruals and
reserves; (iii) experience preparing, auditing, analyzing
or evaluating financial statements that present a breadth and
level of complexity of accounting issues that are generally
comparable to the breadth and complexity of issues that can
reasonably be expected to be raised by the registrant’s
financial statements, or experience actively supervising one or
more persons engaged in such activities; (iv) an
understanding of internal controls and procedures for financial
reporting; and (v) an understanding of audit committee
functions. The determination as to whether a member of the Audit
Committee is an “Audit Committee Financial Expert”
shall be made by the Board.
Except for Board and Audit Committee fees, a member of the Audit
Committee shall not be permitted to accept any fees paid
directly or indirectly for services as a consultant, legal or
financial advisor, or any other fees prohibited by the rules of
the SEC and Nasdaq. Members of the Audit Committee may receive
their Board and Audit Committee fees in cash, Corporation stock
or options, or other in-kind consideration as determined by the
Board or the Compensation Committee, as applicable, in addition
to all other benefits that other directors of the Corporation
receive.
No member of the Audit Committee may simultaneously serve on the
audit committees of more than two other public companies, unless
the Board determines that such simultaneous service would not
impair the ability of such
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member to effectively serve on the Audit Committee and such
determination is disclosed in the Corporation’s annual
proxy statement.
Members of the Audit Committee shall be appointed by the Board
at its annual meeting and shall generally serve until their
successors shall be duly appointed and qualified. The Audit
Committee shall recommend, and the Board shall designate, one
member of the Audit Committee as chairperson. The members shall
serve until their death, failure to qualify, resignation,
retirement, removal by the Board or until their successors shall
be duly appointed and qualified. No member of the Audit
Committee shall be removed except by a majority vote of the
independent directors, as determined in accordance with the
listing standards of Nasdaq and the other director qualification
standards set forth in the Corporation’s Corporate
Governance Guidelines, then in effect. A member of the Audit
Committee shall be deemed to have resigned from the Audit
Committee at such time that the member shall have been removed
from the Board pursuant to the Bylaws of the Corporation or such
member has died, resigned or otherwise terminated his or her
membership of the Board. A member of the Audit Committee shall
also be deemed to have resigned from the Audit Committee at such
time that a majority of the independent members of the Board, as
determined in accordance with the listing standards of Nasdaq
and the other director qualification standards set forth in the
Corporation’s Corporate Governance Guidelines, have
determined that such member of the Audit Committee is no longer
an independent director of the Board.
The Audit Committee shall meet at least four times annually, or
more frequently as circumstances dictate. The Audit Committee
Chairman shall prepare
and/or
approve an agenda in advance of each meeting. The Audit
Committee shall meet in separate executive sessions at least
quarterly with management, the independent auditor, and as a
committee to discuss any matters that the Audit Committee or
each of these groups believe should be discussed privately. In
addition, the Audit Committee, or at least its Chairman, should
communicate with financial management and the independent
auditor quarterly either in person or telephonically to review
the Corporation’s financial statements and significant
findings based upon the independent auditor’s limited
review procedures as provided in Section VIII.A.2. below.
The Audit Committee shall have authority to retain outside
counsel and other advisors as the Audit Committee may deem
appropriate in its sole discretion. The Audit Committee shall
have sole authority to approve related fees and retention terms
associated with the retention of any such firm or individual,
which fees shall be paid by the Corporation. In determining
whether to retain or terminate a provider of such services, the
Committee may, in its discretion, obtain the input of senior
management.
Unless an Audit Committee member has knowledge that makes
reliance unwarranted, each Audit Committee member, in
discharging his or her duties to the Corporation, may rely on
information, opinions, reports, or statements, any of which may
be written or oral, formal or informal, including financial
statements, valuation reports, and other financial data, if
prepared or presented by: (a) one or more officers or
employees of the Corporation whom the Audit Committee member
believes in his or her reasonable business judgment and good
faith to be reliable and competent in the matters presented;
(b) legal counsel or other persons as to matters which the
Audit Committee member believes in his or her reasonable
business judgment and good faith to be within the professional
or expert competence of such person; or (c) another
committee of the Board of which such Audit Committee member is
not a member if the Audit Committee member believes in his or
her reasonable business judgment and good faith that such
committee merits confidence.
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The Audit Committee shall keep correct and complete minutes of
its proceedings and the names and places of residence of its
members. Minutes of the meeting will be prepared by the Audit
Committee Chairperson or such other person designated to act as
Secretary for the meeting.
Following each of its meetings, the Audit Committee shall
deliver a report on the meeting to the Board, including a
description of all actions taken by the Audit Committee at the
meeting.
To fulfill its responsibilities and duties the Audit Committee
shall perform the following:
1. Review and reassess the adequacy of this Charter at
least annually. Submit the Charter, which is approved by the
Audit Committee, to the Board for ratification and have the
Charter published at least every three years in accordance with
SEC regulations.
2. Review and discuss with management and the independent
auditor, the Corporation’s annual audited financial
statements prior to filing on
Form 10-K
or distribution. Discuss significant issues regarding accounting
principles, practices and judgments, including the
Corporation’s disclosures under “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.”
3. Review and discuss with management and the independent
auditor, the Corporation’s quarterly financial results
and/or the
Corporation’s quarterly financial statements prior to the
earlier of the release of earnings or the filing of the
Quarterly Report on
Form 10-Q.
Discuss the Corporation’s disclosures under
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” any significant
changes to the Corporation’s accounting principles and any
items required to be communicated by the independent auditor in
accordance with SAS 61 (as may be modified or amended). The
Audit Committee Financial Expert may represent the entire Audit
Committee for purposes of this review.
4. In consultation with management and the independent
auditor, consider the integrity of the Corporation’s
financial reporting processes and controls, including
(i) internal controls and procedures for financial
reporting, (ii) disclosure controls and procedures, and
(iii) computerized information system controls and
security. Discuss significant financial risk exposures and the
steps management has taken to monitor, control and report such
exposures. Review the significant reports to management prepared
by the independent auditor, together with management’s
responses, including the status of previous recommendations, and
follow up to these reports.
5. Discuss with management and the independent auditor the
quality and adequacy of the Corporation’s internal controls
for financial reporting and internal auditing procedures,
including any significant deficiencies in the design or
operation of those controls which could adversely affect the
Corporation’s ability to record, process, summarize and
report financial data and any fraud, whether or not material,
that involves management or other employees who have a
significant role in the Corporation’s internal controls,
and discuss with the independent auditor how the
Corporation’s financial systems and controls compare with
industry practices.
6. Discuss with management the type of information to be
disclosed in any quarterly or year-end earnings press releases
and earnings guidance provided to analysts and rating agencies
and the type of presentation, if any, to be made in connection
with the disclosure of such information, including the
procedures to be followed to assure compliance with
Regulation FD in connection with such disclosures and
presentations.
7. On at least an annual basis, discuss with management the
guidelines and policies established by management to assess and
manage the Corporation’s exposure to risk, including a
discussion of the Corporation’s major financial risk
exposures and the steps management has taken to monitor and
control such exposures.
8. Report regularly to the Board with respect to any issues
that arise with respect to the quality or integrity of the
Corporation’s financial statements, the Corporation’s
compliance with legal or regulatory requirements, the
performance and independence of the Corporation’s
independent auditor.
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9. Conduct an annual performance self-evaluation of the
Audit Committee, including: (a) major issues regarding
accounting principles and financial statement presentations,
including any significant changes in the Corporation’s
selection or application of accounting principles, and major
issues as to the adequacy of the Corporation’s internal
controls for financial reporting and any special audit steps
adopted in light of material control deficiencies;
(b) analyses prepared by management
and/or the
independent auditor setting forth significant financial
reporting issues and judgments made in connection with the
preparation of the financial statements, including analyses of
the effects of alternative GAAP methods on the financial
statements; (c) the effect of regulatory and accounting
initiatives, as well as any off-balance sheet structures, on the
Corporation’s financial statements; and (d) earnings
press releases (paying particular attention to any use of
“pro forma” or “adjusted” non-GAAP
information), as well as financial information and earnings
guidance provided to analysts and rating agencies. The Audit
Committee shall report its conclusions regarding this evaluation
to the Board. The Committee’s report should generally
include an assessment of its compliance with this Charter, as
well as identification of areas in which the Committee could
improve its performance and the Charter could be improved.
1. The independent auditor is ultimately accountable to and
shall report directly to the Audit Committee, as the
representative of the Corporation’s stockholders. The Audit
Committee has the sole authority and direct responsibility to
select, hire, evaluate and, where appropriate, replace the
independent auditor or to nominate the independent auditor to be
proposed for shareholder approval in any proxy statement. The
Audit Committee must also approve any non-audit relationship
with the independent auditor, and all non-audit services
provided by the independent auditor and determine whether such
relationships and services are compatible with the
auditor’s independence. The Audit Committee shall annually
review the independence, qualifications and performance of the
auditors, including the review and evaluation of the lead
partner of the independent auditor, and shall oversee the work
of the independent auditor for the purpose of preparing or
issuing an audit report on the Corporation’s financial
statements or related work or performing other audit, review or
attest services for the Corporation. In making its evaluation,
the Audit Committee shall take into account the opinions of
management.
2. The Audit Committee has the authority to, and shall,
approve the fees and other compensation to be paid to the
independent auditor and the funding therefor.
3. Require the independent auditor to submit on a periodic
basis (but at least annually) to the Audit Committee a formal
written statement in accordance with Independence Standards
Board (“ISB”) Statement No. 1 (as may be modified
or amended) and such other requirements as may be established by
the Public Company Accounting Oversight Board delineating all
relationships between them and the Corporation and to actively
engage in a dialogue with the independent auditor with respect
to any relationships or services disclosed in the statement that
may impact the independent auditor objectivity and independence,
and take appropriate action in response to the statement of the
independent auditor to satisfy itself of the outside
auditors’ independence and objectivity.
4. On an annual basis, obtain and review a report from the
independent auditor describing: (i) the independent
auditor’s internal quality-control procedures; and
(ii) any material issues raised by the most recent internal
quality-control review or peer review of the independent auditor
or by any inquiry or investigation by governmental or
professional authorities, within the preceding five years,
respecting one or more independent audits carried out by the
independent auditor and any steps taken to deal with any such
issues.
5. At least annually, consult with the independent auditor
out of the presence of management about the adequacy, quality
and integrity of the internal controls for financial reporting
and the fair presentation and accuracy of the Corporation’s
financial statements.
6. Resolve disagreements, if any, between management and
the independent auditor regarding financial reporting.
7. Review the independent auditor engagement letter and
audit plan — discuss scope and general approach
of the audit, staffing, locations and reliance upon management
and the internal audit staff.
8. Approve in advance any audit services (which may entail
providing comfort letters in connection with securities
underwritings) and non-audit services (including the fees and
terms thereof) to be performed by the
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independent auditor; provided, however, that the
following services cannot be provided even with Audit Committee
approval, except to the extent permitted by SEC rule or the
Public Company Accounting Oversight Board approves an exemption
on a case by case basis: (A) bookkeeping or other services
related to the accounting records or financial statements of the
Corporation; (B) financial information systems design and
implementation; (C) appraisal or valuation services,
fairness opinions or
contribution-in-kind
reports; (D) actuarial services; (E) internal audit
outsourcing services; (F) management functions or human
resources; (G) broker-dealer, investment adviser, or
investment banking services; (H) legal services and expert
services unrelated to the audit; and (I) any other service
that the Public Accounting Oversight Board determines, by
regulation, is not permissible.
9. The Audit Committee may pre-approve audit and non-audit
services by either (a) designating one or more members of
the Audit Committee to pre-approve any audit or non-audit
services to be performed by the independent auditor; provided
that such members present such pre-approved activity to the full
Audit Committee at its next scheduled meeting or
(b) establishing pre-approval policies and procedures;
provided the policies and procedures are detailed as to the
particular service, the Audit Committee is informed of each
service and such policies do not delegate to management the
Audit Committee’s responsibilities.
10. Prior to releasing the year-end earnings, review and
discuss the results of the audit with the independent auditor.
Also review and discuss certain matters required to be
communicated to audit committees in accordance with AICPA SAS
61, as amended by SAS 90, (as may be modified or amended),
including, without limitation, the independent auditor’s
judgments about the quality, not just the acceptability, of the
Corporation’s accounting principles as applied in its
financial reporting. Items to be reviewed and discussed include
(communications may be written or oral):
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11. Consider the independent auditor’s judgments about
the quality and appropriateness of the Corporation’s
accounting principles as applied in financial reporting:
12. The Audit Committee shall periodically discuss with the
independent auditor whether all material correcting adjustments
identified by the independent auditor in accordance with
generally accepted accounting principles and rules of the SEC
are reflected in the Corporation’s financial statements.
13. The Audit Committee shall review with management and
the independent auditor any material financial or other
arrangements of the Corporation which do not appear on the
Corporation’s financial statements and any transactions or
courses of dealing with third parties that are significant in
size or involve terms or other aspects that differ from those
that would likely be negotiated with independent parties, and
which arrangements or transactions are relevant to an
understanding of the Corporation’s financial statements.
14. Assure that the independent auditor changes the audit
partners for the audit in accordance with the rules of the SEC
and at least annually consider whether, in order to assure
continuing auditor independence, the Corporation should change
the independent auditor.
15. Annually, present its conclusions with respect to the
independent auditor to the Board.
1. On at least an annual basis, review with the
Corporation’s outside legal counsel (i) any legal
matters that could have a significant impact on the
organization’s financial statements or reporting,
(ii) disclosure controls and procedures and their interface
with internal controls for financial reporting,
(iii) disclosure policy and practices, (iv) the
Corporation’s compliance with applicable laws and
regulations and internal controls designed to ensure such
compliance, and (v) inquiries received from regulatory or
governmental agencies.
2. Consult with counsel if, in the opinion of the Audit
Committee, any matter under consideration by the Audit Committee
has the potential for any conflict between the interests of the
Corporation and any of its subsidiaries in order to ensure that
appropriate procedures are established for addressing any such
potential conflict and for ensuring compliance with all
applicable laws.
1. Annually prepare a report to shareholders as required by
the SEC. The report is to be included in the Corporation’s
annual proxy statement. The report is to state whether the Audit
Committee has:
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2. If, based on the foregoing review and discussions, the
Audit Committee recommended to the Board that the audited
financial statements be included in the annual report filed with
the SEC includes a statement to that effect in the annual report.
3. Review the process for filing accurate and timely SEC
reports.
4. Review and update periodically the Corporation’s
Code of Business Conduct and Ethics for Directors, Officers and
Employees, ensure that management has established a system to
enforce this Code and approve any waivers thereof that the Audit
Committee determines are appropriate.
5. Review and approve related-party transactions on an
ongoing basis.
6. Adopt and implement a policy (A) to receive, handle
and retain complaints regarding (i) accounting and auditing
matters, (ii) internal controls for financial reporting,
(iii) disclosure controls and procedures, and (iv) the
Code of Business Conduct and Ethics for Directors, Officers and
Employees, and (B) to provide for confidential, anonymous
submissions by employees making such complaints.
7. Establish clear policies for hiring current employees or
former employees of the independent auditor, including policies
to ensure that any such hiring will not cause such accounting
firm to no longer be considered independent.
8. Perform any other activities consistent with this
Charter, the Corporation’s articles of incorporation and
bylaws, and governing law, as the Audit Committee or the Board
deems necessary or appropriate.
While the Audit Committee has the responsibilities and powers
set forth in this Charter, it is not the duty of the Audit
Committee to plan or conduct audits or to determine that the
Corporation’s financial statements and disclosures are
complete and accurate and are in accordance with GAAP and
applicable rules and regulations. These are the responsibilities
of management and the independent auditor.
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FORM OF
PROXY
Cut or tear along perforated
edge.
QUEST RESOURCE
CORPORATION
The undersigned hereby appoints JERRY D. CASH and DAVID E.
GROSE, in the order named, as proxies (each with the power to
act alone and with power of substitution) to vote, as directed
below, all shares of common stock of QUEST RESOURCE CORPORATION
(the “Company”) which the undersigned would be
entitled to vote if personally present at the Annual Meeting of
Stockholders to be held on May 31, 2006, at
11:00 a.m., Central time, at The Oklahoma City Marriott,
located at 3233 Northwest Expressway, Oklahoma City, OK, in the
Rose Rock meeting room, or any adjournment thereof, as follows:
1. To elect the Directors of the Company.
(Continued and to be dated and
signed on reverse side)
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When properly executed, this proxy will be voted in the manner
directed by the undersigned Stockholder. If no direction is
made, this proxy will be voted FOR all directors in
Proposal 1 and FOR Proposals 2, 3 and 4 and in
accordance with discretion of the proxies upon such other
matters as may properly come before the meeting and any
adjournment thereof.
The Board of Directors recommends a vote FOR all directors
in Proposal 1 and FOR Proposals 2, 3 and 4. The
proposals are not related to or conditioned on the approval of
other matters, and have been proposed by the Company.
Please sign exactly as name appears below.
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