UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
SCHEDULE
14A
INFORMATION
REQUIRED IN PROXY STATEMENT
SCHEDULE
14A INFORMATION
Proxy
Statement Pursuant to Section 14(a) of the Securities
Exchange
Act of 1934 (Amendment No. )
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the Registrant þ
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a Party other than the Registrant o
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þ Preliminary
Proxy Statement
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Commission Only (as permitted by Rule 14a-6(e)(2))
o Definitive
Proxy Statement
o Definitive
Additional Materials
o Soliciting
Material Pursuant to §240.14a-12
Petroleum
Development Corporation
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(Name
of Registrant as Specified In Its
Charter)
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(Name
of Person(s) Filing Proxy Statement, if other than the
Registrant)
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PETROLEUM
DEVELOPMENT CORPORATION
120
Genesis Boulevard
Bridgeport,
West Virginia 26330
__________________________
NOTICE
OF ANNUAL MEETING OF SHAREHOLDERS
June
23, 2008
__________________________
Waterfront
Place Hotel
Two
Waterfront Place
Morgantown,
WV 26501
To the
Shareholders:
Notice is
hereby given that the Annual Meeting of Shareholders of Petroleum Development
Corporation (the "Company") will be held at the Waterfront Place Hotel, Two
Waterfront Place, Morgantown, West Virginia 26501, on June 23, 2008, at 10:00
a.m., local time, for the following purposes, all as more fully described in the
accompanying Proxy Statement:
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(1)
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To
elect directors;
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(2)
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To
amend and restate the Company’s Articles of Incorporation to: (1) increase
the number of authorized shares of common stock, par value $0.01, of the
Company from 50,000,000 shares to 100,000,000 shares, and (2) authorize
50,000,000 shares of preferred stock, par value $0.01, of the Company,
which may be issued in one or more series, with such rights, preferences,
privileges and restrictions as shall be fixed by the Company’s Board of
Directors from time to time;
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(3)
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To
amend and restate the Company’s 2005 Non-Employee Director Restricted
Stock Plan to, as material, increase the number of shares authorized under
the plan from 40,000 to 100,000 and change the vesting
provisions;
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(4)
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To
ratify the selection of PricewaterhouseCoopers LLP as independent
registered public accounting firm for the Company for the year ending
December 31, 2008;
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(5)
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To
consider such other business as may properly come before the meeting and
at any and all adjournments or postponements
thereof.
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The Board
of Directors has fixed the close of business on May 19, 2008, as the record date
for determining the shareholders having the right to vote at the annual meeting
or any adjournment or postponement thereof. The presence in person or
by proxy of the holders of a majority of the outstanding shares of the Company's
common stock entitled to vote is required to constitute a quorum.
Each
shareholder is cordially invited to attend and to vote at this meeting in
person. Shareholders who do not expect to attend are requested to
sign and date the accompanying proxy card and return it promptly in the enclosed
postpaid envelope.
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By
Order of the Board of Directors,
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Steven
R. Williams, Chairman
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Bridgeport,
West Virginia
May
23, 2008
PETROLEUM
DEVELOPMENT CORPORATION
120
Genesis Boulevard
Bridgeport,
West Virginia 26330
__________________________
PROXY
STATEMENT
ANNUAL
MEETING OF SHAREHOLDERS
TO
BE HELD June 23, 2008
__________________________
Waterfront
Place Hotel
Two
Waterfront Place
Morgantown,
WV 26501
The
accompanying proxy is solicited by the Board of Directors ("Board") of Petroleum
Development Corporation ("PDC" or the "Company") for use at the Annual Meeting
of Shareholders of the Company to be held on June 23, 2008, at 10:00 a.m., and
at any and all adjournments or postponements of the meeting, for the purposes
set forth in this Proxy Statement and the attached Notice of Annual Meeting of
Shareholders. This Proxy Statement and the enclosed form of proxy are
first being mailed to the shareholders of the Company on or about May 23,
2008.
The
Company will bear the cost related to the solicitation of
proxies. The Company will reimburse brokerage firms and other
custodians, nominees and fiduciaries for reasonable and appropriate expenses
incurred by them in sending proxy materials to the beneficial owners of the
Company's common stock. In addition to solicitations by mail,
directors, officers and employees of the Company may solicit proxies by
telephone and, to the extent necessary, or other electronic communication, and
personal interviews without additional compensation.
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A-1
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B-1
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Who
May Vote
Shareholders
of Petroleum Development Corporation ("PDC" or the "Company"), as recorded in
the Company's stock register on May 19, 2008, may vote at the
meeting. The outstanding voting securities of the Company as of April
4, 2008, consisted of 14,849,007 shares of common stock. Each share
is entitled to one vote on each matter considered at the meeting.
How
to Vote
You may
vote in person at the meeting or by proxy. The Board recommends you
vote by proxy even if you plan to attend the meeting. You can always
change your vote at the meeting.
How
Proxies Work
The Board
is asking for your proxy. Giving the Board your proxy means you
authorize the Board to vote your shares at the meeting in the manner you
direct. You may vote for all, or some of the director candidates, or
you may withhold your vote from any or all of the director
candidates. You may also vote for or against the other proposals, or
abstain from voting. Cumulative voting is not permitted by the
Company's By-Laws in the election of directors.
If your
shares are held in your name, you can vote by completing, signing and dating
your proxy card and returning it in the enclosed envelope.
If you
give the Board your signed proxy but do not specify how to vote, your shares
will be voted in favor of their director candidates and in favor of the other
three proposals.
If you
hold shares through someone else, such as a stockbroker, you will receive
material from that firm asking how you want to vote. Check the voting
form used by that firm to see what voting options you have
available.
Revoking
a Proxy
You may
revoke your proxy before it is voted by:
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Submitting
a new signed proxy with a later
date;
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Notifying
PDC's Secretary in writing before the meeting that you wish to revoke your
proxy; or
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Appearing
at the meeting, notifying the Inspectors of the Election that you wish to
revoke your proxy, and voting in person at the meeting. Merely
attending the meeting will not result in your revoking your
proxy.
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If you
hold your shares through someone else, such as a stockbroker, you will need to
follow the directions they give you to revoke a proxy or otherwise vote at the
meeting.
Quorum
In order
to carry on the business of the meeting, there must be a quorum. This
means at least a majority of the outstanding shares eligible to vote must be
represented at the meeting, either by proxy or in person. Treasury
shares, which are shares owned by PDC itself, are not voted and do not count for
this purpose.
Votes
Needed
The
director candidates who receive the most votes will be elected to fill the
available seats on the Board. There is no provision in the Company's
By-Laws which requires director candidates to receive a majority of the votes
cast to be elected. Approval of the proposal to amend the Company's Articles of
Incorporation requires the favorable vote of a majority of the Company's
outstanding shares of common stock. Approval of the other proposals requires the
favorable vote of a majority of the votes cast. Only votes for or
against a proposal count. Abstentions and broker non-votes count for
quorum purposes but not for voting purposes. Broker non-votes occur
when a broker returns a proxy but does not have authority from the owner of the
stock to vote on a particular proposal. Although there are no
controlling precedents under Nevada law regarding the treatment of broker
non-votes in certain circumstances, the Company intends to apply the principles
presented herein.
Attending
in Person
Only
shareholders or their proxy holders and PDC's guests may attend the annual
meeting. For safety and security reasons, no cameras, audio or video
recording equipment, large bags, briefcases or packages will be permitted in the
meeting. In addition, each shareholder and guest may be asked to
present valid, government-issued picture identification, such as a driver's
license, before being admitted to the meeting.
If your
shares are held in the name of your broker, bank, or other nominee, you must
bring to the meeting an account statement or letter from the nominee indicating
that you beneficially owned the shares on May 19, 2008, the record date for
voting. Shareholders who do not present such information at the
meeting will be admitted upon verification of ownership at the admissions
counter.
Conduct
of the Meeting
The
Chairman has broad authority to conduct the annual meeting in an orderly and
timely manner. This authority includes establishing rules for
shareholders who wish to address the meeting. Copies of these rules
will be available at the meeting. The Chairman may also exercise
broad discretion in recognizing shareholders who wish to speak and in
determining the extent of discussion on each item of business. In
light of the need to conclude the meeting within a reasonable period of time,
there can be no assurance that every shareholder who wishes to speak on an item
of business will be able to do so. The Chairman may also rely on
applicable law regarding disruptions or disorderly conduct to ensure that the
meeting is conducted in a manner that is fair to all shareholders.
Contact
Information
If you
have questions or need more information about the annual meeting, write to or
call:
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Corporate
Secretary
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Petroleum
Development Corporation
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120
Genesis Boulevard
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P.O.
Box 26
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Bridgeport,
WV 26330
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(304)
842-3597
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For
information about shares registered in your name, call PDC at
1-800-624-3821. You are also invited to visit PDC's internet site at
www.petd.com. Internet
site materials are not part of this proxy solicitation.
PROPOSAL 1 – ELECTION OF DIRECTORS
(ITEM
1 ON THE PROXY)
As of the
date of this proxy statement and as permitted by the Company's By-Laws, the
Company's Board of Directors ("Board") has nine members divided into three
classes. Directors are usually elected for three-year
terms. The terms for members of each class end in successive
years. In 2007, however, the following three new directors were
appointed by the Board, all to serve only until the 2008 Annual Meeting of
Shareholder: Joseph E. Casabona, Larry F. Mazza and Richard W.
McCullough. Therefore, five members of the Board are nominated for
election at this 2008 meeting.
The Board
of Directors has nominated three continuing directors, David C. Parke, Jeffrey
C. Swoveland and Joseph E. Casabona, whose terms expire in 2008, to stand for
election to the Board for a three-year term expiring in 2011. Mr.
Parke has served on the Board since 2003 and currently serves as Chair of the
Compensation and the Planning and Finance Committees as well as a member of the
Audit and the Nominating and Governance Committees. Mr. Swoveland has
served on the Board since 1991 and currently serves as the Presiding Independent
Director, Chair of the Audit Committee, and member of the Planning and Finance
and the Executive Committees. Mr. Casabona has served on the Board
since October 2007 and is a member of the Audit and the Planning and Finance
Committees.
The Board
of Directors has nominated two continuing directors, Richard W. McCullough and
Larry F. Mazza, whose terms expire in 2008, to stand for election to the Board
for a two year term expiring in 2010. Mr. McCullough has served on
the Board since December 2007 and serves on the Executive and the Planning and
Finance Committees. Mr. Mazza has served on the Board since October
2007 and serves on the Nominating and Governance and the Compensation
Committees.
The
appointed proxies will vote your proxy for the election of the five nominees
unless you withhold your authority to vote for any or all of
them. The Board does not contemplate that any of the nominees will
become unavailable for any reason; however, if any director is unable to stand
for election, the Board may reduce its size or choose a
substitute. Proxies cannot be voted for a greater number of persons
than the number of nominees named.
NOMINEES
FOR A THREE YEAR TERM EXPIRING IN 2011
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Name,
Principal
Occupation for Past Five Years
and Other Directorships
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Age
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Year
First
Elected
Director
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DAVID
C. PARKE is a Managing Director in the investment banking group of
Boenning & Scattergood, Inc., West Conshohocken, PA, a full-service
investment banking firm. Prior to joining Boenning & Scattergood
in November 2006, he was a Director with Mufson Howe Hunter & Company
LLC, Philadelphia, Pennsylvania, an investment banking firm, from October
2003 to November 2006. From 1992 through 2003, Mr. Parke was
Director of Corporate Finance of Investec, Inc. and its predecessor
Pennsylvania Merchant Group Ltd., investment banking companies.
Prior to joining Pennsylvania Merchant Group, Mr. Parke served in
the corporate finance departments of Wheat First Butcher & Singer, now
part of Wachovia Securities, and Legg Mason, Inc., now part of Stifel
Nicolaus.
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2003
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JEFFREY
C. SWOVELAND is the Chief Operating Officer of Coventina Healthcare
Enterprises, a medical device company specializing in therapeutic warming
and multi-modal treatment systems used in the treatment, rehabilitation
and management of pain since May 2007. Previously, Mr.
Swoveland served as Chief Financial Officer of Body Media, Inc., a
life-science company specializing in the design and development of
wearable body monitoring products and services, from September 2000 to May
2007. Prior thereto, Mr. Swoveland held various positions,
including Vice-President of Finance, Treasurer and interim Chief Financial
Officer with Equitable Resources, Inc., a diversified natural gas company
from 1997 to September 2000. Mr. Swoveland serves as a member
of the Board of Directors of Linn Energy, LLC, a public, independent
natural gas and oil company.
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1991
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JOSEPH
E. CASABONA served as Executive Vice President and member of the Board of
Directors of Denver based Energy Corporation of America, a natural gas
exploration and development company, from 1985 to his
retirement in May 2007. Mr. Casabona's responsibilities
included strategic planning as well as executive oversight of the drilling
operations in the continental United States and
internationally.
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64
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2007
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NOMINEES
FOR A TWO YEAR TERM EXPIRING IN 2010
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RICHARD
W. MCCULLOUGH
was appointed President in March 2008, elected Vice Chairman
of PDC's Board of Directors in December 2007, was appointed Chief
Financial Officer in November 2006 and also served as PDC’s Treasurer from
November 2006 until October 2007. Prior to joining PDC, Mr.
McCullough served as an energy consultant from July 2005 to November
2006. From January 2004 to July 2005, Mr. McCullough served as
president and chief executive officer of Gasource, LLC, Dallas, Texas, a
marketer of long-term, natural gas supplies. From 2001 to 2003,
Mr. McCullough served as an investment banker with J.P. Morgan Securities,
Atlanta, Georgia, and served in the public finance utility group
supporting bankers nationally in all natural gas
matters. Additionally, Mr. McCullough has held senior positions
with Progress Energy, Deloitte and Touche, and the Municipal Gas Authority
of Georgia. Mr. McCullough, a Certified Public Accountant, was
a practicing certified public accountant for 8 years.
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56
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2007
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LARRY
F. MAZZA has served as Chief Executive Officer of MVB Bank
Harrison, Inc., in Bridgeport, West Virginia since March
2005. Prior to the formation of MVB Bank Harrison, Mr. Mazza
served as Senior Vice President Retail Banking Manager for BB&T in
West Virginia, where he was employed from June 1986 to March
2005.
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47
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2007
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Continuing
Directors with Terms Expiring in 2009
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KIMBERLY
LUFF WAKIM, an Attorney and a Certified Public Accountant, is a Partner
with the Pittsburgh, Pennsylvania law firm, Thorp, Reed & Armstrong
LLP, where she serves as a member of the Executive
Committee. Ms. Wakim has practiced law with Thorp, Reed &
Armstrong LLP since 1990.
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49
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2003
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STEVEN
R. WILLIAMS was elected Chairman and Chief Executive Officer in January
2004. Mr. Williams served as President from March 1983 until
December 2004.
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57
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1983
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ANTHONY
J. CRISAFIO , a Certified Public Accountant, serves as an
independent business consultant, providing financial and operational
advice to businesses and has done so since 1995. Additionally,
Mr. Crisafio has served as the Chief Operating Officer of Cinema World,
Inc. from 1989 until 1993 and was a partner with Ernst & Young from
1986 until 1989.
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55
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2006
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Continuing
Directors with Term Expiring in 2010
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VINCENT
F. D'ANNUNZIO has served as president of Beverage Distributors, Inc.
located in Clarksburg, West Virginia since 1985.
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55
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1989
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For the 2007-2008 Board term, each
non-employee director was paid an annual fee of $55,000 and received 2,000
shares of restricted stock, which was awarded on the date of the 2007 annual
meeting. The Presiding Independent Director was paid an additional
fee of $27,500. Each non-employee director received for services on
each committee on which he or she served the following fees:
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Committees
of the Board
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Chair
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Non-Chair
Member
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Audit
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$ | 22,500 | $ | 10,000 | ||||
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Compensation
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7,500 | 2,500 | ||||||
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Executive
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- | 5,000 | ||||||
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Nominating
and Governance
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7,500 | 2,500 | ||||||
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Planning
and Finance
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7,500 | 2,500 | ||||||
Pursuant
to the shareholder-approved 2005 Non-Employee Director Restricted Stock Plan, as
of the date of each annual shareholders' meeting of the Company, each
non-employee director will be awarded a specified number of shares of restricted
stock as determined by the Board. Directors receiving restricted
stock under the Restricted Stock Plan will have all of the rights of a
shareholder including the right to vote the shares and receive cash dividends
and other cash distributions. Restricted stock will be subject to the
restrictions for the restricted period commencing on the date the stock is
awarded.
Each
non-employee director may also choose to defer a portion or all of their annual
cash compensation by participating in the Non-Employee Director Deferred
Compensation Plan. The plan's trustee invests all cash
deposits received exclusively in the common stock of the Company.
On March
8, 2008, the Board of Directors approved compensation for the 2008-2009 Board
year. Such compensation is principally the same to the prior Board year with the
exceptions that (1) the annual retainers for the Compensation Committee Chairman
and members were increased to $10,000 and $5,000 from $7,500 and $2,500,
respectively, and (2) subject to shareholder approval, the vesting of prior and
future restricted stock awards would be changed as described in Proposal #3 in
this proxy.
2007
Director Compensation Table
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Fees
Earned
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||||||||||||
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or
Paid
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Stock
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|||||||||||
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Name
(1)
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in
Cash
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Awards
(2)
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Total
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Kimberly Luff
Wakim
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$ | 59,000 | $ | 72,280 | $ | 131,280 | ||||||
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Vincent F. D'Annunzio
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56,250 | (3) | 72,280 | 128,530 | ||||||||
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David C. Parke
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67,125 | 72,280 | 139,405 | |||||||||
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Jeffrey C. Swoveland
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94,781 | 72,280 | 167,061 | |||||||||
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Anthony J. Crisafio
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57,750 | 72,280 | 130,030 | |||||||||
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Joseph E. Casabona
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11,542 | 64,037 | (4) | 75,579 | ||||||||
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Larry F. Mazza
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10,625 | 64,037 | (4) | 74,662 | ||||||||
_______________
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(1)
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Compensation
paid to Messrs. Williams and McCullough for their services as executive
officers is shown in the Summary Compensation Table; neither receives
additional compensation for services as a
Director.
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(2)
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For
all Directors, excluding Messrs. Casabona and Mazza, the amounts represent
the grant date fair value of the 2007-2008 term restricted stock
award. The grant date fair value was computed in accordance
with FAS 123(R) by multiplying the number of shares awarded (2,000 shares)
by the closing price of the Company's common stock on the date of grant
($36.14 on August 28, 2007).
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(3)
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Includes
amounts deferred (100%) pursuant to stock purchase election under the
Non-Employee Deferred Compensation
Plan.
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(4)
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Messrs.
Casabona and Mazza were appointed to serve on the Company's Board
effective October 26, 2007. The amount represents the grant
date fair value of a pro rata portion of the 2007-2008 term restricted
stock award. The grant date fair value was computed in
accordance with FAS 123(R) by multiplying the number of shares awarded
(1,355 shares) by the closing price of the Company's common stock on the
dated of grant ($47.26 on November 12,
2007).
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THE
BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" EACH OF THE NOMINEES TO THE BOARD OF
DIRECTORS SET FORTH IN THIS PROPOSAL #1. PROXIES SOLICITED BY THE
BOARD WILL BE SO VOTED UNLESS SHAREHOLDERS SPECIFY A CONTRARY VOTE. DIRECTORS
ARE ELECTED BY A PLURALITY OF THE VOTE.
PROPOSAL 2: TO CONSIDER AND VOTE UPON A PROPOSAL TO AMEND AND
RESTATE THE COMPANY’S ARTICLES OF INCORPORATION TO: (1) INCREASE THE NUMBER OF
AUTHORIZED SHARES OF COMMON STOCK FROM 50,000,000 SHARES TO 100,000,000 SHARES,
AND (2) AUTHORIZE 50,000,000 SHARES OF PREFERRED STOCK, WHICH MAY BE ISSUED IN
ONE OR MORE SERIES, WITH SUCH RIGHTS, PREFERENCES, PRIVILEGES AND RESTRICTIONS
AS SHALL BE FIXED BY THE COMPANY’S BOARD OF DIRECTORS FROM TIME TO
TIME.
(ITEM
2 ON THE PROXY)
On March
8, 2008, the Board of Directors, believing it to be in the best interests of the
Company and its shareholders, authorized, subject to approval of the
shareholders, an amendment and restatement of the Company’s Articles of
Incorporation to: (1) increase the number of authorized shares of Common Stock
from 50,000,000 shares to 100,000,000 shares and (2) authorize 50,000,000 shares
of Preferred Stock, which may be issued in one or more series, with such rights,
preferences, privileges and restrictions as shall be fixed by the Company’s
Board of Directors from time to time. As provided in the Nevada
General Corporation Law and the Company's Articles of Incorporation, the
Company's shareholders are not entitled to pre-emptive rights at such times when
the Board issues shares of the Company's Common Stock or Preferred Stock. This
summary is qualified in its entirety by reference to the full text of the
Articles of Incorporation, as Amended and Restated, which appear in
Exhibit B to this document.
Increase in Authorized
Common Stock of the Company. As of April 4, 2008, a total
of 14,849,007 shares of the Company’s currently authorized 50,000,000
shares of Common Stock are issued and outstanding. Furthermore, under the
Company's Shareholder Rights Plan, implemented on September 13, 2007, the
Company must have at least two shares authorized for every share outstanding.
The increase in the number of authorized but unissued shares of Common Stock
would enable the Company, without further shareholder approval, to issue shares
from time to time as may be required for proper business purposes, such as
raising additional capital for ongoing operations, business and asset
acquisitions, stock splits and dividends, present and future employee benefit
programs and other corporate purposes. The number of authorized, non-designated
shares of Common Stock available for issuance by the Company in the future has
been reduced, and the Company’s flexibility with respect to possible future
stock splits, equity financings, stock-for-stock acquisitions, stock dividends
or other transactions that involve the issuance of Common Stock has been
severely diminished.
Authorization of “Blank
Check” Preferred Stock. The term “blank check” preferred stock refers to
stock for which the designations, preferences, conversion rights, cumulative,
relative, participating, optional or other rights, including voting rights,
qualifications, limitations or restrictions thereof are determined by the Board
of Directors of a company. Upon the effectiveness of the Articles of
Incorporation amendment and restatement, the Board of Directors of the Company
will be able to authorize the designation and issuance of up to 50,000,000
shares of Preferred Stock in one or more series with such limitations and
restrictions as may be determined in the sole discretion of the Company’s Board
of Directors, with no further authorization by shareholders required for the
creation and issuance thereof. When required by law and in accordance
with the Nevada Revised Statutes of the State of Nevada, the Board of Directors
of the Company will have the express authority to execute, acknowledge and file
a certificate of designations setting forth, any and all powers, designations,
preferences, rights, qualifications, limitations or restrictions on the
Preferred Stock. The Board of Directors believes that having such blank check
preferred stock available for, among other things, proposed financing
transactions, as well as possible issuances in connection with such activities
as public or private offerings of shares for cash, dividends payable in stock of
the Company, acquisitions of other companies or businesses, and otherwise, is in
the best interest of the Company and its shareholders.
Rights and Preferences with
respect to Common Stock. If the Company issues Preferred Stock, such
Preferred Stock will include certain designations, preferences, conversion
rights, cumulative, relative, participating, optional or other rights, including
voting rights, qualifications, limitations or restrictions, any of which may
dilute the voting power and economic interest of the holders of the Common
Stock. For example, in a liquidation, the holders of the Preferred Stock may be
entitled to receive a certain amount per share of Preferred Stock before the
holders of the Common Stock receive any distribution. In addition, the holders
of Preferred Stock may be entitled to a certain number of votes per share of
Preferred Stock and such votes may dilute the voting rights of the holders of
Common Stock when the Company seeks to take corporate action. Furthermore,
Preferred Stock could be issued with certain preferences over the holders of
Common Stock with respect to dividends or the power to approve the declaration
of a dividend. The aforementioned are only examples of how shares of Preferred
Stock, if issued, could dilute the interests of the holders of Common
Stock.
Possible Anti-Takeover
Effect. As previously disclosed,
effective September 11, 2007, the Company adopted a shareholders rights
agreement. The proposed article amendments are not needed to implement the
shareholders' rights agreement. The increased shares could, however,
permit the Company to also issue shares of Common Stock or
Preferred Stock that may, depending on the terms of such series, make
also more difficult or discourage an attempt to obtain control of
the Company by means of a merger, tender offer, proxy contest or other means.
When, in the judgment of the Board of Directors, this action would be in the
best interest of the shareholders and the Company, such shares could be used to
create voting or other impediments or to discourage persons seeking to gain
control of the Company. Such shares also could be privately placed with
purchasers favorable to the Board of Directors in opposing such action. In
addition, the Board of Directors could authorize holders of a series of Common
or Preferred Stock to vote either separately as a class or with the holders of
the Company’s Common Stock, on any merger, sale or exchange of assets by the
Company or any other extraordinary corporate transaction. The existence of the
additional authorized shares could have the effect of discouraging unsolicited
takeover attempts. The issuance of new shares also could be used to dilute the
stock ownership of a person or entity seeking to obtain control of the Company
should the Board of Directors consider the action of such entity or person not
to be in the best interest of the shareholders of the Company. The issuance of
new shares also could be used to entrench current management or deter an attempt
to replace the Board of Directors by diluting the number or rights of shares
held by individuals seeking to control the Company by obtaining a certain number
of seats on the Board of Directors.
Except
for potential equity financings, and shares to be reserved under the Amended and
Restated 2005 Non-Employee Director Restricted Stock Plan, there are currently
no plans, arrangements, commitments or understandings for the issuance of the
additional shares of Common Stock or Preferred Stock which are to be
authorized.
THE
BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE “FOR” THIS PROPOSAL #2 TO
AMEND THE ARTICLES OF INCORPORATION TO: (1) INCREASE THE NUMBER OF AUTHORIZED
SHARES OF COMMON STOCK FROM 50,000,000 SHARES TO 100,000,000 SHARES AND (2)
AUTHORIZE 50,000,000 SHARES OF PREFERRED STOCK, WHICH MAY BE ISSUED IN ONE OR
MORE SERIES, WITH SUCH RIGHTS, PREFERENCES, PRIVILEGES AND RESTRICTIONS AS SHALL
BE FIXED BY THE COMPANY’S BOARD OF DIRECTORS FROM TIME TO TIME, AS IN EXHIBIT A.
PROXIES SOLICITED BY THE BOARD WILL BE SO VOTED UNLESS SHAREHOLDERS SPECIFY A
CONTRARY VOTE. THE AFFIRMATIVE VOTE OF A MAJORITY OF THE COMPANY'S OUTSTANDING
SHARES OF COMMON STOCK IS REQUIRED FOR APPROVAL OF THIS PROPOSAL #2
PROPOSAL 3 – AMEND AND RESTATE 2005 NON-EMPLOYEE
DIRECTOR RESTRICTED STOCK PLAN
(ITEM
3 ON THE PROXY)
Purpose
of this Proposal
The
purpose of this proposal is to seek shareholder approval of amendments to the
Company's 2005 Non-Employee Director Restricted Stock Plan, as amended and
restated on March 8, 2008. We refer to this plan as the Director Stock Plan. The
Plan increases the number of shares authorized under the Plan from 40,000 to
100,000, and changes the permitted vesting periods.
Our Board
of Directors proposes that you approve this amendment and restatement of the
2005 Non-Employee Director Restricted Stock Plan. The following is a fair and
complete summary of the Plan as proposed to be amended and restated. This
summary is qualified in its entirety by reference to the full text of the Plan
which appears as Exhibit B to this
document.
Description
of the Restricted Stock Plan
The Board
of Directors of the Company plays a key role in setting the direction of the
Company and representing the shareholders’ interests. Ongoing changes
in rules and regulations governing public corporations and in the general
business environment have greatly increased the time and effort required of all
directors of publicly traded companies, including the Company’s non-employee
Directors. The Board of Directors annually reviews the compensation
package for its non-employee Directors to insure that such compensation package
remains competitive and that it (i) compensates its non-employee Directors in a
manner that will help attract qualified candidates to serve as non-employee
Directors, and (ii) induces incumbent non-employee Directors to continue to
serve if the Board of Directors desires that they remain on the
Board.
As part
of accomplishing these objectives, the Board of
Directors adopted and the shareholders approved in 2005 the Petroleum
Development Corporation 2005 Non-Employee Director Restricted Stock
Plan, which is referred to as the “Director Stock Plan”, to provide the
Company’s non-employee Directors with awards of shares of Common Stock, subject
to the restrictions and other provisions of the Director Stock Plan. We refer to
this director stock as “Restricted
Stock.”
The
Director Stock Plan reserved 40,000 shares of the Company’s common stock, par
value $0.01 per share for issuance . To date, 26,156 shares of
Restricted Stock have been issued to the Company’s non-employee
Directors. The Board of Directors has additionally approved a total
of 14,000 restricted shares for the 2008-2009 plan year to the Non-Employee
Directors. In order to insure an adequate reserve of shares of the Company’s
common stock under the Director Stock Plan for the next several years,
which is impacted by the addition of two non-employee Directors to the Board of
Directors, the Board of Directors seeks to increase the reserve of shares of the
Company's common stock from 40,000 to 100,000.
The Director Stock
Plan has also been amended to change the definition as to what constitutes
a “Change in Control” of the Company. As amended, the definition is
compliant with the definition used for a “Change of Control” for purposes
of Section 409A of the Internal Revenue Code . The amended definition
is intended to be consistent with the definition of “Change in Control”
generally used or intended to be used in other Company agreements, including its
employment agreements with its executives.
After
discussions with its compensation consultant, the Board of Directors also has
amended the vesting schedule for the Restricted Stock under the Director Stock
Plan to be consistent with what it believes is industry
standard. Currently, the Director Stock Plan provides that the
awarded shares of restricted stock will vest upon termination of that director's
directorship, whether by retirement from the Board of Directors or by
non-election. Beginning with awards of Restricted Stock issued to non-employee
Directors at the 2008 Annual Meeting, an award of Restricted Stock will vest
100% on July 1 of the calendar year following the award of the Restricted Stock,
if such non-employee Director provides continued service on the Board through
such date. All awards of Restricted Stock made prior to the 2009 plan
year to non-employee directors will vest 100% on July 1,
2008.
The
following table presents the benefits or amounts that will be received by the
various PDC non-employee directors if the shareholders approve the amendments to
the Director Stock Plan as proposed. Because one of the amendments of
the Director Stock Plan that the Board of Directors is proposing the Company
shareholders to approve is the acceleration of vesting, including shares of
Restricted Stock that were awarded in previous years, the table below reflects
the current fair market value as of April 4, 2008, of the shares of Restricted
Stock held by the named directors and assumes that the respective shares were
fully vested as of that date. If the amendments to the Director Stock
Plan are approved by the Company shareholders at the 2008 Annual Meeting, the
shares referenced in the table will vest as of July 1, 2008. On April
4, 2008, the closing price per share of the Company's common stock on the NASDAQ
Stock Exchange was $73.82.
New
Plan Benefits
2005
Non-Employee Director Restricted Stock Plan
|
Date
of
|
Number
of
Restricted
Shares
|
Grant
Date
Fair
Value
of
|
Market
Value of Shares
That
Have
Not
Vested
(2)
|
|||||||||||||||
|
Name
of Non-Employee Director
|
Grant
|
Awarded
|
Award
(1)
|
12/31/2007
|
4/4/2008
|
|||||||||||||
|
Vincent
F. D'Annunzio
|
6/10/2005
|
1,379 | $ | 39,991 | $ | 81,540 | $ | 101,798 | ||||||||||
|
9/15/2006
|
1,379 | 53,753 | 81,540 | 101,798 | ||||||||||||||
|
8/28/2007
|
2,000 | 72,280 | 118,260 | 147,640 | ||||||||||||||
| 4,758 | 166,024 | 281,340 | 351,236 | |||||||||||||||
|
Jeffrey
C. Swoveland
|
6/10/2005
|
1,379 | 39,991 | 81,540 | 101,798 | |||||||||||||
|
9/15/2006
|
1,379 | 53,753 | 81,540 | 101,798 | ||||||||||||||
|
8/28/2007
|
2,000 | 72,280 | 118,260 | 147,640 | ||||||||||||||
| 4,758 | 166,024 | 281,340 | 351,236 | |||||||||||||||
|
Kimberly
Luff Wakim
|
6/10/2005
|
1,379 | 39,991 | 81,540 | 101,798 | |||||||||||||
|
9/15/2006
|
1,379 | 53,753 | 81,540 | 101,798 | ||||||||||||||
|
8/28/2007
|
2,000 | 72,280 | 118,260 | 147,640 | ||||||||||||||
| 4,758 | 166,024 | 281,340 | 351,236 | |||||||||||||||
|
David
C. Parke
|
6/10/2005
|
1,379 | 39,991 | 81,540 | 101,798 | |||||||||||||
|
9/15/2006
|
1,379 | 53,753 | 81,540 | 101,798 | ||||||||||||||
|
8/28/2007
|
2,000 | 72,280 | 118,260 | 147,640 | ||||||||||||||
| 4,758 | 166,024 | 281,340 | 351,236 | |||||||||||||||
|
Anthony
J. Crisafio
|
10/25/2006
|
1,035 | 47,517 | 61,200 | 76,404 | |||||||||||||
|
8/28/2007
|
2,000 | 72,280 | 118,260 | 147,640 | ||||||||||||||
| 3,035 | 119,797 | 179,460 | 224,044 | |||||||||||||||
|
Joseph
E. Casabona
|
11/12/2007
|
1,355 | 64,037 | 80,121 | 100,026 | |||||||||||||
|
Larry
F. Mazza
|
11/12/2007
|
1,355 | 64,037 | 80,121 | 100,026 | |||||||||||||
|
All
non-employee directors as a group
|
24,777 | $ | 911,967 | $ | 1,465,062 | $ | 1,829,040 | |||||||||||
|
(1)
|
Grant
date fair value is computed by multiplying the number of shares awarded by
the closing price of the Company's common stock on the date of grant,
which was $29.00 on June 10, 2005, $38.98 on September 15, 2006, $45.91 on
October 25, 2006, $36.14 on August 28, 2007, and $47.26 on November 12,
2007.
|
|
(2)
|
The
market value of shares is based on the closing price of the Company's
common stock on the respective dates, which
was $59.13 on December 31, 2007, and $73.82 on April 4,
2008.
|
The
Director Stock Plan has also been amended to clarify that a non-employee
Director may satisfy his or her withholding obligations, with respect to
Restricted Stock which has vested and become taxable, by a net exercise which
means that the Company may withhold a certain number of shares equal in market
value to the amount of the withholding tax.
The
Director Stock Plan is being presented to the shareholders for your approval as
required by the Director Stock Plan and listing standards of the NASDAQ Stock
Market.
Vote
Required
The
affirmative vote of a majority of the shares of Common Stock cast at the Annual
Meeting represented in person or by proxy and entitled to vote at the Annual
Meeting is required for approval of the Director Stock Plan, as
amended.
Summary
Description of the Director Stock Plan
The
following summary of the terms of the Director Stock Plan is qualified in its
entirety by reference to the text of the Director Stock Plan, which is attached
as Exhibit B to this Proxy Statement. The amendments to the Director
Stock Plan were adopted by the Board of Directors effective as of March 8, 2008,
subject to your approval.
Administration
The
Director Stock Plan is administered by the Compensation Committee of the Board
of Directors or such other committee of Directors as may be designated by the
Board (the “Committee”).
Eligibility
Only
Directors who are not employees of the Company or its subsidiaries are eligible
to participate in the Director Stock Plan. Currently seven Directors
of the Company are eligible to participate. However, because the size
of the Board could change or other non-employee Directors could be elected, the
total number of persons who will be eligible to participate in the future and
the respective benefits to be accorded to them cannot be determined at this
time.
Stock
Available for Issuance through the Director Stock Plan
Up to
100,000 shares of the Company’s common stock, par value $0.01 per share, are
authorized for issuance through the Director Stock Plan. The Board
has approved 2,000 shares to be issued to each non-employee Director
for the plan year ending on June 30, 2009. If the shareholders
approve the amendments proposed in this proxy statement, there will be 59,844
shares available for future issuance under the Director Stock Plan (after the
2008 awards referenced in this paragraph). Shares issued under the
Director Stock Plan may be either authorized but unissued shares, previously
issued shares of stock reacquired by the Company, including shares purchased in
the open market, or any combination thereof. On April 4, 2008 the
closing price for a share of the Company’s common stock on the NASDAQ National
Market was $73.82.
The
Director Stock Plan provides for appropriate adjustment in the number of shares
of common stock subject to awards and available for future awards in the event
of changes in outstanding common stock by reason of a recapitalization,
reorganization, merger, stock split, or certain other events.
Description
of Awards under the Plan
As of the
date of each annual meeting of shareholders (“Annual Meeting”), each
non-employee Director will be awarded that number of shares of Restricted Stock
as determined by the Board, after consideration of the recommendations of the
Committee. A non-employee Director who is elected to the Board on a date other
than the date of an Annual Meeting will be awarded that number of shares of
Restricted Stock as determined by the Board, after consideration of the
recommendations of the Committee. The amount of the award for the upcoming plan
year will be disclosed in the Company's proxy statement for the Company's Annual
Meeting of Shareholders. For 2008, the Board has determined to award
each non-employee Director 2,000 shares of Restricted Stock on the date of the
Annual Meeting. Non-employee Directors receiving Restricted Stock
will have, subject to the provisions of Director Stock Plan, all of the rights
of a shareholder with respect to the shares of Restricted Stock including the
right to vote the shares and receive cash dividends and other cash distributions
thereon.
Restricted
Stock will be subject to the restrictions for a period (the “Restricted Period”)
commencing on the date as of which the Restricted Stock is awarded and ending on
the earliest of the first to occur of the following:
|
|
·
|
the
retirement of the non-employee Director from the Board in compliance with
the Board's retirement policy as then in
effect;
|
|
|
·
|
the
termination of the non-employee Director's service on the Board as a
result of the non-employee Director's not being nominated for reelection
by the Board.
|
|
|
·
|
the
termination of the non-employee Director's service on the Board because of
the non-employee Director's resignation or failure to stand for reelection
with the consent of the Board (which means approval by at least 80% of the
directors voting, with the affected non-employee Director
abstaining);
|
|
|
·
|
the
termination of the non-employee Director's service on the Board because
the non-employee Director, although nominated for reelection by the Board,
is not reelected by the
shareholders;
|
|
|
·
|
the
termination of the non-employee Director's service on the Board because of
(i) the non-employee Director's resignation at the request of the
Nominating and Governance Committee of the Board, (ii) the
non-employee Director's removal by action of the shareholders or by the
Board, or (iii) a Change in Control of the
Company;
|
|
|
·
|
the
termination of the non-employee Director's service on the Board because of
disability or death. “Disability” will have the meaning
ascribed to such term in the Company's governing long-term disability
plan, or if no such plan exists, at the discretion of the Committee;
or
|
|
|
·
|
continued
service on the Board through July 1 of the calendar year following the
year of the award of the Restricted
Stock;
|
A “Change
in Control” of the Company is deemed to have occurred as of the first day that
any one or more of the following conditions will have been
satisfied:
|
1.
|
Change in
Ownership: A change in ownership of the Company occurs on the date
that any one person, or more than one person acting as a group, acquires
ownership of stock of the Company that, together with stock held by such
person or group, constitutes more than 50% of the total fair market value
or total voting power of the stock of the Company, excluding the
acquisition of additional stock by a person or more than one person acting
as a group who is considered to own more than 50% of the total fair market
value or total voting power of the stock of the
Company.
|
|
2.
|
Change in Effective
Control: A change in effective control of the Company occurs on the
date that either:
|
(A) Any
one person, or more than one person acting as a group, acquires (or has acquired
during the l2-month period ending on the date of the most recent acquisition by
such person or persons) ownership of stock of the Company possessing 30% or more
of the total voting power of the stock of the Company; or
(B) A
majority of the members of the Board is replaced during any l2-month period by
directors whose appointment or election is not endorsed by a majority of the
members of the board of directors prior to the date of the appointment or
election; provided, that this paragraph (B) will apply only to the Company if no
other corporation is a majority shareholder.
|
3.
|
Change in Ownership of
Substantial Assets: A change the ownership of a substantial portion
of the Company's assets occurs on the date that any one person, or more
than one person acting as a group, acquires (or has acquired during the
l2-month period ending on the date of the most recent acquisition by such
person or persons) assets from the Company that have a total gross fair
market value equal to or more than 40% of the total gross fair market
value of the assets of the Company immediately prior to such acquisition
or acquisitions. For this purpose, “gross fair market value” means the
value of the assets of the Company, or the value of the assets being
disposed of, determined without regard to any liabilities associated with
such assets.
|
If a
non-employee Director ceases to be a member of the Board for any other reason,
including but not limited to removal or resignation for “Cause,” the
non-employee Director will forfeit to the Company all Restricted Stock awarded
to the non-employee Director for which the Restricted Period has not
ended. For purposes of the Director Stock Plan, “Cause” will be a
good faith determination by the Board that the non-employee Director (i) failed
to substantially perform his or her duties (other than a failure resulting from
his or her incapacity due to physical or mental illness) after a written demand
for substantial performance has been delivered to the non-Employee Director by
the Board, which demand specifically identifies the manner in which the Board
believes he or she has not substantially performed his or her duties; (ii) has
engaged in conduct the consequences of which are materially adverse to the
Company, monetarily or otherwise; or (iii) has pleaded guilty to or been
convicted of a felony. The non-employee Director will not be deemed
to have been terminated for Cause unless there shall have been delivered to the
non-employee Director a letter setting forth the reasons for the Company's
termination of the non-employee Director for Cause and the Director has failed
to cure that reason for termination within thirty days after the receipt of the
notice.
Following
satisfaction of the Restricted Period, the Restricted Stock will be released to
the non-employee Director, free and clear of all restrictions and other
provisions of the Director Stock Plan. The non-employee Director will
continue to be subject to the restrictions imposed by the federal securities
laws, including resale limitations under the Securities Act of 1933 and the
ownership reporting requirements of Section 16(a) under the Securities Exchange
Act and the short-swing profits provisions of Section 16(b) of the Exchange
Act.
Any
additional Company stock or other securities or property (other than cash) that
may be issued with respect to Restricted Stock as a result of any stock
dividend, stock split, business combination or other event, will be subject to
the restrictions and other provisions of the Director Stock Plan. The
Company will have the right to withhold from any settlement of stock made under
the Director Stock Plan any federal, state, or local taxes of any kind
subsequently required by law to be withheld or paid by the Company on behalf of
a non-employee Director with respect to the settlement. If any such
taxes are imposed, the subject non-employee Director will be required to make
arrangements satisfactory to the Company for the satisfaction of any such
withholding tax obligation, including satisfaction of such withholding tax
obligation through a net exercise. The Company will not be required
to deliver stock under the Director Stock Plan until any such obligation is
satisfied. Neither the establishment of the Director Stock Plan nor
the awarding of Restricted Stock to a non-employee Director will be considered
to give the non-employee Director any right to be retained on, or nominated for
reelection to, the Board, or to any benefits or awards not specifically provided
for by the Director Stock Plan.
Nontransferability
The
Restricted Stock may not be sold, assigned, transferred, pledged, hypothecated
or otherwise disposed of, and neither the right to receive Restricted Stock nor
any interest under the Director Stock Plan may be assigned by a non-employee
Director, until such time as the restriction has lapsed in accordance with the
terms of the Director Stock Plan.
Amendment
and Termination of the Director Stock Plan
The Board
may at any time amend or terminate the Director Stock Plan provided that no
amendment or termination may, without the written consent of the affected
non-employee Director, adversely affect the non-employee Director's rights under
outstanding awards of Restricted Stock. Shareholder approval of any
such amendment will be required if it is required under law or any exchange on
which any of the Company's equity securities are listed.
Tax
Treatment of the Director Stock Plan
The
federal income tax consequences of the issuance of awards under the Director
Stock Plan are described below. The following information is only a
summary of the tax consequences of the awards, and recipients should consult
with their own tax advisors with respect to the tax consequences inherent in the
ownership of the awards.
A
recipient will not be taxed at the date of an award of shares of Restricted
Stock under the Director Stock Plan, but will be taxed at ordinary income rates
on the fair market value of any Restricted Stock as of the date that the
restrictions lapse, unless the recipient, within 30 days after transfer of such
Restricted Stock to the recipient, elects under Section 83(b) of the Code to
include in income the fair market value of the Restricted Stock as of the date
of such transfer. The Company will be entitled to a corresponding
deduction. Any disposition of shares after restrictions lapse will be
subject to the regular rules governing long-term and short-term capital gains
and losses, with the basis for this purpose equal to the fair market value of
the shares at the end of the Restricted Period (or on the date of the transfer
of the Restricted Stock, if the non-employee Director elects to be taxed on the
fair market value upon such transfer). Dividends received by a
recipient during the Restricted Period will be taxable to the recipient at
ordinary income tax rates and will be deductible by the Company unless the
recipient has elected to be taxed on the fair market value of the Restricted
Stock upon transfer, in which case they will thereafter be taxable to the
non-employee Director as dividends and will not be deductible by the
Company.
THE
BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THIS PROPOSAL #3 TO AMEND AND RESTATE
THE 2005 NON-EMPLOYEE DIRECTOR RESTRICTED STOCK PLAN. PROXIES SOLICITED BY THE
BOARD WILL BE SO VOTED UNLESS SHAREHOLDERS SPECIFY A CONTRARY
VOTE. THE AFFIRMATIVE VOTE OF A MAJORITY OF THE SHARES OF COMMON
STOCK CAST AT THE MEETING REPRESENTED IN PERSON OR BY PROXY AND ENTITLED TO VOTE
AT THE MEETING IS REQUIRED FOR APPROVAL OF THIS PROPOSAL #3.
PROPOSAL 4 - RATIFICATION OF SELECTION OF AN INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
The Audit
Committee has the authority to appoint and discharge the independent registered
public accounting firm. On March 8, 2008, the Audit Committee
recommended and the Board ratified, upon the recommendation of the audit
committee, the engagement of PricewaterhouseCoopers LLP ("PwC") as the Company’s
independent registered public accounting firm with respect to its year ending
December 31, 2008. The Board is submitting the appointment of PwC to
the shareholders for ratification. If the appointment of PwC is not
ratified, the Board will require the Audit Committee to reconsider its
selection. A representative of PwC is expected to be present at the
meeting, will have an opportunity to make a statement if he or she so desires,
and will also be available to respond to appropriate questions. It is
not expected that representatives of KPMG LLP ("KPMG"), the Company’s
independent registered public accounting firm for 2006, will be present at the
2008 Annual Meeting of Shareholders.
During
the Company’s fiscal years ended December 31, 2006 and 2005, and through May 24,
2007, the Company did not consult with PwC regarding either (i) the application
of accounting principles to a specified transaction, either completed or
proposed, or the type of audit opinion that might be rendered on the Company’s
financial statements, and neither a written report was provided to the Company
nor oral advice was provided that PwC concluded was an important factor
considered by the Company in reaching a decision as to any of the accounting,
auditing or financial reporting issues; or (ii) any matter that was either the
subject of a disagreement, as that term is defined in paragraph 304(a)(1)(iv) of
Regulation S-K, or a reportable event required to be reported under paragraph
304(a)(1)(v) of Regulation S-K.
On May
24, 2007, the Audit Committee recommended, and the Board ratified, the dismissal
of KPMG as its independent registered public accounting firm. The
audit reports of KPMG on the consolidated financial statements of the Company as
of December 31, 2006 and 2005, and for the three years ended December 31, 2006,
contained no adverse opinion or disclaimer of opinion, nor were such reports
qualified or modified as to uncertainty, audit scope or accounting principles,
except as follows:
The audit
report of KPMG on the Company’s consolidated financial statements as of December
31, 2006 and 2005, and for the three years ended December 31, 2006, dated May
22, 2007, indicated that, as described in Note 1 to such consolidated financial
statements, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 123(R), Share-Based Payment, and the Company changed
its method of quantifying errors based on SEC Staff Accounting Bulletin No. 108,
Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements, in 2006.
The audit
reports of KPMG on management's assessment of the effectiveness of internal
control over financial reporting and the effectiveness of internal control over
financial reporting as of December 31, 2006 and 2005, did not contain any
adverse opinion or disclaimer of opinion, nor were they qualified or modified as
to uncertainty, audit scope, or accounting principles, except that:
|
|
(1)
|
KPMG's
report as of December 31, 2006, includes an explanatory paragraph stating
that “the Company acquired Unioil on December 6, 2006, and management
excluded from its assessment of the effectiveness of the Company's
internal control over financial reporting as of December 31, 2006,
Unioil’s internal control over financial reporting associated with total
assets of $26.1 million and total revenues of $0.3 million included in the
consolidated financial statements of the Company as of and for the year
ended December 31, 2006. Our audit of internal control over
financial reporting of the Company also excluded an evaluation of the
internal control over financial reporting of
Unioil.”
|
|
|
(2)
|
KPMG’s
reports indicate that the Company did not maintain effective internal
control over financial reporting as of December 31, 2006 and 2005, because
of the effect of material weaknesses on the achievement of the objectives
of the control criteria as described
below:
|
Material Weaknesses as of
December 31, 2006, Identified in KPMG’s Report
|
|
·
|
The
Company did not have effective policies and procedures to ensure the
timely reconciliation, review and adjustment of significant balance sheet
and income statement accounts. As a result, material
misstatements were identified during the Company's closing process in
certain significant balance sheet and income statement accounts of the
Company’s 2006 consolidated financial statements. This
deficiency resulted in a more than remote likelihood that a material
misstatement of the Company’s annual or interim financial statements would
not be prevented or detected.
|
|
|
·
|
The
Company did not have effective policies and procedures, or personnel with
sufficient technical expertise to ensure proper accounting for derivative
instruments. Specifically, the Company’s internal control
processes did not ensure the completeness of all derivative contracts
related to oil and gas sales, and also did not ensure the determination of
the fair value of certain derivatives. As a result,
misstatements were identified in the fair value of derivatives and related
income statement accounts of the Company’s 2006 consolidated financial
statements. This deficiency resulted in a more than remote
likelihood that a material misstatement of the Company’s annual or interim
financial statements would not be prevented or
detected.
|
|
|
·
|
The
Company did not have effective policies and procedures to ensure proper
accounting for oil and gas properties. Specifically, the
Company’s review procedures were not sufficient to ensure that the
calculations of depreciation and depletion were performed accurately and
that the capitalization of costs was performed in accordance with the
applicable authoritative accounting guidance. As a result,
misstatements were identified in 2006 in depreciation, depletion and
amortization expense of the Company’s consolidated financial
statements. This deficiency resulted in a more than remote
likelihood that a material misstatement of the Company’s annual or interim
financial statements would not be prevented or
detected.
|
Material Weaknesses as of
December 31, 2005, Identified in KPMG’s Report
The
Company did not have effective policies and procedures, and was not adequately
staffed with accounting personnel possessing an appropriate level of technical
expertise in U.S. generally accepted accounting principles, as further described
below:
|
|
·
|
The
Company did not have effective policies and procedures, or personnel with
sufficient technical expertise, to properly account for derivative
transactions in accordance with generally accepted accounting
principles. Specifically, the Company's policies and procedures
relating to derivatives transactions were not designed effectively to
ensure that each of the requirements for hedge accounting was evaluated
appropriately with respect to the Company's commodity based
derivatives. Additionally, the Company's policies and
procedures relating to the derivative transactions entered into on behalf
of affiliated partnerships were not adequate to ensure these transactions
were recorded properly in the financial statements. As a
result, a misstatement was identified in the fair value of derivatives and
the oil and gas price risk management loss accounts that was corrected
prior to the issuance of the Company's 2005 consolidated financial
statements. This deficiency results in more than a remote
likelihood that a material misstatement of the Company's annual or interim
consolidated financial statements would not be prevented or
detected.
|
|
|
·
|
The
Company did not have effective policies and procedures, or personnel with
sufficient technical expertise, to ensure compliance with appropriate
accounting principles for its oil and gas
properties. Specifically, the Company's policies and procedures
were not designed effectively to ensure that the calculation of
depreciation and depletion and the determination of impairments were
performed in accordance with the applicable authoritative accounting
guidance. As a result, misstatements were identified in the
accumulated depreciation, depletion and amortization and the depreciation,
depletion and amortization expense accounts that was corrected prior to
the issuance of the Company's 2005 consolidated financial
statements. This deficiency results in more than a remote
likelihood that a material misstatement of the Company's annual or interim
consolidated financial statements would not be prevented or
detected.
|
|
|
·
|
The
Company did not have effective policies and procedures, or personnel with
sufficient technical expertise, to ensure proper accounting and disclosure
for income taxes. Specifically, the Company's policies and
procedures did not provide for appropriate control documentation or
supervisory review of permanent and temporary differences, or assessment
of tax reserves to ensure that they were properly reflected and disclosed
in the Company's financial statements. As a result,
misstatements were identified in the deferred income tax liability and
income tax expense accounts in the Company's preliminary 2005 consolidated
financial statements. This deficiency results in more than a
remote likelihood that a material misstatement of the Company's annual or
interim consolidated financial statements would not be prevented or
detected.
|
|
|
·
|
The
Company did not have effective policies and procedures, or personnel with
sufficient technical expertise, to ensure that its accounting for asset
retirement obligations complied with generally accepted accounting
principles. Specifically, the Company's policies and procedures
regarding the estimate of the fair value of the asset retirement
obligations were not designed effectively to ensure that it was estimated
in accordance with FAS No. 143, Asset Retirement
Obligations. This deficiency results in more than a
remote likelihood that a material misstatement of the Company's annual or
interim consolidated financial statements would not be prevented or
detected.
|
|
|
·
|
The
Company did not have effective policies and procedures, or personnel with
sufficient technical expertise, to provide for adequate monitoring and
assessment of the application of accounting principles, standards or rules
as it relates to proportionate consolidation in a timely
manner. As a result of this control deficiency, the Company did
not appropriately eliminate its proportionate share of transactions with
the Company sponsored limited partnerships, which resulted in the
restatement of the Company's financial statements for the first three
quarters of 2005, the years ended December 31, 2004, 2003, 2002, and 2001
and each of the quarters in 2004 and
2003.
|
During
the two years ended December 31, 2006, and the subsequent interim period through
May 24, 2007, there were no: 1) disagreements with KPMG on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure that, if not resolved to KPMG’s satisfaction, would have
caused KPMG to make reference to the subject matter of the disagreement in
connection with its audit reports on the Company’s financial statements for such
years, or 2) reportable events, except for the material weaknesses described
above.
KPMG has
been authorized to respond fully to the inquiries of the successor independent
registered public accounting firm concerning the subject matter of the
foregoing.
In
connection with its change in independent registered public accounting firm, the
Company provided KPMG with a copy of the foregoing statements and requested that
KPMG furnish the Company with a letter addressed to the Securities and Exchange
Commission stating whether KPMG agreed with the foregoing statements, and, if
not, stating the respects in which KPMG did not agree. KMPG furnished
the Company with such a letter, addressed to the SEC. A copy of
KPMG's letter was filed as an Exhibit to a Current Report on Form 8-K filed with
the SEC on May 31, 2007.
Principal
Accountant Fees and Services
The
following table presents the aggregate fees billed to the Company by PwC and
KPMG for services.
|
PwC
|
KPMG
|
|||||||||||||||
|
2007
|
2006
|
2007
|
2006
|
|||||||||||||
|
Audit
fees
(1)
|
$ | 3,516,203 | $ | - | $ | 640,659 | $ | 3,261,822 | ||||||||
|
Audit
related fees
(2)
|
238,771 | - | 205,234 | 983,701 | ||||||||||||
|
Tax
fees
(3)
|
1,212,035 | 346,743 | - | - | ||||||||||||
|
Other
fees
(4)
|
65,416 | - | 99,013 | - | ||||||||||||
|
Total
fees
|
$ | 5,032,425 | $ | 346,743 | $ | 944,906 | $ | 4,245,523 | ||||||||
_______________
|
(1)
|
Audit
fees consist of the aggregate fees billed for professional services
rendered for audit procedures performed with regard to the Company's of
our annual consolidated financial statements and the report on
management's assessment of internal control over fianncial reporting and
the effectiveness of the Company's internal control over financial
reporting, including reviews of the consolidated financial statements
included in our Quarterly Reports on Form 10-Q, and services that are
normally provided by the independent registered public accounting firm in
connection with statutory and regulatory filings or
engagements.
|
|
(2)
|
Audit-related
fees consist of the aggregate fees billed for assurance and related
services that are reasonably related to the performance of the audit or
review of the Company's consolidated financial statements and are not
reported under “Audit fees.” Fees billed by PwC include
primarily amounts related to the offering of the Company's 12% Senior
Notes. Fees billed by KPMG include amounts related to the audit
of the annual financial statements of the Company-sponsored drilling
partnerships.
|
|
(3)
|
Tax
fees consist of the aggregate fees billed for professional services
rendered for tax compliance, tax advice and tax planning for the Company
and its Company-sponsored drilling
partnerships.
|
|
(4)
|
All
other fees consist of aggregate fees billed for products and services
other than the services reported above. Fees billed by PwC were
for services related to the investigation of the potential offering of a
MLP. Fees billed by KPMG were for services related to the
Company's 12% Senior Notes Offering
Memorandum.
|
Audit
Committee Pre-Approval Policies and Procedures
The
Sarbanes-Oxley Act of 2002 requires that all services provided to the Company by
its Independent Registered Public Accounting Firm be subject to pre-approval by
the Audit Committee or authorized members of the Committee. The Audit
Committee has adopted policies and procedures for pre-approval of all audit
services and non-audit services to be provided by the Company's Independent
Registered Public Accounting Firm. Services necessary to conduct the
annual audit must be pre-approved by the Audit Committee annually at a
meeting. Permissible non-audit services to be performed by the
independent accountant may also be approved on an annual basis by the Audit
Committee if they are of a recurring nature. Permissible non-audit
services, which are not eligible for annual pre-approval, to be conducted by the
independent accountant must be pre-approved individually by the full Audit
Committee or by an authorized Audit Committee member. Actual fees
incurred for all services performed by the independent accountant will be
reported to the Audit Committee after the services are fully
performed. The duties of the Committee are described in the Audit
Committee Charter, which is available at the Company's website under Corporate
Governance.
THE
BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THIS PROPOSAL #4. PROXIES
SOLICITED BY THE BOARD WILL BE SO VOTED UNLESS SHAREHOLDERS SPECIFY A CONTRARY
VOTE. THE AFFIRMATIVE VOTE OF A MAJORITY OF THE SHARES OF COMMON
STOCK CAST AT THE MEETING REPRESENTED IN PERSON OR BY PROXY AND ENTITLED TO VOTE
AT THE MEETING IS REQUIRED FOR APPROVAL OF THIS PROPOSAL #4.
The Audit
Committee of the Board is composed of five directors (four prior to October
2007) and operates under a written charter adopted by the Board of
Directors. Each member of the committee meets the independence
requirements of Rule 4200(a)(15) of the NASDAQ's listing
standards. The duties of the Committee are summarized in this proxy
statement under "Committees of the Board of Directors" and are more fully
described in the charter, which is available at the Company’s website under
“Corporate Governance.”
Management
is responsible for the Company's internal controls and preparation of the
consolidated financial statements in accordance with generally accepted
accounting principles. The Company's Independent Registered Public
Accounting Firm is responsible for performing an independent audit of
consolidated financial statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States) and issuing a report
thereon. The Committee's responsibilities include monitoring and
overseeing these processes.
The
Committee met nine times during 2007, and has continued to meet frequently
during 2008. In addition to normal meetings to accomplish the work of
the Committee, the Committee also held numerous meetings with the management of
the Company and PricewaterhouseCoopers LLP ("PwC") to review the progress on the
implementation of improved internal controls early in the year, and regarding
the causes, impacts and corrective measures related to the Company's historical
accounting errors and financial statements at various times throughout 2007 and
into early 2008.
In this
context, the Committee reviewed and discussed the Company's audited consolidated
financial statements for the year ended December 31, 2007 (the "audited
financial statements") with management and the Company's Independent Registered
Public Accounting Firm for 2007, PwC. The Committee also discussed
with PwC the matters required to be discussed by Statement of Auditing Standards
No. 61, as amended (Communication with Audit
Committees), and PwC directly provided reports on significant matters to
the Committee.
The
Committee has received the written disclosures and the letter from PwC required
by Independence Standards Board Standard No. 1 (Independence Discussion with Audit
Committees), and has discussed with PwC its independence from the
Company.
The
Committee has discussed with management and PwC such other matters and received
such assurances from them as the Committee deemed appropriate.
Based on
the foregoing review and discussions and relying thereon, the Committee
recommended that the Board of Directors include the audited financial statements
in the Company's Annual Report on Form 10-K for the year ended December 31,
2007.
On March
8, 2008, the Board approved the Committee's recommendation to appoint PwC to
serve as the Company's Independent Registered Public Accounting Firm for
2008. In connection therewith, the Audit Committee considered whether
the provision of non-audit services by PwC prior to their engagement was
compatible with maintaining the Independent Registered Public Accounting Firm’s
independence. This appointment is subject to ratification by the
Company's shareholders.
Jeffrey
C. Swoveland, Chair
Kimberly
Luff Wakim
David C.
Parke
Anthony
J. Crisafio
Joseph E.
Casabona
AUDIT
COMMITTEE
of
the Board of Directors
ALL OTHER BUSINESS THAT MAY COME BEFORE THE 2008
ANNUAL MEETING
As of the
date of this proxy statement, the Board is not aware of any matters to be
brought before the 2008 Annual Meeting other than the matters set forth in this
proxy statement. However, if other matters properly come before the
meeting, it is the intention of the proxy holders named in the enclosed form of
proxy to vote in accordance with their discretion on such matters pursuant to
such proxy.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The
following table sets forth certain information regarding ownership of the
Company's common stock as of April 4, 2008, by (a) each person known by the
Company to own beneficially more than 5% of the outstanding shares of common
stock; (b) each director of the Company; (c) each executive officer; and (d) all
directors and executive officers as a group. As of April 4, 2008,
14,849,007 common shares of the Company were issued and
outstanding.
|
Name
and Address of Beneficial Owner
|
Number
of
Shares
Beneficially
Owned
|
Percent
of
Shares
Beneficially
Owned
|
||||||
|
FMR
LLC
|
||||||||
|
82
Devonshire Street
|
||||||||
|
Boston,
MA 02109
|
2,276,260 | (1) | 15.3 | % | ||||
|
Steinberg
Asset Management, LLC
|
||||||||
|
12
East 49th Street
|
||||||||
|
New
York, NY 10017
|
1,531,255 | (2) | 10.3 | % | ||||
|
Dimensional
Fund Advisors LP
|
||||||||
|
1299
Ocean Avenue
|
||||||||
|
Santa
Monica, CA 90401
|
1,238,580 | (3) | 8.3 | % | ||||
|
Kayne
Anderson Rudnick Investment Management, LLC
|
||||||||
|
1800
Avenue of the Stars, 2nd Floor
|
||||||||
|
Los
Angeles, CA 90067
|
917,857 | (4) | 6.2 | % | ||||
|
Barclays
Global Investors, NA.
|
||||||||
|
45
Fremont Street
|
||||||||
|
San
Francisco, CA 94105
|
842,151 | (5) | 5.7 | % | ||||
|
Steven
R. Williams
|
297,665 | (6) | 2.0 | % | ||||
|
Eric
R. Stearns
|
65,573 | (7) | * | |||||
|
Richard
W. McCullough
|
2,364 | (8) | * | |||||
|
Darwin
L. Stump
|
22,546 | (9) | * | |||||
|
Daniel
W. Amidon
|
- | (10) | * | |||||
|
Barton
R. Brookman, Jr.
|
7,182 | (11) | * | |||||
|
Vincent
F. D'Annunzio
|
22,317 | (12) | * | |||||
|
Jeffrey
C. Swoveland
|
10,158 | (13) | * | |||||
|
Kimberly
Luff Wakim
|
3,099 | (14) | * | |||||
|
David
C. Parke
|
1,371 | (15) | * | |||||
|
Anthony
J. Crisafio
|
- | (16) | * | |||||
|
Joseph
E. Casabona
|
- | (17) | * | |||||
|
Larry
F. Mazza
|
- | (18) | * | |||||
|
All
directors and executive officers as a group (13 persons)(19)
|
432,275 | (20) | 2.9 | % | ||||
_______________
*
Represents less than 1% of the outstanding shares of common stock.
|
(1)
|
According
to the Schedule 13G filed by FMR LLC with the SEC on February 14,
2008.
|
|
(2)
|
According
to the Schedule 13G filed by Steinberg Asset Management, LLC with the SEC
on February 11, 2008.
|
|
(3)
|
According
to the Schedule 13G filed by Dimensional Fund Advisors LP with the SEC on
February 6, 2008.
|
|
(4)
|
According
to the Schedule 13G filed by Kayne Anderson Rudnick Investment Management,
LLC with the SEC on February 8,
2008.
|
|
(5)
|
According
to the Schedule 13G filed by Barclays Global Investors, NA. with the SEC
on February 6, 2008.
|
|
(6)
|
Excludes
43,070 restricted shares subject to vesting greater than 60 days; includes
8,160 shares subject to options exercisable within 60 days of April 4,
2008.
|
|
(7)
|
Excludes
21,778 restricted shares subject to vesting greater than 60 days; includes
4,939 shares subject to options exercisable within 60 days of April 4,
2008.
|
|
(8)
|
Excludes
22,126 restricted shares subject to vesting greater than 60 days; includes
833 shares subject to options exercisable within 60 days of April 4,
2008.
|
|
(9)
|
Excludes
7,807 restricted shares subject to vesting greater than 60 days; includes
4,348 shares subject to options exercisable within 60 days of April 4,
2008.
|
|
(10)
|
Excludes
11,511 restricted shares subject to vesting greater than 60
days.
|
|
(11)
|
Excludes
19,893 restricted shares subject to vesting greater than 60
days.
|
|
(12)
|
Excludes
2,000 restricted shares subject to vesting greater than 60
days.
|
|
(13)
|
Excludes
4,758 restricted shares subject to vesting greater than 60
days.
|
|
(14)
|
Excludes
3,379 restricted shares subject to vesting greater than 60
days.
|
|
(15)
|
Excludes
4,758 restricted shares subject to vesting greater than 60
days.
|
|
(16)
|
Excludes
3,035 restricted shares subject to vesting greater than 60
days.
|
|
(17)
|
Excludes
1,355 restricted shares subject to vesting greater than 60
days.
|
|
(18)
|
Excludes
1,355 restricted shares subject to vesting greater than 60
days.
|
|
(19)
|
Address: 120
Genesis Blvd., Bridgeport,
WV 26330
|
|
(20)
|
Excludes
148,825 restricted shares subject to vesting greater than 60 days;
includes 18,280 shares subject to options exercisable within 60
days.
|
Section 16(a) Beneficial Ownership Reporting
Compliance
Section
16(a) of the Exchange Act requires the Company's officers and directors, and
persons who own more than 10% of the Company's equity securities, to file
reports of ownership and changes in ownership with the Securities and Exchange
Commission. Officers, directors and holders of more than 10% of the
common stock are required by regulations promulgated by the Commission pursuant
to the Exchange Act to furnish the Company with copies of all Section 16(a)
forms they file. The Company assists officers and directors, and will
assist beneficial owners, if any, of more than 10% of the common stock, in
complying with the reporting requirements of Section 16(a) of the Exchange
Act.
Based
solely on its review of the copies of such forms received by it, the Company
believes that since January 1, 2007, all Section 16(a) filing requirements
applicable to its directors, officers and greater than 10% beneficial owners
were met with the following exception. On December 13, 2007,
restricted stock vested for the following persons: Steven R. Williams, Thomas E.
Riley, Richard W. McCullough, Eric R. Stearns and Darwin L. Stump, and such
officers elected to receive the restricted stock net of stock sufficient to pay
taxes, which was withheld to pay taxes. This stock withholding was
reportable, and was not reported until December 21, 2007.
Corporate
Governance Guidelines
The Board
has adopted Corporate Governance Guidelines that govern the structure and
functioning of the Board and establish the Board's policies on a number of
corporate governance issues. The Guidelines are posted under
“Governance Policies” in the Corporate Governance section of the Company's
internet site at www.petd.com. They
are also available to any shareholder on request; see "Contact Information"
above.
The
Company's By-Laws provide that the number of members of the Board of Directors
shall be designated from time to time by a resolution of the Board; and the
Board has currently designated the number of directors as nine. The
By-Laws provide that the Board shall be divided into three separate classes of
directors which are required to be as nearly equal in number as
practicable. At each annual meeting of shareholders one class of
directors, whose term expires, will be elected to a term of three
years. The classes are staggered so that the term of one class
expires each year. There is no family relationship between any
director or executive officer and any other director or executive officer of the
Company. There are no arrangements or understandings between any
director or officer and any other person pursuant to which the person was
selected as an officer.
Subject
to some exceptions and transition provisions, the NASDAQ Listing standards
generally provide that a director will not be independent if:
|
|
(A)
|
the
director is, or at any time during the past three years was, employed by
the Company;
|
|
|
(B)
|
the
director or a member of the director's immediate family has received from
the Company compensation of more than $100,000 during any period of 12
consecutive months within the three years preceding the determination of
independence other than for service as a director; or compensation paid to
a family member who is an employee of the Company (other than an executive
officer);
|
|
|
(C)
|
the
director is a family member of an individual who is, or at any time during
the past three years was, an executive officer of the
Company;
|
|
|
(D)
|
the
director or a member of the director's immediate family is a partner in,
or a controlling person of, or an executive officer of any organization to
which PDC made, or from which PDC received, payments for property or
services in the current or any of the three past fiscal years that exceed
5% of the recipient’s consolidated gross revenues for that year, or
$200,000, whichever is more;
|
|
|
(E)
|
the
director or a member of the director's immediate family is employed as an
executive officer of another entity where at any time during the past
three years any of the Company’s executive officers serves on the
compensation committee of the other entity;
or
|
|
|
(F)
|
the
director or a member of the director's immediate family is a current
partner of PwC, the Company's independent registered public accounting
firm, or during the past three years was a partner or employee of either
PwC or KPMG, the Company's former independent registered public accounting
firm.
|
Audit
Committee members are subject to additional, more stringent NASDAQ and Exchange
Act requirements.
The Board
has reviewed business and charitable relationships between the Company and each
non-employee director to determine compliance with the NASDAQ Listing standards
described above and to evaluate whether there are any other facts or
circumstances that might impair a director's independence. The Board
has determined that all non-employee directors are independent under NASDAQ
Marketplace Rule 4200 and the Exchange Act.
The Board
met 15 times in 2007. Each of PDC's directors attended at least 75%
of the aggregate Board and committee meetings (on which he or she served) during
2007.
Annual
Meeting Attendance
As
specified in the Company's Corporate Governance Guidelines, directors are
strongly encouraged to attend the annual meeting of shareholders. All
directors attended last year's meeting.
The
following table identifies the current membership and chair of the five standing
committees of the Board.
|
Name
|
Audit
|
Compensation
|
Executive
|
Nominating
and Governance
|
Planning
and
Finance
|
||||||||||
|
Jeffrey
C. Swoveland
|
Chair
|
–
|
Member
|
–
|
Member
|
||||||||||
|
Kimberly
Luff Wakim
|
Member
|
Member
|
–
|
Member
|
–
|
||||||||||
|
Vincent
F. D'Annunzio
|
–
|
Member
|
Member
|
Chair
|
–
|
||||||||||
|
David
C. Parke
|
Member
|
Chair
|
|
–
|
Member
|
Chair
|
|||||||||
|
Anthony
J. Crisafio
|
Member
|
Member
|
–
|
–
|
–
|
||||||||||
|
Larry
F. Mazza
|
–
|
Member
|
–
|
Member
|
–
|
||||||||||
|
Joseph
E. Casabona
|
Member
|
–
|
–
|
–
|
Member
|
||||||||||
|
Richard
W. McCullough
|
–
|
–
|
Member
|
–
|
Member
|
||||||||||
|
Steven
R. Williams
|
–
|
–
|
Chair
|
–
|
–
|
||||||||||
The
non-employee directors generally meet in "executive sessions" without the
presence of employee directors at their discretion in connection with each
regularly scheduled board meeting. Mr. Swoveland serves as Presiding
Independent Director at these sessions; however, the other non-employee
directors may, in the event of his absence, select another director to preside
over a particular session.
Audit
Committee
The Audit
Committee, which met nine times in 2007, is composed entirely of persons whom
the Board has determined to be independent under NASDAQ Marketplace Rule
4200(a)(15), Section 301 of the Sarbanes-Oxley Act of 2002 and Section 10A(m)(3)
of the Exchange Act.. Mr. Swoveland chairs the committee; other audit
committee members are Ms. Wakim and Messrs. Parke, Crisafio and
Casabona. The Board has determined that Mr. Swoveland and the other
Audit Committee members qualify as audit committee financial experts as defined
by SEC regulations and are all, without exception, independent of
management. The Audit Committee’s purpose is to assist the Board in
monitoring the integrity of the financial reporting process, systems of internal
controls and financial statements of the Company, and compliance by the Company
with legal and regulatory requirements. Additionally, the committee
is directly responsible for the appointment, compensation and oversight of the
independent auditors employed by the Company for the purpose of preparing or
issuing an audit report or related work and to assess the need for an internal
audit function and recommend its establishment when deemed
appropriate.
In
performing its responsibilities, the Audit Committee monitors the integrity of
the Company's financial reporting process and systems of internal controls
regarding finance, accounting and legal compliance; monitors the independence of
the Independent Registered Public Accounting Firm; and provides an avenue of
communications among the Independent Registered Public Accounting Firm,
management and the Board of Directors. The Board has adopted a
Charter of the Audit Committee which is posted on the Company's
website. The Board continues to assess the adequacy of the Charter
and will revise it as necessary.
Compensation
Committee
The Board
has determined that all members of the Compensation Committee are independent of
the Company under Rule 4200(a)(15) of the NASDAQ's listing
standards. The Compensation Committee met 10 times in
2007. The Board has adopted a Compensation Committee Charter which is
posted on the Company's website.
The
purpose and functions of the Compensation Committee are to (1) oversee the
development of a compensation strategy for the Company, (2) oversee the
administration of the Company's compensation programs, (3) evaluate the
performance of and set compensation for the Chief Executive Officer, (4) review
and approve the elements of compensation for other executive officers of the
Company, (5) negotiate the terms of employment agreements with executive
officers of the Company, (6) review and recommend to the full Board compensation
of the Company's Directors and changes in compensation levels to the Board of
Directors, (7) approve equity grants and recommend equity-based incentive plans
necessary to implement the Company's compensation strategy, and (8) administer
all equity-based incentive programs of the Company.
Compensation
Committee Interlocks and Insider Participation.
There are
no Compensation Committee interlocks.
Executive
Committee
The
purpose and functions of the Executive Committee are to exercise the powers and
duties of the Board between Board meetings and, while the Board is not in
session, implement the policy decisions of the Board. The Board has
adopted an Executive Committee Charter which is posted on the Company's
website.
Nominating
and Governance Committee
The Board
has determined that all members of the Nominating and Governance Committee are
independent of the Company under Rule 4200(a)(15) of the NASDAQ's listing
standards. The Nominating and Governance Committee met five times in
2007. The purpose and functions performed by the Committee are to (1)
assist the Board by identifying individuals qualified to become Board members
and to recommend to the Board the director nominees for the next annual meeting
of shareholders or fill any vacancies; (2) recommend to the Board corporate
governance guidelines applicable to the Company; (3) lead the Board in its
annual review of the Board's performance and (4) recommend to the Board director
nominees for each committee. The Board has adopted a Charter for the
Nominating and Governance Committee. The Charter has been posted on
the Company's website.
Director
Qualifications and Selection
The Board
has adopted Director Nomination Procedures that prescribe the process the
Nominating and Governance Committee will use to select the Company’s nominees
for election to the Board. The Nominating and Governance Committee
evaluates each candidate based on the candidate's level and diversity of
experience and knowledge (specifically within the industry and relevant
industries in which the Company operates, as well as his or her general overall
experience and knowledge), skills, education, reputation and integrity,
professional stature and other factors that may be relevant depending on the
particular candidate.
Additional
factors considered by the Committee include the size and composition of the
Board at a particular time, and allowing the Company to benefit from having a
broad mixture of skills, experience and perspectives on the
Board. Accordingly, one or more of these factors may be given more
weight in a particular case at a particular time, no single factor would be
viewed as determinative, and the Committee has not specified any minimum
qualifications that the Committee believes must be met by any particular
nominee. The Company's Director Nomination Procedures are posted on
the Company's website.
The
Committee identifies director candidates primarily through recommendations made
by the non-employee directors. These recommendations are developed
based on the directors' own knowledge and experience in a variety of fields, and
research conducted by PDC staff at the Committee's direction. The
Committee also considers recommendations made by the employee directors,
employees, shareholders, and others, including search firms. All
recommendations, regardless of the source, are evaluated on the same basis
against the criteria contained in the guidelines. The Committee has
the authority to engage consultants to help identify or evaluate potential
director nominees but has not done so recently.
Shareholder
Recommendations
The
Company's Nominating and Governance Committee will consider director candidates
recommended by shareholders of the Company. Any shareholder who
wishes to recommend a prospective Board nominee to the Committee should notify
the Nominating and Governance Committee of their recommendation by writing to
the Committee at the Company's headquarters, or by sending the information via
email to board@petd.com. All
recommendations will be received by the Nominating and Governance
Committee.
A
submission recommending a candidate should include:
|
|
·
|
Sufficient
biographical information to allow the Committee to evaluate the candidate
in light of the guidelines;
|
|
|
·
|
An
indication as to whether the proposed candidate will meet the requirements
for independence under the NASDAQ
guidelines;
|
|
|
·
|
Information
concerning any relationships between the candidate and the shareholder
recommending the candidate; and
|
|
|
·
|
Material
indicating the willingness of the candidate to serve if nominated and
elected.
|
Shareholder
Nominations
Shareholders
who wish to may nominate candidates for election to the Board. The
Company's By-Laws require shareholders who wish to submit nominations of persons
for election to the Board of Directors at the annual meeting of shareholders to
follow certain procedures. The shareholder must give written notice
to the Corporate Secretary at Petroleum Development Corporation, 120 Genesis
Boulevard, Bridgeport, West Virginia 26330 or may email notice to board@petd.com, not
later than 80 days prior to the first anniversary of the preceding year's annual
meeting or within 10 days of the Company's public announcement of the date of
its annual shareholder meeting. The shareholder notice also must be
received by the Company no earlier than 90 days prior to the annual meeting. The
shareholder must be a shareholder of record at the time the notice is
given. The written notice must set forth (a) as to each nominee all
information relating to that person that is required to be disclosed in
solicitations of proxies for election of directors in an election contest, or is
otherwise required, in each case pursuant to Regulation 14A under the Securities
Exchange Act of 1934 (including such person's written consent to being named in
the proxy statement as a nominee and to serving as a director if elected); (b)
as to the shareholder giving the notice and the beneficial owner, if any, on
whose behalf the nomination is made (1) the name and address of the shareholder,
as they appear on the Company's books, and of such beneficial owner and (2) the
class and number of shares of the Company's securities that are beneficially
owned by such shareholder and the beneficial owner; and (c) any material
interest of such shareholder and such beneficial owner in such
nomination.
Planning
and Finance Committee
The
purpose of the Planning and Finance Committee is to oversee the responsibilities
of the Board relating to planning and finance, including: (1) to organize and
oversee the Board’s participation in the development of the Strategic Plan and
the risk assessment and management process; (2) to follow the progress in the
implementation of the Strategic Plan and to advise the Board if additional Board
action appears to be needed to assure successful implementation of the plan or
if a need exists to revise the plan in the face of changing conditions or other
factors; (3) to assure that management is addressing the personnel requirements
for the successful implementation of the Strategic Plan; (4) to assure that a
talent-rich organization is being developed to address both current and future
leadership needs; (5) to assure that robust management development and
succession planning processes are developed and implemented for management at
all levels in the Company; and (6) work with the CFO and other executive
management regarding corporate financial matters including operating and capital
budgets, capital structure, dividends, and other significant financial and
capital issues. The Board has adopted a charter for the Planning and
Finance Committee which is posted on the Company’s website.
CEO
Succession
During
2007 the current CEO communicated to the Board his intention to retire during
2008. The Board designated a committee comprised of five independent Board
members serving at the time (Swoveland (Chair), Wakim, D'Annunzio, Parke and
Crisafio) to serve as a search committee for a new CEO and to recommend a successor to the Board.
The Search Committee developed a process, identified and evaluated candidates,
and recommended to the Board that Richard W. McCullough, the Company's CFO be the next CEO.
In December 2007, the full Board approved the
recommendation.
Shareholders
wishing to communicate with the Board or a committee may do so by writing to the
attention of the Board or Committee at the corporate headquarters or by emailing
the Board at board@petd.com, with
"Board" or appropriate committee in the subject line.
In
January 2003, the Company adopted its Code of Business Conduct and Ethics, as
amended (the “Code of Conduct”) applicable to all directors, officers,
employees, agents and representatives of the Company and
consultants. The Company's principal executive officer, principal
financial officer and principal accounting officer are subject to additional
specific provisions under the Code of Conduct. The Company's Code of
Conduct is posted on its website at www.petd.com. In
the event of an amendment to, or a waiver of, including an implicit waiver, the
Code of Conduct, the Company will disclose the information on its internet
website. On November 17, 2007, the Board approved a waiver of regarding any
potential conflict related to the service of Mr. Swoveland on the Board of
Directors of Linn Energy LLC. If the Board of Directors becomes aware
of a potential conflict in the future, the Board of Directors will consider at
that time whether or not to continue this waiver.
Policies and Procedures with Respect to
Transactions with Related Persons
The Board
has adopted a written policy for the review, approval and ratification of
transactions that involve related parties and potential conflicts of
interest.
The
related party transaction policy applies to each director and executive officer
of the Company, any nominee for election as a director, any security holder who
is known to own more than five percent of the Company's voting securities, any
immediate family member of any of the foregoing persons and any corporation,
firm or association in which one or more of the Company's directors are
directors or officers, or have a substantial financial
interest.
Under the
related party transaction policy a related person transaction is a transaction
or arrangement involving a related person in which the Company is a participant
or that would require disclosure in the Company's filings with the SEC as a
transaction with a related person.
The
related persons must disclose to the Audit Committee any potential related
person transactions and must disclose all material facts with respect to such
interest. All related person transactions will be reviewed by the
Audit Committee. In determining whether to approve or ratify a
transaction, the Audit Committee will consider the relevant facts and
circumstances of the transaction which may include factors such as the
relationship of the related person with the Company, the materiality or
significance of the transaction to the Company and the business purpose and
reasonableness of the transaction, whether the transaction is comparable to a
transaction that could be available to the Company on an arms-length basis, and
the impact of the transaction on the Company's business and
operations.
During
the year ended December 31, 2007, there was no transaction or series of
transactions, or any currently proposed transaction, in which the amount
involved exceeds $120,000 and in which any director, executive officer, holder
of more than 5% of the Company's common stock or any member of the immediate
family of any of the foregoing persons had or will have a direct or indirect
material interest.
The
Company's By-Laws provide that the Company shall indemnify any director,
officer, employee, or other agent of the Company who is or was a party, or is
threatened to be made a party, to any proceeding (other than an action by or in
the right of the Company to procure a judgment in its favor) by reason of the
fact that such person is or was an agent of the Company, against expenses,
judgments, fines, settlements, and other amounts actually and reasonably
incurred in connection with such proceeding, if that person acted in good faith
and in a manner that person reasonably believed to be in the best interest of
the Company, and in the case of a criminal proceeding, had no reasonable cause
to believe the conduct of that person was unlawful.
The
Company has entered into separate indemnification agreements with each of its
directors and officers whereby the Company has agreed to indemnify the director
or officer against all expenses, including attorneys' fees, and other amounts
reasonably incurred by the officer or director in connection with any
threatened, pending or completed civil, criminal, administrative or
investigative action or proceeding to which such person is party by reason of
the fact that he is or was a director or officer, as the case may be, of the
Company, if the person acted in good faith and in a manner reasonably believed
to be in or not opposed to the best interests of the Company, and, with respect
to any criminal action or proceeding, the person had no reasonable cause to
believe such conduct to be unlawful. The agreements provide for the
advancement of expenses and that the Company has the right to purchase and
maintain insurance on behalf of the director or officer against any liability or
liabilities asserted against him, whether or not the Company would have the
power to indemnify the person against such liability under any provision of the
agreement. The Company has agreed to indemnify such person against
expenses actually and reasonably incurred in connection with any action in which
the person has been successful on the merits or
otherwise. Indemnification must also be provided by the Company
(unless ordered otherwise by a court) only as authorized in the specific case
upon a determination that the indemnification of the person is appropriate
because he has met the applicable standard of conduct described in the agreement
made by (i) the Board of Directors, by a majority vote of a quorum consisting of
directors who are not parties to such action or proceeding, (ii) independent
legal counsel in a written opinion or (iii) the shareholders of the
Company.
The
Corporate Governance section of the Company's internet site contains additional
information, including PDC's Certificate of Incorporation and By-Laws; written
charters for each Board committee; and Board policy statements.
The
Company files annual, quarterly and current reports, proxy statements and other
information with the SEC. A copy of the Company's filings with
the SEC are available to the public at the SEC’s website at http://www.sec.gov. These
documents may also be viewed at the SEC’s public reference room located at 100 F
Street, N.E., Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330 for further information on the public reference
room.
The
executive officers of the Company, their principal occupations for the past five
years and additional information is set forth below.
|
Name
|
Age
|
Position(s)
|
Director
Since
|
Directorship
Term
Expires
|
||||||
|
Steven
R. Williams
(1)
|
57
|
Chairman,
Chief Executive Officer and Director
|
1983
|
2009
|
||||||
|
Richard
W. McCullough
(1)
|
56
|
Vice
Chairman, President
(2), Chief Financial Officer and
Director
|
2007
|
2008
|
||||||
|
Eric
R. Stearns
|
50
|
Executive
Vice President
|
–
|
–
|
||||||
|
Barton
R. Brookman, Jr.
(3)
|
45
|
Senior
Vice President Exploration and Production
|
–
|
–
|
||||||
|
Daniel
W. Amidon
|
47
|
General
Counsel and Secretary
|
–
|
–
|
||||||
|
Darwin
L. Stump
|
53
|
Chief Accounting Officer
|
–
|
–
|
_______________
|
(1)
|
Mr.
Williams has announced his intent to retire as CEO, which is anticipated
to be in August 2008. Mr. McCullough was selected as his
successor upon Mr. Williams' retirement. The Company has not
yet identified Mr. McCullough's successor as
CFO.
|
|
(2)
|
Thomas
E. Riley resigned as President of the Company effective March 9,
2008.
|
|
(3)
|
Mr.
Brookman was appointed to the executive position of Senior Vice President
on March 8, 2008.
|
Steven R. Williams was elected
Chairman and Chief Executive Officer in January 2004. Mr. Williams served as
President from March 1983 until December 2004 and has been a Director of PDC
since 1983.
Richard W. McCullough was
appointed President in March 2008, elected Vice Chairman of PDC's Board of
Directors in December 2007, was appointed Chief Financial Officer in November
2006 and also served as PDC’s Treasurer from November 2006 until October
2007. Prior to joining PDC, Mr. McCullough served as an energy
consultant from July 2005 to November 2006. From January 2004 to July
2005, Mr. McCullough served as president and chief executive officer of
Gasource, LLC, Dallas, Texas, a marketer of long-term, natural gas
supplies. From 2001 to 2003, Mr. McCullough served as an investment
banker with J.P. Morgan Securities, Atlanta, Georgia, and served in the public
finance utility group supporting bankers nationally in all natural gas
matters. Additionally, Mr. McCullough has held senior positions with
Progress Energy, Deloitte and Touche, and the Municipal Gas Authority of
Georgia. Mr. McCullough, a CPA, was a practicing certified public
accountant for 8 years.
Eric R. Stearns was appointed
Executive Vice President in March 2008. Prior to his current
position, Mr. Stearns served as Executive Vice President Exploration and
Production since December 2004, Executive Vice President Exploration and
Development from November 2003 until December 2004, and Vice President
Exploration and Development from April 1995 until November 2003. Mr.
Stearns joined PDC as a geologist in 1985 after working at Hywell, Incorporated
and for Petroleum Consultants.
Barton R. Brookman, Jr. was
appointed Senior Vice President Exploration and Production in March
2008. Previously Mr. Brookman served as Vice President Exploration
and Production since joining PDC in July 2005. Prior to joining the
PDC, Mr. Brookman worked for Patina Oil and Gas and its predecessor Snyder Oil
for 17 years in a series of positions of increasing responsibility ending his
service as Vice President of Operations of Patina.
Daniel W. Amidon was appointed
General Counsel and Secretary in July 2007. Prior to his current
position, Mr. Amidon was employed by Wheeling-Pittsburgh Steel Corporation
beginning in July 2004; he served in several positions including General Counsel
and Secretary. Prior to his employment with Wheeling-Pittsburgh
Steel, Mr. Amidon worked for J&L Specialty Steel Inc. from 1992 through July
2004 in positions of increasing responsibility, including General Counsel and
Secretary. Mr. Amidon practiced with the Pittsburgh law firm of
Buchanan Ingersoll PC from 1986 through 1992.
Darwin L. Stump was appointed
Chief Accounting Officer in November 2006. Mr. Stump has been an
officer of PDC since April 1995 and held the position of Chief Financial Officer
and Treasurer from November 2003 until November 2006. Previously, Mr.
Stump served as Corporate Controller from 1980 until November
2003. Mr. Stump, a CPA, was a senior accountant with Main Hurdman,
Certified Public Accountants prior to joining PDC.
The
Compensation Committee has met to review and discuss with the Company’s
management the specific disclosure contained under the heading “Compensation
Discussion and Analysis.” Based on its review and discussions with
management, the Compensation Committee has recommended to the Board of Directors
that the Compensation Discussion and Analysis be included in this proxy
statement.
This
report has been provided by the Compensation Committee of the Board of Directors
of the Company.
David C.
Parke, Chair
Vincent
F. D'Annunzio
Kimberly
Luff Wakim
Anthony
J. Crisafio
Larry F.
Mazza
COMPENSATION
COMMITTEE
of
the Board of Directors
***
COMPENSATION DISCUSSION AND ANALYSIS
The Board
has assigned to the Compensation Committee (the “Committee”) responsibility for
developing and overseeing the Company’s compensation programs and executive
compensation. The Committee consists entirely of independent Board
members. The Committee has been authorized by the Board to make final
determinations for all elements of compensation for the executive
officers. Independent board members who are not part of the Committee
are often consulted as part of the Committee’s decision process. The Committee
also negotiates terms and approves all executive employment agreements and
administers the Company’s long-term incentive plans.
Summary
The
Committee’s overall goal is to design an executive compensation plan with the
following characteristics:
|
|
·
|
Is
fair to both the executive and the
Company
|
|
|
·
|
Is
competitive with compensation being paid by other oil and gas companies of
similar size and complexity
|
|
|
·
|
Is
competitive with companies located in the same geographic regions as the
Company’s operations
|
|
|
·
|
Helps
retain key executives
|
|
|
·
|
Avoids
encouraging illegal or unethical
activities
|
|
|
·
|
Rewards
efforts that improve the performance of the
Company
|
|
|
·
|
Is
appropriate considering compensation of other employees in the
Company
|
The
Committee, working with nationally recognized compensation consultant Towers
Perrin, has developed and annually reviews and updates a peer group of companies
to use to establish total level of compensation and components of compensation
at competitive companies. Executive compensation includes salary,
short-term incentive (cash bonus) and long-term incentive (stock or stock-based)
compensation. In addition executives participate in and benefit from
the qualified benefit programs available to all employees as well as to an
executive retirement plan and other perquisites.
The peer
group median compensation levels are the primary basis for salary, short-term
and long-term incentive target levels. Position, contributions to company
performance, future potential, skills and other factors are also
considered. The Committee seeks to tie a large percentage of the
short-term incentive to specific performance goals established at the beginning
of the year. In 2007, the Committee set a target for production
growth and intended to set a target for earnings per share but did not do so due
to the delay in the filing of the financial statements for 2006 and significant
operational changes at the Company due primarily to several large acquisitions
which were completed at the beginning of 2007. As a result 60% of the
short-term incentive in 2007 was determined by the Committee following the end
of the year, although financial performance of the Company compared to estimates
made by the Company during the year was considered. In making its
decision about the discretionary portion of the awards positive factors the
Committee considered included the significant increase in the value of the
Company’s stock, progress made in the accounting area, the
installation and start-up of a new enterprise software system, and the very
competitive level of the Company’s finding and development
costs. Areas of concern included the high levels of G&A and
operating costs and the material weaknesses in the internal control over
financial reporting.
For
long-term incentives the Committee first sets dollar targets based on the peer
group levels and factors related to the individual executive, and then
determines the number of shares using valuation methods based on the average
price for the preceding December (the December 2006 average closing price for
2007 awards and the December 2007 average closing price for 2008 awards) and
adjusted for the type of award and the timing and likelihood of
vesting. The compensation consultant assists the Company in
evaluating the value of awards based on generally accepted valuation methods
consistent with the compensation reported for SEC reporting.
The
Compensation Committee also consults with the CEO regarding proposed peer group
changes and for his evaluation of performance and suggestions for compensation
of the other executive officers. Topics discussed with the CEO include
individual executive achievement of key operating targets, participation in and
support for development and execution of the Company's strategic plan,
management development and succession planning, the CEO's assessment of the
executives' contributions to the Company's success, and the limitations or
shortcomings in the executives' performance or potential.
In 2006,
using a similar method to establish compensation levels, the compensation of
each of the five named executives at the Company ranged from the 38th
percentile to 60th
percentile of the comparable peer group executives (41st
percentile for the CEO). While final numbers for peer group compensation for
2007 are not available the Committee anticipates that the Company’s compensation
for executives in 2007 will be modestly higher than the median of the peer group
in total. These final compensation levels in excess of the median of the peer
group were justified by the impressive performance of the Company in 2007, with
production increase of 65%, reserve increase of 112% and a significant increase
in the Company's stock price, which performance was remarkable by general market
and by industry standards.
The
Committee also recommended and the Board approved changes to Board Compensation
for 2007 and 2008. As with the executive compensation, the peer group
compensation was a primary factor used to determine competitive levels of cash
and equity compensation for Board members.
COMPENSATION DESIGN
Compensation Philosophy and Objectives
The
Committee’s philosophy is to provide compensation packages that will attract,
motivate and retain executive talent and deliver rewards for superior
performance and consequences for underperformance. The Committee considers many
factors in establishing the compensation packages for the executive officers of
the Company. The ultimate goal is to provide compensation that is fair to both
the Company and the executive officers, that motivates behavior that will
enhance the value of the Company that avoids encouraging behavior that does not
serve the best interests of the Company and that will allow the Company to
attract and retain executive officers.
The
Committee believes the following characteristics of a compensation program
contribute to the implementation of its philosophy:
|
|
·
|
Offer
a total compensation program that is competitive with the compensation
practices of those peer companies with which the Company competes for
talent;
|
|
|
·
|
Tie
a significant portion of executive compensation to the Company’s
achievement of pre-established financial and operating objectives and to
personal objectives established for each executive
individually;
|
|
|
·
|
Provide
a significant portion of overall compensation in the form of equity-based
compensation in order to align the interests of the Company’s executives
with those of the Company’s shareholders and to avoid excess focus on
short-term results; and
|
|
|
·
|
Structure
a significant proportion of total compensation in a fashion that promotes
executive retention.
|
Pay-for-Performance
The
Committee believes that a significant portion of executive compensation should
be closely linked to both the Company’s and the individual’s performance. The
Committee’s pay-for-performance philosophy is reflected in the Company’s
compensation practices, which tie a significant portion of executive
compensation to the achievement of financial and operating objectives of the
Company and also to take into account personal objectives and performance. This
philosophy is reflected in annual incentive awards, which are directly linked to
the achievement of short-term financial and operating objectives set by the
Committee and have potential payouts ranging from zero to as much as 180% of the
target for each of the components. During 2007, the targets were increases in
production, and the Committee’s assessment of other factors related to the
individual’s performance and development. Factors deemed particularly important
in the Committee's assessment of the discretionary portion of the STI for 2007
included dramatic increases in reserves and production and the overall growth of
the Company, management's efforts relating to the impending retirement of the
CEO and mangement's efforts in improving the Company's historical financial and
accounting systems and reporting. The following table summarizes the
criteria used in determining the 2007 bonus amount. Earnings per
share, which the Committee had planned to include as a factor, was ultimately
not used in determining any formula-based short-term incentive in 2007 due to
the delay in filing the 2006 Form 10-K and major operational changes at the
Company due to several large acquisition in early 2007. As a result,
the Committee included financial performance as one of the criteria in its
discretionary evaluation for 2007, which was increased from 30% to 60% of the
overall bonus calculation. This discretionary portion of the STI program permits
the Committee to account for individual performance and differentiate among
executives. In addition, half of the discretionary annual bonus was
based on 2007 earnings performance compared to internal estimates made by
management during the year. The Committee also assesses individual executive
performance with input from the CEO as well as other Board members and
Committees. When determining what portion of the discretionary income to award,
the Committee discusses each executive individually and considers all the
available information. In 2008, the Committee established performance targets
for 70% of the STI, with the balance determined at the discretion of the
Committee. In 2007 and 2008, 100% of Mr. Stump's STI is determined by the
Committee at its discretion.
|
Pay-for-Performance
Table
|
||||||||||||||||
|
Criteria
|
Lower
Threshold Amount
|
Target
Bonus
|
Maximum
Bonus
|
Percent
of Total Maximum Bonus
|
||||||||||||
|
2007:
|
||||||||||||||||
|
Production
(Mmcfe)
|
24,000 | 26,000 | 28,000 | 40 | % | |||||||||||
|
Discretionary
evaluation
|
Compensation
Committee Determination
|
60 | % | |||||||||||||
|
2008:
|
||||||||||||||||
|
Production
(Mmcfe)
|
35,000 | 37,000 | 39,000 | 40 | % | |||||||||||
|
Diluted
earnigns per share
|
$ | 2.55 | $ | 3.05 | $ | 3.55 | 30 | % | ||||||||
|
Discretionary
evaluation
|
Compensation
Committee Determination
|
30 | % | |||||||||||||
The
Committee also ties compensation to performance through equity-based LTI awards
that are designed to motivate executives to meet the Company’s long-term
performance goals and to tie their interests to those of the shareholders. In
2007 and for 2008, the LTI awards are restricted stock which vest over time, and
long-term incentive performance shares (“LTIP shares”). The LTIP shares will
vest only if certain minimum thresholds of stock price appreciation are met.
One-half of the LTIP shares will vest and be issued based upon an annual stock
price increase of approximately 12%, with the starting price based on the
average price of the stock in December proceeding the award year. An additional
25% of the awarded LTIP shares will vest and be issued at annualized hurdle rate
of 16% and an additional 25% at 20%. The stock price used to determine if the
LTIP shares will vest will be the average daily closing price for each of the
three monthly periods: December 2009, 2010 and 2011 for the 2007 awards, and
2010, 2011, and 2012 for the 2008 awards. Any shares not vested in 2009 or 2010
(or 2010 and 2011 for the 2008 awards) will remain eligible to be vested in
future years; however, any unvested shares at December 31, 2011 for the 2007
awards or December 31, 2012 for the 2008 awards will be forfeited. The Committee
decided to use three measurement dates to take into account the volatility of
energy prices and their impact on the stock price of the Company.
As a
result of the structure of the STI and LTI compensation, a significant amount of
variable compensation under the Company’s compensation program is contingent on
the achievement of key financial and operating objectives of the Company and on
increasing the value of the shares of the Company’s stock.
The
Company’s LTI program is an integral part of the Company’s overall executive
compensation program. The LTI program is intended to serve a number of
objectives including aligning the interests of executives with those of the
Company’s shareholders and focusing senior executives on the achievement of
well-defined, long-term performance objectives that are aligned with the
Company’s corporate strategy, thereby establishing a direct relationship between
compensation and shareholder value. The program also furthers the goal of
executive retention, since the executive officer will forfeit any unvested
awards in the event the officer voluntarily terminates employment with the
Company without "good reason."
Historically,
the primary form of equity compensation awarded by the Company was qualified and
non-qualified stock options, although such grants were not issued on a regular
basis. This form was selected because of the favorable individual and corporate
accounting and tax treatments provided by rules at the time, and the widespread
use of stock options in executive compensation. In 2004, the Committee began
utilizing a combination of restricted stock and options for executive
compensation, believing that the restricted stock was better appreciated by
employees and resulted in less dilution for the Shareholders. Beginning in 2006,
the accounting treatment for stock options changed as a result of the
applicability of Statement of Financial Accounting Standards No. 123(R), making
the use of stock options less attractive. As a result, the Committee assessed
the desirability of granting only shares of restricted stock to executives, and
concluded that shifting entirely to restricted stock would provide an equally
motivating form of incentive compensation, while permitting the issuance of
fewer shares, thereby reducing potential dilution to other shareholders. The
Committee did want to tie the value received by executives to performance for a
portion of the equity compensation, thereby providing executives with a greater
incentive to focus on the long-term appreciation of the stock. To accomplish
this, a portion of the LTI for each executive consists of LTI performance shares
(“LTIP shares”), which require both the passage of time and specified increases
in the stock price to become vested.
In making
long-term incentive awards, the Committee uses a pre-determined market-based
value approach. The Committee determines the dollar value of awards in the
marketplace using a valuation methodology. The Committee establishes the desired
dollar value for each executive officer relative to the market. The
corresponding number of equity instruments to be awarded is then determined
using the same valuation methodology, based on prevailing factors in advance of
the award date. The valuation for financial statement purposes is subsequently
re-calculated based on the prevailing factors at the time of the
award.
The
value-based approach can cause the number of equity instruments needed to be
granted from year to year to vary, even though the awards may have the same
dollar value. This can be caused by, among other things, fluctuations in the
Company’s common stock price at the time of grant. This issue is further
addressed in the Long-Term Incentives section.
The
current CEO has announced his planned retirement in 2008, the CFO was named as
the CEO successor, and the former president resigned in early
2008. As a result a large part of the executive team will have new
and expanded responsibilities in 2008. Largely as a result of
relatively short tenure with the Company the new executive team does not have a
significant ownership position in Company stock. As a result of these
factors, and the additional and unusual demands of a major management
transition, the Committee felt that a one time award of Company stock, vesting
over a 5-year time frame, would both compensate the management team for their
additional efforts and provide a better link between their interests and those
of the
shareholders; 32,711 shares of restricted common stock were issued to
Messrs. McCullough, Stearns, Brookman and Amidon in connection with this
issuance.
Use of Consultants and Benchmarking to Help Establish
Target Compensation Levels
The
Compensation Committee utilizes the compensation consulting services of Towers
Perrin ("Consultant"). Over the past 18 months, the Consultant: assisted the
Committee with a review and revision of the Peer Group, conducted a competitive
benchmarking of the Company's executive and non-employee director compensation
programs, helped the Committee in its redesign of the Long-Term Incentive
("LTI") program in 2007 as described below, and led an educational session
focused on new SEC pay disclosure rules. The Committee periodically assesses the
effectiveness and competitiveness of the Company’s executive compensation
structure with the assistance of the Consultant, and utilizes the assistance of
the Consultant in assessing the value and cost of various proposed compensation
arrangements. The Consultant is engaged by, and reports directly to, the
Committee.
In
developing its compensation objectives, the Committee compared the Company’s
compensation levels with those of a group of 14 companies for 2007, and 17
companies for 2008. These groups, collectively, are referred to as the “Peer
Group.” This benchmarking is done with respect to each of the key annual
elements of the Company’s executive compensation programs discussed above
(salary, STI and LTI compensation), as well as the compensation of individual
executives based on their position in the overall compensation hierarchy. The
Committee uses data from the Peer Group to establish a dollar target level for
each key element to deliver compensation to each executive at approximately the
50th percentile of the Peer Group, with adjustments made based on the
executive’s individual performance. Targeting the 50th percentile helps ensure
that the Company’s compensation practices will be competitive in terms of
attracting and retaining executive talent, while performance based compensation
provides for variations due to superior or sub-par performance. Because
compensation for the Peer Group is for prior periods, the Committee attempts to
anticipate future movements in compensation levels when it sets compensation
targets. For example, when setting compensation for 2007, the most recent
compensation information available was from the 2006 proxy statements for
compensation paid in 2005. As more up to date information becomes available, it
is reviewed by the Committee to evaluate whether future compensation plans
should be adjusted to take unanticipated changes in actual compensation of the
Peer Group into account.
The 2007
Peer Group was comprised of the following companies:
|
•
|
Unit
Corporation
|
•
|
St.
Mary Land & Exploration
|
•
|
Cabot
Oil & Gas Corporation
|
|
•
|
Penn
Virginia Corporation
|
•
|
Whiting
Petroleum Corporation
|
•
|
Range
Resources Corporation
|
|
•
|
Encore
Acquisition Company
|
•
|
Berry
Petroleum Company
|
•
|
Bill
Barrett Corporation
|
|
•
|
Quicksilver
Resources
|
•
|
Clayton
Williams Energy
|
•
|
Brigham
Exploration Company
|
|
•
|
Forest
Oil Corporation
|
•
|
Comstock
Resources
|
For
determination of 2008 compensation, Forest Oil Corporation, Range Resources and
Quicksilver Resources were eliminated from the group because they had grown much
larger than the Company. Six additions were made to the group,
Venoco, Rosetta Resources, Petroquest Energy, Delta Petroleum, Parallel
Petroleum and Carrizo Oil & Gas, to help keep the median revenue and market
capitalization of the group consistent with the Company. The
Committee believes that the Peer Group represents companies with similar
operations, of similar complexity, and with which the Company believes it
competes for executive talent.
The
following chart shows the comparison by category for the median compensation for
the five highest paid executives combined of the peer group based on 2006
compensation adjusted for projected inflation increases, the target compensation
levels set by the Committee for 2007, and the actual compensation paid in
2007. The compensation above the Target level reflects the
achievement of the maximum target for production growth and the Committee’s
assessment of performance for the discretionary portion of the STI, and the
increase in stock price between the average stock price in December 2006 (which
is used to determine the number of shares awarded for the LTI compensation) and
the stock price on the date the awards were finalized.
* Source: Towers Perrin, based on 2006 public documents.
Review of Overall Compensation
The
Committee reviews for each of the executive officers the total dollar value of
the officer’s annual compensation, including salary, STI, LTI compensation,
perquisites, deferred compensation accruals and other compensation. The
Committee also reviews shareholdings and accumulated unrealized gains under
prior equity-based compensation awards, and amounts payable to the executive
officer upon termination of the executive’s employment under various different
circumstances, including retirement and termination in connection with a change
in control. See 2007 Summary Compensation Table below.
Consideration of Prior Compensation
While the
Committee considers all compensation previously paid to the executive officers,
including amounts realized or realizable under prior equity-based compensation
awards, the Committee believes that current compensation practices must be
competitive to retain the executives in light of prevailing market practices and
to motivate the future performance of the executive officers. Accordingly,
wealth accumulation through superior past performance of the Company is not
punished through reductions in current compensation levels.
ELEMENTS OF EXECUTIVE COMPENSATION
Overview
To
achieve the objectives of the executive compensation program, the Committee uses
four elements of compensation in varying proportions for the different executive
officers. These elements are base salary, STI, LTI, and other benefits. The
Committee uses cash payments (base salary and STI), awards tied to the Company's
stock (LTI, which we also refer to as “equity-based compensation”) and non-cash
benefits in its overall compensation packages. The Committee balances salary and
performance-based compensation, and cash and non-cash compensation, in a manner
it believes best serves the objectives of the Company’s compensation program.
The Committee allocates among the different elements of compensation in a manner
similar to the median allocation of the Peer Group, based on the level of the
executive's position. Generally, it is the policy of the Committee that, as
income levels increase, a greater proportion of the executive’s income should be
in the form of STI and LTI compensation. For example the Chief Executive Officer
("CEO") of the Company receives a higher percentage of his compensation in the
form of short and long term incentives compared to other executives, as is the
case of CEOs in the Peer Group. The following table shows the breakdown of
target compensation among the three elements for 2007 and 2008 for each
executive officer.
|
Target
Compensation for Elements
|
||||||||||||||||||||||||
|
as
a Percentage of Total Target Compensation
|
||||||||||||||||||||||||
|
2007
|
2008
|
|||||||||||||||||||||||
|
Name
|
Base
Salary
|
Bonus
Target
|
Equity
Target
|
Base
Salary
|
Bonus
Target
|
Equity
Target
|
||||||||||||||||||
|
Steven
R. Williams
|
33 | % | 24 | % | 43 | % | 27 | % | 24 | % | 49 | % | ||||||||||||
|
Thomas
E. Riley
(1)
|
36 | % | 22 | % | 42 | % | – | – | – | |||||||||||||||
|
Richard
W. McCullough (2)
|
40 | % | 20 | % | 40 | % | 29 | % | 27 | % | 44 | % | ||||||||||||
|
Eric
R. Stearns
|
36 | % | 23 | % | 41 | % | 33 | % | 20 | % | 47 | % | ||||||||||||
|
Barton
R. Brookman, Jr.
(3)
|
– | – | – | 40 | % | 20 | % | 40 | % | |||||||||||||||
|
Daniel
W. Amidon
(4)
|
– | – | – | 40 | % | 20 | % | 40 | % | |||||||||||||||
|
Darwin
L. Stump
|
44 | % | 22 | % | 34 | % | 40 | % | 20 | % | 40 | % | ||||||||||||
__________
|
(1)
|
Mr.
Riley resigned as President of the Company effective March 9,
2008.
|
|
(2)
|
Mr.
McCullough was selected as successor to the CEO upon Mr. Williams'
retirement, anticipated to be in August
2008.
|
|
(3)
|
Mr.
Brookman was appointed to the executive position of Senior Vice President
on March 8, 2008.
|
|
(4)
|
Mr.
Amidon joined the Company in July 2007 as General
Counsel.
|
The
Committee annually reviews the base salaries of the CEO and other executive
officers. Salaries are also reviewed in the case of promotions or other
significant changes in responsibilities. In each case, the Committee takes into
account the results achieved by the executive, his or her future potential,
scope of responsibilities and experience, and competitive salary practices of
the Peer Group. Base salary is intended to provide a baseline of compensation
that is not contingent upon the Company’s performance.
After
reviewing the Peer Group salary levels and considering individual performance,
the Committee established Base Salary increases for 2007 of 7.2% for the CEO and
between 0% and 8.2% for the other executive officers. The total
salary compensation of the executive officers approximated the mean of the Peer
Group, although the spread between the highest and lowest is less than the Peer
Group. For 2008, the Committee established Base Salary increases of 8.1% for the
CEO and between 3.2% and 44.7% for other executive officers. Mr. McCullough’s
base salary was increased by 44.7% to reflect the additional responsibilities he
has assumed as President and the anticipated further increase in
responsibilities upon his assumption of the CEO position later in the year.
Annual base salaries for the executive officers for 2007 and 2008 are shown in
the following table:
|
Annual
Base Salaries
|
||||||||
|
Name
|
2007
|
2008
|
||||||
|
Steven
R. Williams
|
$ | 370,000 | $ | 400,000 | ||||
|
Thomas
E. Riley
|
292,500 | – | ||||||
|
Richard
W. McCullough
|
235,000 | 340,000 | ||||||
|
Eric
R. Stearns
|
271,500 | 305,000 | ||||||
|
Barton
R. Brookman, Jr.
|
200,000 | 250,000 | ||||||
|
Daniel
W. Amidon
|
210,000 | 227,500 | ||||||
|
Darwin
L. Stump
|
220,500 | 227,500 | ||||||
Annual
STI are tied to the Company’s overall performance for the fiscal year, as
measured against objective criteria set by the Committee, as well as the
Committee’s assessment of company performance and individual performance of each
executive. For 2007, at least 40% of the target STI payments are performance
based awards measured against objective criteria established early in the fiscal
year for all named executives except Mr. Stump. The remainder was awarded at the
discretion of the Committee based on its assessment of Company and executive
performance. For 2007 and 2008, 100% of Mr. Stump's STI is discretionary and for
the other executive officers, STI performance based award percentages will be
70% of the total target STI. The Compensation Committee has decided to maintain
discretion over STI bonus amounts for Mr. Stump to emphasize the focus of his
role in 2007 and 2008 on the continued development of the accounting functions
of the Company rather than on production targets and overall financial
performance. The Committee, comprised entirely of independent directors,
believes that some discretion with respect to individual awards is desirable to
compensate for unusual and unexpected events, and as a result does not set
specific performance targets for 30% of the target STI in 2008.
Target
STI payments, expressed as a percentage of base salary, are set for each
executive officer prior to the beginning of the fiscal year based on job
responsibilities. STI payments for the year may range from zero up to 180% of
the executive officer’s base salary, based on the achievement of the objective
criteria for performance based payments and the assessment by the Committee for
the balance. For fiscal year 2007 target STI awards for the executive officers
ranged from 50% to 75% of salary. In 2008 target STI awards for the executive
officers range from 50% to 90% of salary, which is in line with the Peer group
compensation.
With
respect to the executive officers, the Committee establishes formulae to
determine the percentage of the target annual incentive payment that may be
payable for the fiscal year. The Committee does not have the discretion to
change any objective criteria once they have been established. However, the
Committee does retain discretion over 60% (100% for Mr. Stump) of the total
target STI in 2007 to allow some flexibility to award superior, or reflect the
effect of sub-par, personal performance that may not be captured by the
financial and operating criteria. In 2008 the Committee established objective
criteria for 70% of the total STI for all executives except Mr. Stump, where it
will continue to maintain discretion over 100% of the STI award. In addition,
the Committee has the authority to recommend to the Board compensation for
unusual circumstances. In July of 2007 the Company hired Dan Amidon as General
Counsel under an employment agreement that called for STI of up to 75% of his
annual salary, prorated for the term of service. As a result of Mr.
Amidon’s outstanding performance and contributions the Committee awarded Mr.
Amidon total STI compensation equal to 100% of his salary (reduced pro rata for
the partial year worked). The following table sets forth the STI
threshold, target and maximum levels for 2007 and 2008 for the executives
expressed as a percentage of base salary.
|
Short-Term
Incentive Compensation
(1)
|
||||||||||||||||||||||||
|
2007
|
2008
|
|||||||||||||||||||||||
|
%
of Base Salary
|
%
of Base Salary
|
|||||||||||||||||||||||
|
Name
|
Threshold
|
Target
|
Stretch
|
Threshold
|
Target
|
Stretch
|
||||||||||||||||||
|
Steven
R. Williams
|
0 | % | 75 | % | 150 | % | 0 | % | 90 | % | 180 | % | ||||||||||||
|
Thomas
E. Riley
|
0 | % | 62.5 | % | 125 | % | – | – | – | |||||||||||||||
|
Richard
W. McCullough
|
0 | % | 50 | % | 100 | % | 0 | % | 90 | % | 180 | % | ||||||||||||
|
Eric
R. Stearns
|
0 | % | 62.5 | % | 125 | % | 0 | % | 62.5 | % | 125 | % | ||||||||||||
|
Barton
R. Brookman, Jr.
|
– | – | – | 0 | % | 50 | % | 100 | % | |||||||||||||||
|
Daniel
W. Amidon
|
0 | % | 50 | % | 75 | % | 0 | % | 50 | % | 100 | % | ||||||||||||
|
Darwin
L. Stump
|
– | – | – | – | – | – | ||||||||||||||||||
_______________
|
(1)
|
Percentages
apply to all executive officers with the exception of Mr. Stump, 100% of
his STI was and is discretionary. Additionally, Mr. Brookman
was not eligible to for STI compensation until March
2008.
|
The
Committee’s practice has been to determine the dollar amount of target equity
compensation and to then grant equity-based compensation that has a fair value
equal to that amount. To provide consistency from year-to-year and to
avoid questions about timing of awards, the Committee uses a consistent period
to value the awards when determining the number of shares in the award, the
average daily price in December of the year prior to the award year. The 2007
awards were determined using the fair value of the awards based on the average
daily closing price of the Company's stock in December 2006, with average
December 2007 prices being used to determine the awards for 2008. At
the Committee’s direction the Consultant calculated the fair value utilizing
methods they have developed for use with these types of equity valuations,
including taking into account the probability and/or timing of vesting under the
performance criteria for the LTIP shares and the other restricted stock. For the
purpose of recording an expense for financial reporting purposes, the awards are
valued based on the market price at the time the award is
finalized.
In April
2007, the Company corrected an administrative error in the stock option exercise
price of shares awarded the executive officers in March 2006, none of which were
exercised at the time. The administrative error related to the use of the
closing price of the Company's common stock on the day prior to the award,
rather than the closing price on the day of the award in accordance with the
Company's 2004 Long-Term Equity Compensation Plan. The need for the correction
was identified by the Company and the effect of the correction was not material
to the fair value of the awards, either at the time of the award or the time of
the correction.
In 2007,
a percentage of the equity-based compensation awards are LTIP shares with the
percentage increasing for more highly compensated executives, and the balance of
the awards are time vesting restricted stock. For example, 50% of the CEO’s
equity-based compensation in 2007 was LTIP shares, in contrast to 40% for the
President and 30% for the CAO. The following table summarizes LTI awards for
2007 and 2008, and the second table summarizes the target prices for the
performance vesting of the LTIP awards.
|
Long-Term
Incentive Compensation
|
||||||||||||||||||||||||
|
2007
|
2008
|
|||||||||||||||||||||||
|
Name
|
Percent of |
Percent
of
Value from |
Percent
of Value |
Percent of |
Percent
of
Value from |
Percent
of Value |
||||||||||||||||||
|
Steven
R. Williams
|
175 | % | 50 | % | 50 | % | 175 | % | 0 | % | 100 | % | ||||||||||||
|
Thomas
E. Riley
|
145 | % | 60 | % | 40 | % | – | – | – | |||||||||||||||
|
Richard
W. McCullough
|
– | – | – | 150 | % | 50 | % | 50 | % | |||||||||||||||
|
Eric
R. Stearns
|
140 | % | 60 | % | 40 | % | 145 | % | 50 | % | 50 | % | ||||||||||||
|
Barton
R. Brookman, Jr.
|
– | – | – | 100 | % | 50 | % | 50 | % | |||||||||||||||
|
Daniel
W. Amidon
|
– | – | – | 100 | % | 50 | % | 50 | % | |||||||||||||||
|
Darwin
L. Stump
|
90 | % | 70 | % | 30 | % | 75 | % | 50 | % | 50 | % | ||||||||||||
|
LTIP
Target Prices (1)
|
||||||||||||||||||||
|
Year
of
Award
|
Approximate GrowthTarget
|
Target
Price
|
Percent
Vested
ifTarget
Attained(2)
|
|||||||||||||||||
|
2007
|
||||||||||||||||||||
|
2009
|
2010
|
2011
|
||||||||||||||||||
| 12 | % | $ | 60.00 | $ | 67.50 | $ | 75.00 | 50 | % | |||||||||||
| 16 | % | 67.50 | 77.50 | 90.00 | 75 | % | ||||||||||||||
| 20 | % | 75.00 | 90.00 | 107.50 | 100 | % | ||||||||||||||
|
2008
|
||||||||||||||||||||
|
2010
|
2011
|
2012
|
||||||||||||||||||
| 12 | % | $ | 80.50 | $ | 90.00 | $ | 101.00 | 50 | % | |||||||||||
| 16 | % | 89.50 | 103.50 | 120.00 | 75 | % | ||||||||||||||
| 20 | % | 99.00 | 118.50 | 142.50 | 100 | % | ||||||||||||||
_______________
|
(1)
|
Growth
target percentages and target prices are based on the average closing
price of the Company's common stock during the preceding December for each
of the years.
|
|
(2)
|
Performance
shares will vest for a performance period only if the target price is met
or exceeded for such period. Performance shares vested for a
performance period shall not be subject to divestment in the event the
share price subsequently decreases below the threshold in a subsequent
period.
|
The
Company has a combined 401(k) and qualified profit sharing plan for all of the
Company’s employees including the executive officers. The plan provides for
discretionary matching contributions. Generally, the Company matches employee
401(k) contributions dollar for dollar up to 10% of the employee’s compensation
and then matches 20% for contributions above 10% of the employees' compensation
up to the maximum allowable limits under the Internal Revenue Code ("IRC"). The
Company's profit sharing contribution is discretionary and for 2007 was equal to
1% of the Company's
consolidated net income. In addition, there was a carryover contribution earned
in 2006 of $1.1 million. Total Company contributions, to both 401(k) and profit
sharing, to the plan for 2007 were $2.5 million.
Under
their current employment agreements, each of the named executive officers also
earns the right to future payments following their retirement or other departure
from the Company. For each year worked under his current agreement, the CEO
earns an annual retirement benefit equal to $500 times the number of his full
years of service times 10 ($500 per year of service for 10 years). Following the
termination of his service with the Company, the cumulative total of the
calculated annual retirement benefits is disbursed in ten equal annual
installments. For 2007, the retirement benefit was $120,000 ($12,000 per year
for 10 years) and for 2008, the retirement benefit will be $125,000 ($12,500 per
year for 10 years) if the CEO is employed by the Company for the full year, but
no additional benefit will be earned if
the CEO retires before the end of the year as planned. The CEO's total
cumulative retirement benefit, under this plan, at December 31, 2007, was
$450,000 ($45,000 per year for 10 years). The CEO also receives a lifetime
healthcare benefit under his employment agreement; the Company has recorded an
accumulated postretirement obligation of $296,819 as of December 31, 2007,
related to this benefit. Each of the other executive officers, under
their respective employment agreements, annually earns a retirement benefit
equal to $75,000 ($7,500 per year for 10 years). Following their termination of
service with the Company, their cumulative total annual retirement benefit will
be disbursed in ten equal annual installments. As of December 31, 2007, for Mr.
Stearns and Mr. Stump, the total cumulative benefit, including the 2007
increment, was $300,000 ($30,000 per year for 10 years). As of December 31,
2007, Mr. McCullough’s total cumulative benefit, including the 2007 increment,
was $75,000 ($7,500 per year for 10 years).
Additionally,
under his previous employment agreement, Mr. Williams earned supplemental
retirement benefits. The prior agreement requires the Company to pay Mr.
Williams an annual sum of $40,000 per year for the ten year period following his
retirement from the Company (an aggregate of $400,000). This benefit was fully
vested on December 31, 2003. The amount of the annual benefit is increased by
10.75% compounded annually for the period after December 31, 2003. Under
provisions of his previous employment agreement, Mr. Williams may elect to defer
payment up to five years following his retirement. In the event of deferral of
payment following retirement the amount of the annual benefit will be increased
by 10.75% compounded annually. As of December 31, 2007, the amount of this
benefit is $601,893(or $60,189 per year for 10 years). In the event of change in
control the benefits due under this agreement will be accelerated and due
immediately.
Other Compensation and Benefits
The
Company also provides certain other benefits to its executive officers that are
not tied to any formal individual or Company performance criteria and are
intended to be part of a competitive overall compensation program. Each of the
executive officers has 1) a Company vehicle (or vehicle allowance) that they use
for Company business, and are allowed to use for personal uses as well, 2)
coverage under the Company’s medical plan and reimbursement of medical expenses
not covered by the plan, 3) the right to be reimbursed for one Board-approved
club membership, 4) reimbursement of the cost of a $1 million life insurance
policy, and 5) reimbursement of the cost of disability insurance. Given the
importance of the executives and their good health to the success of the Company
and the achievement of its business goals, the Committee believes that the
medical insurance and reimbursement encourage the executives to seek appropriate
medical assistance. The other benefits are commonly provided to executives and
are necessary to create a competitive compensation package.
Termination Benefits including Change in Control
Payments
The
compensation provisions in the event of a change in control serve to lessen the
potential negative impact of a change in control on the executive officers and
to lessen the potential conflict between the best interest of the shareholders
and that of the executives. The Committee believes this is desirable, in
combination with significant stock ownership, to encourage the executives to
consider possible change in control situations that might benefit the Company’s
shareholders.
The
Committee also believes that severance benefits for senior management should
reflect the fact that it may be difficult for employees to find comparable
employment within a short period of time. They also should disentangle the
Company from the former employee as soon as practicable. For instance, while it
is possible to provide salary continuation to an employee during the job search
process, which in some cases may be less expensive than a lump-sum severance
payment, a lump-sum severance payment is preferable in order to most cleanly
sever the relationship as soon as practicable. The Company has entered into
employment agreements with each of the executive officers that include change in
control provisions. These agreements provide for the continued employment of the
executives for a period of two years following a change in control of the
Company. These agreements are intended to retain the executives and provide
continuity of management in the event of an actual or threatened change in the
control of the Company and ensure that the executive’s compensation and benefits
expectations would be satisfied in such event.
Where the
termination is without “cause” or the executive officer terminates employment
for “good reason,” the severance plan provides for benefits equal to three times
the sum of: a) the executive officer’s highest base salary during the previous
two years of employment immediately preceding the termination date, plus b) the
highest bonus paid to the executive officer during the same two year period. The
executive officer is also entitled to 1) vesting of any unvested equity
compensation, 2) reimbursement for any unpaid expenses, 3) retirement benefits
earned under the current or previous agreements, 4) continued coverage under the
Company’s medical plan for up to 18 months, and 5) payment of any earned, unpaid
bonus amounts. In addition, a terminated executive officer is entitled to
receive any benefits that he otherwise would have been entitled to receive under
our 401(k) and profit sharing plan, although those benefits are not increased or
accelerated. The Committee believes that these termination benefits are
comparable to the general practice among similar companies, although it has not
conducted a study to confirm this.
Good
reason includes 1) assignment to the executive of duties materially and
adversely inconsistent with his position, duties, responsibilities and status
with the Company, 2) an adverse change in the executive’s position with the
Company, 3) a change in control of the Company, 4) a decrease of the executive
officer’s base salary, 5) a material reduction in the benefits provided by the
Company, 6) the requirement by the Company for the executive officer to be based
anywhere outside of Bridgeport, West Virginia, 7) the failure by the Company to
obtain a satisfactory agreement from any successor or assignee of the Company to
assume and agree to the Company’s obligations under the employment agreement, or
8) any other material breach of the employment agreement by the
Company.
The
Company may terminate any of the executive officers for just cause, which is
defined in the employment agreements to include 1) a failure by the executive to
perform his duties, 2) conduct by the executive that results in consequences
which are materially adverse to the Company, monetarily or otherwise, 3) a
guilty plea or conviction of a felony, or 4) a material breach of the terms of
the employment agreement by the executive officer. If an executive officer is
terminated for just cause, the Company is required to pay the executive officer
his base salary through the termination date plus any bonus (only for periods
completed and accrued, but not paid), incentive, deferred, retirement or other
compensation, and provide any other benefits, which have been earned or become
payable as of the termination date but which have not yet been paid or
provided.
If an
executive officer voluntarily terminates his employment with the Company for
other than good reason, he is entitled to receive 1) the base salary, bonus and
incremental retirement payment prorated for the portion of the year that the
executive officer is employed by the Company, 2) any incentive, deferred or
other compensation which has been earned or has become payable, but which has
not yet been paid under the schedule originally contemplated in the agreement
under which they were granted or in full without discount within 60 days of the
termination date at the discretion of the Company, 3) any unpaid expense
reimbursement upon presentation by the executive officer of an accounting of
such expenses in accordance with normal Company practices, and 4) any other
payments for benefits earned under the employment agreement or Company
plans.
The table
below provides information regarding the amounts each of the executive officers
would be eligible to receive if a termination event had occurred as of December
31, 2007:
|
Termination
Benefits
|
||||||||||||||||
|
Name
|
Retirement
or
Voluntary
Termination
by
Executive
|
Termination
For
Cause
by
Company
|
Change
in Control or
Termination
Without
Cause or
Good
Reason
by
Executive
|
Death
or
Disability(1)
|
||||||||||||
|
Steven
R. Williams(2)
|
$ | 4,117,113 | $ | 3,867,363 | $ | 8,101,899 | $ | 5,449,275 | ||||||||
|
Thomas
E. Riley
|
647,637 | 461,168 | 3,252,448 | (3) | 1,705,198 | |||||||||||
|
Richard
W. McCullough
|
311,606 | 205,856 | 1,493,174 | 656,674 | ||||||||||||
|
Eric
R. Stearns
|
625,325 | 472,606 | 3,010,848 | 1,579,098 | ||||||||||||
|
Darwin
L. Stump
|
502,231 | 336,856 | 2,294,578 | 1,181,053 | ||||||||||||
_______________
|
(1)
|
In
the event of death or disability, the termination benefits would consist
of (i) the base salary and bonus for the portion of the year the executive
officer is employed by the Company; (ii) the base salary that would have
been earned for six months after termination; (iii) immediate vesting of
all equity and option awards; (iv) the payment of deferred retirement
compensation based upon the schedule originally contemplated in the
deferred retirement compensation agreement or in a lump-sum no later than
two and one-half months following the close of the calendar year in which
the death or disability occurred; (v) reimbursement for any unpaid
expenses; (vi) and benefits earned under the 401(k) and profit sharing
plan; and (vii) continued coverage under the Company's medical plan, life
time coverage for Mr. Williams and for up to 18 months for all other named
executive officers.
|
|
(2)
|
Includes
(i) the estimated lifetime value of medical benefits for Mr. Williams
and/or his spouse; and (ii) a deferred retirement compensation benefit
related to a prior employment
agreement.
|
|
(3)
|
This
benefit is calculated as of December 31, 2007. The value of Mr. Riley's
actual severance benefit upon termination for good reason effective March
9, 2008, was higher than this amount was primarily because the actual
severance was based on 2008 salary ($315,000) and on a higher
annual bonus.
|
Executive and Director Share Retention and
Ownership Guidelines
In order
to promote equity ownership and further align the interests of management with
the Company’s shareholders, the Committee has adopted share retention and
ownership guidelines for senior management and non-employee directors. Under
these guidelines, executive officers and non-employee directors are required to
achieve and continue to maintain a significant ownership position, expressed as
a
|
Chief
Executive Officer
|
3
times salary
|
|
|
Other
Executive Officers
|
2
times salary
|
|
|
Non-Employee
Directors
|
1
times retainer
|
The
Committee periodically reviews share ownership levels of the persons subject to
these guidelines. Shares held by the executive officers and shares held
indirectly through the Company 401(k) plan are included in determining an
executive officer’s share ownership. Shares underlying stock options, including
vested options, as well as unvested restricted stock, are not included. Mr.
McCullough who was hired in November 2006, Mr. Amidon who was hired in July
2007, and Mr. Brookman, who was named as an Executive officer in March 2008,
have not yet met the holding requirement. In addition the two new
directors appointed in 2007, have not yet met the requirement. All
other executive officers and non-employee directors have achieved shareholdings
in excess of the applicable multiple set forth above.
The
Company’s insider trading policy expressly prohibits Company officers,
directors, employees and associates from engaging in options, puts, calls or
other transactions that are intended to hedge against the economic risk of
owning the Company shares.
The Company entered into
employment agreements with Messrs. Williams, Riley, Stearns and Stump effective
January 1, 2004, Mr. McCullough effective November 13, 2006, Mr. Amidon on July
2, 2007, and Mr. Brookman on July 11, 2007. The initial term of the agreements
is for two years and they are automatically extended for an additional 12 months
beginning on the first anniversary of the effective date and on each successive
anniversary unless either party cancels. The employment agreements provide for
the base annual salary to be reviewed annually (see "Base Salary" discussion
above).
Each
employment agreement provides for an annual performance bonus as determined by
the Compensation Committee and is based in part upon written objective criteria
and in part upon the discretion of the Compensation Committee. The annual
performance bonus earned is calculated as a percentage, as determined by the
Compensation Committee, of the executive officers' base salary.
Each
employment agreement contains a standard non-disclosure covenant and, also,
provides that the executive officer is prohibited during the term of his
employment and for a period of one year following his termination from engaging
in any business that is competitive with the Company's oil and gas drilling
business. Additionally, the employment agreements state that the executive
officer must devote substantially all of his business time, best efforts and
attention to promote and advance the business of the Company. The executive
officer may not be employed in any other business activity, other than with the
Company, during the term of the employment agreement, whether or not such
activity is pursued for gain, profit or other pecuniary advantage without
approval by the Compensation Committee of the Board. This restriction will not
prevent the executive officer from investing his personal assets in a business
which does not compete with the Company or its affiliates, and where such
investment will not require services of any significance on the part of the
executive officer in the operation of the affairs of the business.
Other Agreements and Arrangements
Prior to
2007 Executive officers could invest in a Board-approved executive drilling
program at the Company's cost. Effective with the 2007 partnership
the Board eliminated this executive officer investment program, although there
were some carryover drilling from the 2006 program paid in 2007.
During 2007, Messrs. Williams and Riley invested approximately $20,000, and
$7,000, respectively. Other investors participating in drilling with
the Company are generally charged a profit or markup above the cost of the
wells; for example, the markup on Company-sponsored partnerships is
approximately 15% of the cost of the wells. As a result, the
executive officers realize a benefit not generally available to other
investors. The Board believes that having the executive officers
invest in wells with the Company and other investors helps to create a
commonality of interests much like share ownership creates a commonality of
interests between the shareholders and executive officers.
Internal Revenue Code Section 162(m)
The
Committee is aware of IRC Section 162(m) of the tax code, which generally limits
the deductibility of executive pay in excess of one million dollars, and which
specifies the requirements for the “performance-based” exemption from this
limit. Elements of the executive compensation program are indeed
performance-based, and vehicles such as stock options are believed to qualify as
performance-based under Section 162(m). Other aspects of the
executive compensation program may not qualify as performance-based, such as
time-based restricted stock and the Company's annual incentive plan because the
Committee prefers the ability to exercise discretion in evaluating a portion of
participants' performance. The financial implications of a potential
lost deduction are not expected to be material. The Committee will
continue to monitor its position on the impact of Section 162(m) for the
Company's executive compensation programs.
The
following table provides summary compensation information for the Company's
Chief Executive Officer, the Chief Financial Officer, and the three most highly
compensated executive officers, other than the Chief Executive Officer and Chief
Financial Officer, whose total compensation exceeded $100,000 in 2007 (the
"named executive officers").
|
Name
and Principal Position (1)
|
Year
|
Salary
|
Bonus(2)
|
Stock Awards(3) |
Option Awards(4) |
Non-Equity Incentive
Plan |
Nonqualified Deferred |
All
Other Compensation(7) |
Total Compensation |
|||||||||||||||||||||||||
|
Steven
R. Williams
|
2007
|
$ | 370,000 | $ | 249,750 | $ | 184,470 | $ | 34,609 | $ | 222,000 | $ | 140,312 | $ | 64,860 | (8) | $ | 1,266,001 | ||||||||||||||||
|
Chairman,
Chief
|
2006
|
345,000 | 155,250 | 163,023 | 54,546 | 362,250 | 88,438 | 37,778 | 1,206,285 | |||||||||||||||||||||||||
| Executive Officer | ||||||||||||||||||||||||||||||||||
|
and
Director
|
||||||||||||||||||||||||||||||||||
|
Thomas
E. Riley
|
2007
|
292,500 | 186,469 | 255,255 | 35,146 | 124,312 | 32,674 | 24,663 | 951,019 | |||||||||||||||||||||||||
|
President
|
2006
|
272,000 | 81,600 | 107,580 | 35,977 | 190,400 | 30,824 | 9,357 | 727,738 | |||||||||||||||||||||||||
|
and
Director
|
||||||||||||||||||||||||||||||||||