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CHAPARRAL
CHAPARRAL RESOURCES, INC.
Notice and Proxy Statement
June 21, 2001
Dear Stockholder:
We are pleased to invite you to the Annual Meeting of Stockholders of
Chaparral Resources, Inc. The meeting will be held on June 21, 2001 at 10:00
a.m., Central Daylight Time, at the offices of Akin, Gump, Strauss, Hauer &
Feld, L.L.P., located at 1900 Pennzoil Place - South Tower, 711 Louisiana
Street, Houston, Texas 77002.
At the meeting, you and the other stockholders will be asked to vote on the
following:
1. the election of six directors to the Board of Directors of Chaparral;
2. the approval of Chaparral's 2001 Stock Incentive Plan; and
3. the ratification of the appointment of Ernst & Young LLP as the
independent auditors of Chaparral for fiscal year 2001.
You will also hear an overview of Chaparral's current and prior year
operations from senior management to be followed by a question and answer
session open to all stockholders. Our Annual Report, which is enclosed with this
Proxy Statement, contains other detailed information about Chaparral, including
its audited financial statements for the year ended December 31, 2000.
Stockholders are urged to carefully read this Proxy Statement in its
entirety before voting on the proposals. This Proxy Statement and the enclosed
proxy card are being mailed to stockholders on or about May 24, 2001.
We hope you can join us on June 21, 2001. Regardless of whether you expect
to attend the meeting in person, please read the Proxy Statement. When you have
done so, please mark your votes on the enclosed proxy card, sign and date it,
and return it to us in the enclosed postage-paid envelope. It is important that
your shares be represented, and your promptness will assist us in making
necessary preparations for the meeting.
Sincerely,
/s/ John G. McMillian /s/ James A. Jeffs
--------------------- ------------------
John G. McMillian James A. Jeffs
Co-Chairman of the Board Co-Chairman of the Board
and Chief Executive Officer
CHAPARRAL
CHAPARRAL RESOURCES, INC.
Notice of Annual Meeting of Stockholders
To be held June 21, 2001
Chaparral Resources, Inc. will hold its Annual Meeting of Stockholders on
June 21, 2001 at 10:00 a.m., Central Daylight Time, at:
Akin, Gump, Strauss, Hauer & Feld, L.L.P.
1900 Pennzoil Place - South Tower
711 Louisiana Street
Houston, Texas 77002
We are holding this meeting to consider and act upon the following matters
that are more fully-described in the accompanying Proxy Statement, including
proposals to:
1. elect six directors to the Board of Directors of Chaparral;
2. approve Chaparral's 2001 Stock Incentive Plan;
3. ratify the appointment of Ernst & Young LLP as the independent
auditors of Chaparral for fiscal year 2001; and
4. consider such other business as may properly come before the meeting
or any adjournment of the meeting.
The Board of Directors has selected May 22, 2001 as the record date for
determining stockholders entitled to notice of and to vote at the meeting and
any adjournment of the meeting. A list of stockholders as of the record date
will be available for inspection at the corporate headquarters of Chaparral for
ten days before the meeting.
IN ORDER TO ASSURE YOUR REPRESENTATION AT THE MEETING, PLEASE DATE, SIGN,
AND MAIL PROMPTLY THE ENCLOSED PROXY CARD IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
A copy of Chaparral's 2000 Annual Report is enclosed. Please read the
Annual Report in its entirety.
By Order of the Board of Directors,
/s/ Alan D. Berlin
------------------
Alan D. Berlin
Secretary
Houston, Texas
May 24, 2001
CHAPARRAL
CHAPARRAL RESOURCES, INC.
Annual Meeting of Stockholders
To Be Held June 21, 2001
This Proxy Statement is furnished to stockholders of Chaparral for use at
the Annual Meeting of Stockholders to be held at 10:00 a.m., Central Daylight
Time, on June 21, 2001, at the offices of Akin, Gump, Strauss, Hauer & Feld,
L.L.P., 1900 Pennzoil Place - South Tower, 711 Louisiana Street, Houston, Texas
77002, or at any postponements or adjournments of the meeting for the purposes
set forth in the accompanying Notice of Annual Meeting of Stockholders. The
approximate date on which this Proxy Statement and the enclosed proxy card are
first being sent to stockholders is May 24, 2001.
TABLE OF CONTENTS
-----------------
Page
----
General Information..........................................................3
Proposal One: Election of Directors..........................................5
Nominees............................................................5
Remuneration of Directors...........................................7
Recommendation of the Board.........................................7
Certain Relationships and Related Transactions...............................7
Meeting of the Board and its Committees......................................9
Report of the Audit Committee of the Board...................................9
Beneficial Ownership of Certain Stockholders, Directors, Nominees and
Executive Officers........................................................11
Section 16(a) Beneficial Ownership Reporting Compliance......................12
Executive Compensation.......................................................13
Summary Compensation Table..........................................13
Aggregated Option/SAR Exercises and Year-End Option/SAR
Value Table......................................................13
Director Interlocks.................................................13
Stock Performance Graph......................................................14
Insider Participation in Compensation Decisions and Compensation Committee
Report on Executive Compensation........................................14
Compensation Philosophy.............................................14
Compensation Structure..............................................15
Compensation of the Chief Executive Officer.........................15
Executive Compensation Deductibility................................15
Compensation Committee Interlocks and Insider Participation.........15
Proposal Two: Approval of Chaparral's 2001 Stock Incentive Plan..............16
Summary of the Plan.................................................16
Recommendation of the Board.........................................21
Proposal Three: Ratification of Independent Auditors.........................21
Recommendation of the Board.........................................21
Other Business...............................................................21
Appendix A...................................................................A-1
Appendix B...................................................................B-1
2
GENERAL INFORMATION
Q: Who is soliciting my proxy?
A: We, the Board of Directors of Chaparral (the "Board"), are sending you this
Proxy Statement in connection with our solicitation of proxies for use at
Chaparral's Annual Meeting of Stockholders. Specified directors, officers,
and employees of Chaparral may also solicit proxies on our behalf by mail,
phone, fax, or in person.
Q: Who is paying for this solicitation?
A: Chaparral will pay for the solicitation of proxies, including the cost of
preparing, assembling, and mailing this Proxy Statement, the proxy card,
the Annual Report and all other materials which may be sent to stockholders
in connection with this solicitation.
Q: On what am I voting?
A: You will have the chance to vote on, specifically:
o the election of John G. McMillian, James A. Jeffs, David A. Dahl, Ted
Collins, Jr., Richard L. Grant, and Judge Burton B. Roberts to the
Board;
o the approval of Chaparral's 2001 Stock Incentive Plan; and
o the ratification of the appointment of Ernst & Young LLP as
Chaparral's independent auditors for fiscal year 2001.
Q: Who can vote?
A: Only holders of Chaparral's Common Stock or Series A Preferred Stock at the
close of business on May 22, 2001, the record date for the Annual Meeting,
can vote. If you beneficially owned any Common Stock on the record date,
you have one vote per share of Common Stock. If you owned any Series A
Preferred Stock on the record date, you have 9.48 votes per share of Series
A Preferred Stock.
Q: How do I vote?
A: You may vote your shares either in person or by proxy. To vote by proxy,
you should mark, date, sign, and mail the enclosed proxy card in the
postage-paid envelope. Granting a proxy will not affect your right to vote
your shares if you attend the Annual Meeting and want to vote in person; by
voting in person you will revoke your proxy. You may also revoke your proxy
at any time before the vote at the meeting by providing Chaparral's
Secretary written notice of your revocation or by submitting a later-dated
proxy. If you return your proxy but do not mark your voting preferences,
Messrs. McMillian and Jeffs, the proxy holders, will vote your shares as
follows:
o FOR the election of each of the nominees for director;
o FOR the approval of Chaparral's 2001 Stock Incentive Plan; and
o FOR the ratification of the appointment of the independent auditors.
Q: What constitutes a quorum?
A: On the record date, Chaparral had 14,283,801 shares of Common Stock issued
and outstanding and 50,000 shares of Series A Preferred Stock issued and
outstanding. In order for the Annual Meeting to be properly held, a
majority of the outstanding shares, consisting of our outstanding Common
Stock and our Series A Preferred Stock on an as if converted basis (a
quorum), must be present at the meeting or represented by proxy.
Q: What vote is required to approve each proposal?
A: For the election of directors, the affirmative vote of a plurality of the
votes cast at the meeting is required for the election of directors. A
properly executed proxy card marked WITHHOLD AUTHORITY with respect to the
election of one or more directors will not be voted with respect to the
director or directors indicated, although it will be counted for purposes
of determining whether there is a quorum. For all matters other than the
3
election of directors, the affirmative vote of a majority of the votes cast
by person or by proxy at the Annual Meeting is required for approval of
such matter. A properly executed proxy marked ABSTAIN with respect to any
other matter will not be voted, although it will be counted for purposes of
determining whether there is a quorum. Accordingly, if there are any other
items on which the stockholders vote at the Annual Meeting, an abstention
will have the effect of a negative vote on such other item.
Q: What if my shares are held in "street name?"
A: If you hold your shares in "street name" through a broker or other nominee,
your broker or nominee may only exercise voting discretion with respect to
matters deemed routine by The Nasdaq Stock Market, such as the election of
directors and the selection of independent auditors. On a non-routine
matter, a broker or other nominee cannot cast a vote (a so-called "broker
non-vote"). Broker non-votes will not be treated as votes cast, and
therefore, will not affect the outcome of the matters referred to above.
Q: Can I vote on other matters?
A: The matters presented at an annual meeting are limited to those properly
presented by the Board and those properly presented by stockholders. We
have not received notice from any stockholder as to any matter to come
before the Annual Meeting other than as set forth herein. If any other
matter is presented at the Annual Meeting, your signed proxy gives Messrs.
McMillian and Jeffs, the proxy holders, authority to vote your shares.
Q: How does the Board recommend I vote on the proposals?
A: Unless you give other instructions on your proxy card, Messrs. McMillian
and Jeffs, the proxy holders, will vote in accordance with the
recommendations of the Board. The Board recommends a vote FOR:
o the election of the nominated slate of directors (see page 5);
o the approval of Chaparral's 2001 Stock Incentive Plan (see page 16);
and
o the ratification of the appointment of the independent auditors (see
page 21).
With respect to any other matter that properly comes before the meeting,
the proxy holders will vote as recommended by the Board, or if no
recommendation is given, in their own discretion.
Q: What is the deadline for stockholder proposals for next year's Annual
Meeting?
A: Stockholders may submit proposals on matters appropriate for stockholder
action at future annual meetings by following the rules of the Securities
and Exchange Commission. Proposals intended for inclusion in next year's
proxy statement and proxy card must be received by Chaparral not later than
January 24, 2002. If we do not receive notice of any other matter that a
stockholder wishes to raise at our Annual meeting in 2002 by April 9, 2002
and a matter is raised at that meeting, the proxies will have discretionary
authority to vote on the matter. All proposals and notifications should be
addressed to Chaparral's Secretary: Chaparral Resources, Inc., 16945
Northchase Drive, Suite 1620, Houston, Texas 77060.
Q: How do I get copies of the exhibits filed with Chaparral's Form 10-K?
A: A copy of Chaparral's Annual Report for 2000, which contains Chaparral's
Form 10-K and consolidated financial statements, was delivered to you with
this Proxy Statement. Chaparral will provide to any stockholder as of the
record date, who so specifically requests in writing, copies of the
exhibits filed with Chaparral's Form 10-K for a reasonable fee. Requests
for such copies should be directed to Assistant Secretary, Chaparral
Resources, Inc., 16945 Northchase Drive, Suite 1620, Houston, Texas 77060.
In addition, copies of all exhibits filed electronically by Chaparral may
be reviewed and printed from the SEC's website at: http://www.sec.gov.
4
PROPOSAL ONE
ELECTION OF DIRECTORS
Nominees.
At the Annual Meeting, you and the other stockholders will elect six
individuals to serve as directors until the next annual meeting of stockholders
to be held in 2002, until their successors are duly elected or appointed or
until their death, resignation, or removal. Each of the nominees is currently a
member of the Board.
The individuals named as proxies will vote the enclosed proxy for the
election of all nominees, unless you direct them to withhold your votes. If any
nominee becomes unable to serve as a director before the Annual Meeting, an
event which is not presently anticipated, discretionary authority may be
exercised by the persons named as proxies to vote for substitute nominees
proposed by the Board.
The nominees for director, each of whom has consented to serve, if elected,
are as follows:
Name of Nominee Director Since Age Principal Occupation During the Last 5 Years
--------------- -------------- --- --------------------------------------------
John G. McMillian 1997 74 Mr. McMillian has served as the Chairman of the Board of
Chaparral and Chief Executive Officer since January 1999 and
Co-Chairman of the Board since May 1999. From May 1997 to
January 1999, Mr. McMillian served as a director of Chaparral.
Mr. McMillian served as the Chairman, President, and Chief
Executive Officer of Allegheny & Western Energy Corporation,
an oil and gas company, from 1987 to 1995. Mr. McMillian
founded Northwest Energy Company, a major supplier of natural
gas, and served as its Chairman and Chief Executive Officer
from 1973 to 1983. From 1986 to 1989, Mr. McMillian was the
owner, Chairman and Chief Executive Officer of Burger Boat
Company, a boat manufacturing company. Mr. McMillian has
served as a director of Excalibur Technologies and as a member
of its Audit Committee since 1996.
James A. Jeffs 1999 49 Mr. Jeffs has served as the Co-Chairman of the Board of
Chaparral since May 1999. Since 1994, Mr. Jeffs has served as
Managing Director and the Chief Investment Officer for The
Whittier Trust Company, a trust and investment management
company with substantial oil and gas interests, which
beneficially owns 16.23% of our Common Stock. From 1993 to
1994, Mr. Jeffs was a Senior Vice President of Union Bank of
California. Mr. Jeffs was the Chief Investment Officer of
Northern Trust of California, N.A., a trust and investment
management company, from 1992 to 1993. Mr. Jeffs was Chief
Investment Officer and Senior Vice President of Trust Services
of America, a trust and investment management company, from
1988 to 1992 and served as President and Chief Executive
Officer of TSA Capital Management, an institutional investment
management company, during that period.
5
Name of Nominee Director Since Age Principal Occupation During the Last 5 Years
--------------- -------------- --- --------------------------------------------
David A. Dahl 1997 39 Mr. Dahl served as Secretary of Chaparral from August 1997
until May 1998. Currently, Mr. Dahl is the President of
Whittier Energy Company, an oil and gas company, a position
that he has held since 1997. Since 1996, Mr. Dahl has also
served as the President of Whittier Ventures, LLC, a private
investment entity, which beneficially owns 16.23% of our Common
Stock. Since 1993, Mr. Dahl has been a Vice President of
Whittier Trust Company, a trust and investment management
company. From 1990 to 1993, Mr. Dahl was a Vice President of
Merus Capital Management, an investment firm.
Ted Collins, Jr. 1997 62 Mr. Collins has been the President of Collins & Ware
Investments Company, a private investment company, since June
2000. From 1988 to 2000, Mr. Collins was the President of
Collins & Ware, Inc., an independent oil and gas company. From
1982 to 1988, Mr. Collins was the President of Enron Oil & Gas
Co., an oil and gas company. Beginning in 1969 and until 1982,
Mr. Collins was an Executive Vice President and director of
American Quasar Petroleum Co., an oil and gas company. Mr.
Collins also serves on the Board of Directors of Hanover
Compression Company, MidCoast Energy Resources, Inc. and Queen
Sand Resources, Inc.
Richard L. Grant 1998 46 Mr. Grant is the President and Chief Executive Officer of
Cabot LNG LLC, an importer of liquefied natural gas, a
position he has held since September 2000. Since September
1998, Mr. Grant has served as the President of Cabot LNG. Mr.
Grant served in various capacities at Mountaineer Gas Company,
the largest natural gas distribution company in West Virginia,
including President, from September 1988 to August 1998, and
Executive Vice President and General Counsel, from 1986 to
1988. Mr. Grant was an engineer and legal counsel for the
Cincinnati Gas & Electric Company from 1980 to 1986.
Judge Burton B. Roberts 2001 78 Since January 1999, Judge Roberts has served as counsel to the
law firm of Fischbein o Badillo o Wagner o Harding. From 1973
to 1999, Judge Roberts served as Justice of the New York State
Supreme Court, as Administrative Judge for the Criminal
Branch, 12th Judicial District, from January 1984 to January
1999, and for the Civil Branch, 12th Judicial District, from
1988 to 1999. Prior to his service on the bench, Judge Roberts
was an Assistant District Attorney in New York County, then
Chief Assistant District Attorney and District Attorney for
Bronx County, New York. Judge Roberts was formerly Chair of
the Bronx County Coordinating Committee for Criminal Justice
and of the New York State Committee on Audio/Visual coverage.
6
Remuneration of Directors.
During the fiscal year ended December 31, 2000, Chaparral did not
compensate its directors for their service as directors. There were no standard
or other arrangements for the compensation of directors in effect for the fiscal
year ended December 31, 2000.
Recommendation of the Board.
The Board recommends that stockholders vote FOR each of the nominees to
serve as directors of Chaparral.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On September 21, 2000, we converted notes with an aggregate principal
amount of $20.85 million, plus accrued interest of $898,000, into 11,690,259
shares of our Common Stock at a conversion price of $1.86 per share. Originally,
the conversion provision of the notes was subject to stockholder approval, but
our Board authorized management to obtain approval from the holders of the notes
to amend the terms of the notes to allow immediate conversion into shares of our
Common Stock. We obtained approval from such holders, and the notes were
converted on September 21, 2000. The Board's decision to amend the terms of the
notes to allow immediate conversion was based upon several factors, including
the urgency to provide funding for our working capital requirements and the
necessity to raise an additional $10.0 million in new equity on or before
September 30, 2000 that was a requirement under our loan with Shell Capital
Limited.
The principal balance of the notes consisted of $10.04 million issued
during the fourth quarter of 1999 and $10.81 million issued during 2000,
including notes totaling $3.3 million in January and February, $3.0 million in
August, and $4.51 million in September 2000, respectively. The notes were issued
to various related parties and other non-affiliated investors who had provided
funding to support our activities. Notes issued to related parties totaled
$14.69 million, including $9.83 million to Allen & Company Incorporated, $4.05
million to Whittier Ventures, LLC, $662,000 to John G. McMillian, our
Co-Chairman and Chief Executive Officer, and $150,000 to a relative of Jim
Jeffs, our Co-Chairman.
The notes were issued in a series of transactions from late 1999 through
2000. In exchange for the notes, we received $15.56 million in cash and canceled
$5.29 million in promissory notes issued previously in 1999, plus accrued
interest thereon, to Allen & Company ($3.83 million), Whittier Ventures ($1.05
million), and Mr. McMillian ($412,000).
In October 2000, Chaparral issued 1,612,903 shares of Common Stock to Capco
Resources, Ltd. ("Capco") for $3.0 million, or $1.86 per share. Capco Energy,
Inc., an affiliate of Capco, was also a holder of two notes with an aggregate
principal amount of $750,000, which were converted, along with accrued interest
thereon, into 427,113 shares of our Common Stock on September 21, 2000. After
the capital stock transaction, Capco, together with its affiliates, owned
approximately 14.28% of our outstanding Common Stock.
The conversion of the notes and the sale of Common Stock to Capco resulted
in a 92.28% dilution of the holders of our Common Stock outstanding as of
September 20, 2000, not including any shares owned by holders of the notes. The
following table summarizes the additional shares of Common Stock received by
each note holder upon conversion and their respective change in ownership of our
Common Stock before and after the conversion of the notes and the issuance of
Common Stock to Capco.
7
Increase Beneficial ownership %
In Shares ------------------------------
of Common Before After %
8% Noteholder Stock Conversion(1) Conversion(2) Increase
----------------------------------------------------------------------------------------------------
Akin, Gump, Strauss, Hauer & Feld, LLP 113,309 * 0.79% 0.79%
Allen & Company Incorporated 5,561,165 16.69% 40.00% 23.31%
Capco Resources, Ltd. (3) 2,040,016 * 14.28% 14.28%
Cord Capital, LLC 57,125 * 0.40% 0.40%
Cord Family Exempt Trust 85,688 * 0.60% 0.60%
Dardana Limited 405,958 * 2.84% 2.84%
Duncan A. Lee 57,667 * 0.40% 0.40%
EcoTels International Limited 328,593 * 2.30% 2.30%
Global Undervalued Securities Fund, LP 144,168 * 1.01% 1.01%
Goldrust Venture Capital Limited 405,958 * 2.84% 2.84%
Helen Jacobs Strauss Trust 197,985 * 1.39% 1.39%
John G. McMillian 378,634 0.78% 2.70% 1.92%
Marathon Special Opportunity Fund 57,667 * 0.40% 0.40%
Patrick McGee 57,667 * 0.40% 0.40%
Pecos Joint Venture 115,334 * 0.81% 0.81%
Rose Dosti IRA UTA Charles Schwab, Inc. 85,140 * 0.60% 0.60%
Sage Operating, Ltd. 405,958 * 2.84% 2.84%
Stardust Fund Limited 405,958 * 2.84% 2.84%
Thomas G. Murphy 72,084 1.51% 0.61% -0.90%
Whittier Ventures, LLC (4) 2,255,004 6.49% 16.23% 9.74%
William Keller 72,084 1.47% 0.61% -0.86%
----------------------------------------------------------
13,303,162 26.94% 94.89% 67.95%
==========================================================
* No ownership of Common Stock
(1) Chaparral had 980,472 shares of Common Stock outstanding as of September
20, 2000, prior to the conversion of the notes and issuance of Common Stock
to Capco.
(2) Chaparral had 14,283,634 shares of Common Stock outstanding after the
conversion of the notes and accrued interest thereon into 11,690,259 shares
of Common Stock on September 21, 2000, and the issuance of 1,612,903 shares
of Common Stock to Capco on October 30, 2000.
(3) Includes 427,113 shares of Common Stock held by Capco Asset Management,
Inc., an affiliate of Capco Resources, Ltd. and Capco Energy, Inc.
(4) Includes 5,820 shares held by Whittier Energy Company, 158 shares held by
Whittier Opportunity Fund, and 8,334 options underlying shares held by
Whittier Opportunity Fund.
In connection with the loan, Chaparral issued to Shell Capital a warrant to
purchase up to 12.5% of our outstanding Common Stock, subject to certain
anti-dilution provisions. On the date of grant, the warrant represented 147,072
shares of our Common Stock at an exercise price of $15.45 per share. After the
conversion of the notes and the issuance of our Common Stock to Capco, both
dilutive events, the warrant represents 1,785,455 shares of our Common Stock
exercisable at a price of $9.79 per share. Shell Capital is also entitled to
nominate one director to our Board.
Mr. Alan Berlin, Chaparral's Secretary, is a partner in a law firm, Aitken,
Irvin, Berlin & Vrooman, LLP, which provides outside legal services to
Chaparral. The fees incurred are not in excess of 5% of the law firm's gross
revenues for the year ended December 31, 2000.
8
MEETINGS OF THE BOARD AND ITS COMMITTEES
During the fiscal year ended December 31, 2000, Chaparral held six Board
meetings.
The Board had several committees, including the Compensation Committee, the
Nominations Committee and the Audit Committee. No director attended less than
75% of all the meetings of the Board and those committees on which he served
during the fiscal year ended December 31, 2000. The following discussion details
the composition and role of each committee.
As members of the Compensation Committee, Messrs. Grant, Jeffs, and Dahl
recommend cash and non-cash compensation for Chaparral's executives to the full
Board and review and recommend to the full Board stock plans for adoption by the
Chaparral for its directors, officers, employees, and consultants. The
Compensation Committee is also responsible for developing Chaparral's executive
compensation program. The Compensation Committee monitors and grants awards
according to Chaparral's executive compensation program. During the year ended
December 31, 2000, the Compensation Committee met on one occasion.
The Nominations Committee, which consisted of Messrs. Jeffs, Grant and
McMillian, has oversight for recruiting and recommending candidates for election
to the Board and for evaluating director independence and performance. During
fiscal year ended December 31, 2000, the Nominations Committee met on one
occasion.
The Audit Committee of the Board, consisting of Messrs. Grant and Collins
and Judge Roberts, oversees Chaparral's financial reporting process on behalf of
the Board. Management has the primary responsibility for the financial
statements and the reporting process including the systems of internal controls.
The Audit Committee operates pursuant to a written charter, which was approved
and adopted by the Board. A copy of the Audit Committee charter is attached to
this Proxy Statement as Appendix "B". Chaparral's independent accountants, Ernst
& Young LLP, are responsible for expressing an opinion on the conformity of
Chaparral's audited financial statements to generally accepted accounting
principles. The members of the Audit Committee meet the independence and
experience requirements of the Nasdaq SmallCap Stock Market.
REPORT OF THE AUDIT COMMITTEE OF
THE BOARD OF DIRECTORS
In fulfilling its oversight responsibilities, the Audit Committee reviewed
and discussed the audited financial statements in Chaparral's Annual Report with
management, including a discussion of the quality, and not just the
acceptability, of the accounting principles, the reasonableness of significant
judgments, and the clarity of disclosures in the financial statements. The Audit
Committee meets with the independent accountants, with and without management
present, to discuss the scope and plans for the audit, results of their
examinations, their evaluations of Chaparral's internal controls, and the
overall quality of Chaparral's financial reporting. The Audit Committee reviewed
with the independent accountants the acceptability of Chaparral's accounting
principles and such other matters as are required to be discussed with the Audit
Committee under generally accepted auditing standards, including those described
in the Statement on Auditing Standards No. 61, as amended, "Communication with
Audit Committees." In addition, the Audit Committee has discussed with the
independent auditors the auditors' independence from management and Chaparral,
and received the written disclosures required by the Independence Standards
Board Standard No. 1, "Independence Discussions with Audit Committees." The
Audit Committee held one meeting during fiscal year 2000.
9
Fees paid to Ernst & Young, LLP during 2000 amounted to $337,000, composed
of the following:
o Audit Fees. Fees for the audit and quarterly reports for the fiscal
year ended December 31, 2000 totaled $241,000;
o Financial Information Systems Design and Implementation. No fees were
incurred during the fiscal year ended December 31, 2000 for financial
information systems design and implementation; and
o All Other Fees. All other fees paid to our independent auditors during
the fiscal year ended December 31, 2000 totaled $96,000. All non-audit
services were compatible with maintaining Ernst & Young, LLP's
independence.
In reliance on the reviews and discussions referred to above, the Audit
Committee recommended to the Board, and the Board approved, that the audited
financial statements be included in the Annual Report on Form 10-K for the year
ended December 31, 2000, for filing with the Securities and Exchange Commission.
Audit Committee
of the Board of Directors,
Richard L. Grant, Chairman
Ted Collins, Jr.
Judge Burton B. Roberts
10
BENEFICIAL OWNERSHIP OF CERTAIN STOCKHOLDERS, DIRECTORS, NOMINEES,
AND EXECUTIVE OFFICERS
The following table sets forth information as of May 15, 2001, with respect
to directors, nominees, named executive officers of Chaparral and each person
who is known by Chaparral to own beneficially more than 5% of our Common Stock,
and with respect to shares owned beneficially by all directors, nominees, and
executive officers of Chaparral as a group. The address for all directors and
executive officers of Chaparral is 16945 Northchase Drive, Suite 1620, Houston,
Texas 77060.
Percent of
Amount and Nature of Common
Name of Beneficial Owner Position Beneficial Ownership (1) Stock (1)
-------------------------------- ---------------------------- ------------------------ ---------
Allen & Company Incorporated -- 5,732,823(2) 40.00%
711 Fifth Avenue
New York, New York 10022
Whittier Ventures, LLC -- 2,319,169(3) 16.23%
1600 Huntington Drive
South Pasadena, California 91030
Capco Resources, Ltd. -- 1,824,903(4) 13.07%
444 5th Avenue SW
Suite 2240
Calgary, Alberta
Canada T2P2T8
Shell Capital Limited -- 1,785,455(5) 11.11%
Shell Centre
London SE1 7NA
United Kingdom
John G. McMillian Co-Chairman of the Board and 386,303(6) 2.70%
Chief Executive Officer
James A. Jeffs Co-Chairman of the Board 2,329,498(7) 16.30%
David A. Dahl Director 2,320,587(8) 16.24%
Ted Collins, Jr. Director 4,334 *
Richard L. Grant Director -- *
Judge Burton B. Roberts Director -- *
Michael B. Young Treasurer & Controller 1,835(9) *
All current directors, nominees, and -- 2,722,306(10) 19.04%
executive officers as a group (eight
persons)
11
----------
* Represents less than 1% of the shares of Common Stock outstanding.
(1) Beneficial ownership of Common Stock has been determined for this purpose
in accordance with Rule 13d-3 under the Exchange Act, under which a person
is deemed to be the beneficial owner of securities if such person has or
shares voting power or investment power with respect to such securities,
has the right to acquire beneficial ownership within 60 days or acquires
such securities with the purpose or effect of changing or influencing the
control of Chaparral.
(2) Includes 48,284 shares underlying warrants to purchase shares of Common
Stock. Allen & Company is a wholly owned subsidiary of Allen Holding Inc.,
and, consequently, Allen Holding may be deemed to beneficially own the
shares beneficially owned by Allen & Company. Does not include shares owned
directly by officers and stockholders of Allen Holding and Allen & Company
with respect to which Allen Holding and Allen & Company disclaim beneficial
ownership. Officers and stockholders of Allen Holding and Allen & Company
may be deemed to beneficially own shares of the Common Stock reported to be
beneficially owned directly by Allen Holding and Allen & Company.
(3) Includes 334 shares underlying currently exercisable warrants and 8,334
shares underlying a currently exercisable option.
(4) Includes 212,000 shares held by Capco Asset Management, Inc., an affiliate
of Capco Resources, Ltd.
(5) Includes 1,785,455 shares underlying a warrant, which will be exercisable
at the earlier of project completion or September 30, 2001.
(6) Includes 417 shares underlying a currently exercisable option and 417
shares underlying a currently exercisable warrant.
(7) Includes 2,304,523 shares beneficially owned by Whittier Ventures, 334
shares underlying currently exercisable warrants owned by Whittier
Ventures, 5,820 shares owned by Whittier Energy Company, 158 shares owned
by Whittier Opportunity Fund, and 8,334 shares underlying currently
exercisable options owned by Whittier Opportunity Fund. Mr. Jeffs has no
pecuniary interest in the shares beneficially owned by Whittier Ventures,
Whittier Energy Company, and Whittier Opportunity Fund, however, as Vice
President of Whittier Ventures, and Director of Whittier Energy Company,
Mr. Jeffs has voting power and investment power over such shares and, thus,
may be deemed to beneficially own such shares.
(8) Includes 1,251 shares underlying currently exercisable options owned by Mr.
Dahl, 2,304,523 includes shares beneficially owned by Whittier Ventures,
334 shares underlying currently exercisable warrants owned by Whittier
Ventures, 5,820 shares owned by Whittier Energy Company, 158 shares owned
by Whittier Opportunity Fund and 8,334 shares underlying currently
exercisable options owned by Whittier Opportunity Fund. Mr. Dahl has no
pecuniary interest in the shares beneficially owned by Whittier Ventures,
Whittier Energy Company, or Whittier Opportunity Fund, however, as the
President of Whittier Ventures and Whittier Energy Company, Mr. Dahl has
voting power and investment power over such shares and, thus, may be deemed
to beneficially own such shares.
(9) Includes 668 shares owned by Mr. Young and 1,167 shares underlying
currently exercisable options.
(10) Includes the shares as described in Notes (6) through (9) above. In
addition, it includes 4,334 shares owned by Ted Collins, Jr. a Director of
Chaparral. Also includes 167 shares owned by Alan D. Berlin, the Secretary
of Chaparral and 417 shares underlying a presently exercisable option owned
by Mr. Berlin.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Under U.S. securities laws, directors, executive officers and persons
holding more than 10% of Common Stock must report their initial ownership of
Common Stock and any changes in that ownership to the SEC. The SEC has
designated specific due dates for such reports and Chaparral must identify in
this Proxy Statement those persons who did not file such reports when due.
Based solely upon a review of the Forms 3, 4, and 5 and any amendments
furnished to Chaparral during our fiscal year ended December 31, 2000, we
believe that our directors, officers, and greater than 10% beneficial owners
complied with all applicable filing requirements, except the following: (i)
Capco failed to file, on a timely basis, one report representing one
transaction; (ii) Mr. Young failed to file, on a timely basis, one report
representing one transaction, (iii) Messrs. McMillian and Jeffs failed to file,
on a timely basis, one report representing one transaction, (iv) Whittier
Ventures failed to file one report representing one transaction, and (v) Mr.
Dahl failed to file one report representing one transaction. All reports listed
above were subsequently filed with the SEC.
12
EXECUTIVE COMPENSATION
The following table shows the compensation paid by Chaparral for services
rendered by Mr. McMillian, who is currently the Chief Executive Officer and
Co-Chairman of the Board, and Mr. Young, who is the Treasurer, Controller, and
Principal Accounting Officer of Chaparral. There were no other executive
officers of Chaparral whose annual salary and bonus exceeded $100,000 during the
fiscal year ended December 31, 2000.
Summary Compensation Table.
Annual Compensation Long-Term Compensation
--------------------------------- -----------------------------------------
Awards Payouts
--------------------------- ---------
Restricted Securities
Name and Other Annual Stock Underlying LTIP All Other
Principal Position Year Salary Bonus Compensation Awards($) Options/SARs(#) Payouts($) Compensation
------------------ ---- ------ ----- ------------ --------- --------------- ---------- ------------
John G. McMillian 2000 $137,500 -- -- -- -- -- --
Chief Executive 1999 -- -- -- -- -- -- --
Officer (1/99 to
Present)
Michael B. Young 2000 $150,000 -- -- -- -- -- --
Treasurer and 1999 $89,167 $42,500(1) -- -- -- -- --
Controller 1998 $73,333 -- -- $90,000(2) -- -- --
----------
1. Mr. Young received $42,500 in cash bonuses during 1999.
2. Under the terms of a letter agreement, Mr. Young received 167 shares
on February 3, 1998, January 30, 1999, January 30, 2000, and January
30, 2001. The $90,000 represents the market value of such shares at
the closing price on the last trading day immediately preceding the
date of grant. Dividends will be paid on shares of restricted stock
held by Mr. Young if Chaparral pays any dividends on its Common Stock.
At December 31, 2000, the aggregate value of the restricted stock
grants to Mr. Young was $2,168 based on the closing price of our
Common Stock on the last trading day immediately preceding the end of
its fiscal year.
Aggregated Option/SAR Exercises and Year-End Option/SAR Value Table.
Number of Securities Underlying Value of Unexercised
Unexercised Options/SARs at In-the-Money Options/SARs at
December 31, 2000 December 31, 2000
------------------------------- ----------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
Michael B. Young 1,167 -- -- --
No options were exercised in fiscal year 2000.
Director Interlocks.
During our last fiscal year, Messrs. Jeffs, who is the Co-Chairman of the
Board, and Dahl served on the Compensation Committee of the Board and acted as
officers or directors to Whittier Ventures or one of its affiliates. Mr. Jeffs
is a Vice President of Whittier Ventures and a Director of Whittier Energy
Company. Mr. Dahl is President of both Whittier Ventures and Whittier Energy
Company. Whittier Ventures currently owns approximately 16.23% of the
outstanding Common Stock. See "Certain Relationships and Related Transactions"
on page 7 for a description of transactions between Whittier and Chaparral.
13
STOCK PERFORMANCE GRAPH
Comparison of Five Year Cumulative Total Return
The following line graph compares the total returns (assuming
reinvestment of dividends) of our Common Stock, the Nasdaq Market Index and the
SIC Code Index for the five year period ending December 31, 2000.
1995 1996 1997 1998 1999 2000
---- ---- ---- ---- ---- ----
CHAPARRAL RESOURCES, INC. 100.00 140.00 319.98 44.00 16.80 7.73
SIC CODE INDEX 100.00 138.85 141.02 112.96 137.98 175.29
NASDAQ MARKET INDEX 100.00 124.07 151.42 213.57 376.67 236.75
INSIDER PARTICIPATION IN COMPENSATION DECISIONS
AND COMPENSATION COMMITTEE
REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board, consisting of Messrs. Grant,
Jeffs, and Dahl, determines the compensation of the executive officers named in
the Summary Compensation Table on page 13. The Compensation Committee has
furnished the following report on executive compensation in connection with the
Annual Meeting:
Compensation Philosophy.
As members of the Compensation Committee, it is our duty to administer the
executive compensation program for Chaparral. The Compensation Committee is
responsible for establishing appropriate compensation goals for the executive
officers of Chaparral, evaluating the performance of such executive officers in
meeting such goals and making recommendations to the Board with regard to
executive compensation. Chaparral's compensation philosophy is to ensure that
executive compensation be directly linked to continuous improvements in
corporate performance, achievement of specific operations, financial and
strategic objectives, and increases in stockholder value. The Compensation
Committee reviews the compensation packages of Chaparral's executive officers,
taking into account factors which it considers relevant, such as business
conditions within and outside the industry, Chaparral's financial performance,
the market composition for executives of similar background and experience, and
the performance of the executive officer under consideration. The particular
elements of Chaparral's compensation programs for executive officers are
described below.
14
Compensation Structure.
The base compensation for the executive officers of Chaparral named in the
Summary Compensation Table is intended to be competitive with that paid in
comparable situated industries, taking into account the scope of
responsibilities and internal relationships. The goals of the Compensation
Committee in establishing Chaparral's executive compensation program are:
o to compensate the executive officers of Chaparral fairly for their
contributions to Chaparral's short-term and long-term performance; and
o to allow Chaparral to attract, motivate and retain the management
personnel necessary to Chaparral's success by providing an executive
compensation program comparable to that offered by companies with
which Chaparral competes for management personnel.
The elements of Chaparral's executive compensation program, as applied to
all executive officers, including the chief executive officer, are annual base
salaries, annual bonuses and equity incentives. The Compensation Committee bases
its decisions on the scope of the executive's responsibilities, a subjective
evaluation of the executive's performance and the length of time the executive
has been in the position.
During fiscal year ended December 31, 2000, the Compensation Committee
determined not to grant incentive compensation to the executive officers of
Chaparral named in the Summary Compensation Table.
Compensation of the Chief Executive Officer.
Mr. McMillian has served as CEO of Chaparral since January 1999. In
establishing Mr. McMillian's base salary, the Compensation Committee considered
the factors set forth above, including the level of CEO compensation in other
publicly owned/similar sized exploration and production companies in the oil and
gas industry and Mr. McMillian's level of involvement in the day-to-day
operations of Chaparral.
Executive Compensation Deductibility.
Chaparral intends that amounts paid under Chaparral's compensation plans
generally will be deductible compensation expenses. The Compensation Committee
does not currently anticipate that the amount of compensation paid to executive
officers will exceed the amounts specified as deductible according to Section
162(m) of the Internal Revenue Code of 1986.
Compensation Committee Interlocks and Insider Participation.
No executive officer or director of Chaparral serves as an executive
officer, director, or member of a compensation committee of any other entity,
for which an executive officer, director, or member of such entity is a member
of the Board or the Compensation Committee of the Board. There are no other
interlocks.
Compensation Committee
of the Board of Directors,
Richard L. Grant, Chairman
James A. Jeffs
David A. Dahl
15
PROPOSAL TWO
APPROVAL OF CHAPARRAL'S 2001 STOCK INCENTIVE PLAN
The Board has approved, subject to stockholder approval, Chaparral's 2001
Stock Incentive Plan (the "Plan"). The Plan will enhance the ability of
Chaparral and its subsidiaries to attract and retain officers, employees,
directors and consultants of outstanding ability and to provide selected
participants with an interest in Chaparral parallel to that of our stockholders.
The following summary is qualified in its entirety by reference to the text
of the Plan, which is attached to this Proxy Statement as Appendix "A".
SUMMARY OF THE PLAN
General.
The Board intends to enhance the alignment of executive and stockholder
interests through the use of long-term stock-based incentives because they tend
to encourage achievement of superior results over time. By providing
participants with an opportunity to acquire a proprietary interest in Chaparral
and additional incentive and reward opportunities based on the profitable growth
of Chaparral, the Plan will enable the Board to give participants a strong
incentive to work for our continued success. This should result in the retention
of a highly motivated team and make the Plan vital to our ability to attract and
retain outstanding personnel.
Types of Awards.
The Plan provides for the granting of options (either incentive stock
options within the meaning of Section 422(b) of the Internal Revenue Code of
1986, as amended (the "Code"), or nonqualified stock options), restricted Common
Stock, restricted Common Stock units, stock appreciation rights, performance
shares, performance share units, share purchases, share awards, or any
combination thereof (collectively, "Awards").
Options. The Plan provides for two types of options: incentive stock
options and nonqualified stock options (see "Federal Tax Consequences" below).
Chaparral's Board will designate the participants to receive the options, the
number of shares subject to the options, and the terms and conditions of each
option granted under the Plan. An incentive stock option may only be granted to
an individual who is an employee of Chaparral or any parent or subsidiary
corporation (within the meaning of Section 424 of the Code). Further, if the
aggregate fair market value (determined as of the date of grant) of shares with
respect to which incentive stock options become exercisable for the first time
by an employee exceeds $100,000 in any calendar year, the options with respect
to the excess shares will be nonqualified stock options. The term of any option
granted under the Plan cannot exceed ten years from the date of the grant and
any incentive stock option granted to an employee who possesses more than 10% of
the total combined voting power of all classes of stock of Chaparral or of its
subsidiary within the meaning of Section 422(b)(6) of the Code must not be
exercisable after the expiration of five years from the date of grant. The
exercise price per share of Common Stock of options granted under the Plan will
be determined by the Board; provided, however, that the exercise price of an
incentive stock option cannot be less than the fair market value of a share of
Common Stock on the date the option is granted. Further, the exercise price of
any incentive stock option granted to an employee who possesses more than 10% of
the total combined voting power of all classes of stock of Chaparral or of its
subsidiary within the meaning of Section 422(b)(6) of the Code must be at least
110% of the fair market value of the share at the time such option is granted.
The exercise price of options granted under the Plan will be paid in full in a
manner prescribed by the Board.
16
Restricted Common Stock. The Board may from time to time award restricted
Common Stock under the Plan to eligible participants. Restricted Common Stock
will be evidenced in the manner determined by the Board including, but not
limited to, book-entry registration or issuance of stock certificates in the
name of the participant, which shall be held by Chaparral until the end of the
applicable restriction period. A participant may not sell, assign, transfer,
pledge, exchange, hypothecate, or otherwise dispose of such shares until the
expiration of the restriction period. Additionally, a participant will forfeit
all rights to such restricted Common Stock if their service to Chaparral is
terminated prior to expiration of the restriction period. The Board may also
issue restricted Common Stock units having an equivalent value equal to an
identical number of shares of Common Stock.
Stock Appreciation Rights. A stock appreciation right permits the
participant to receive an amount (in cash, Common Stock, or a combination
thereof) equal to the number of stock appreciation rights exercised by the
participant multiplied by the excess of the fair market value of Common Stock on
the exercise date over the stock appreciation rights' exercise price. Stock
appreciation rights may or may not be granted in connection with the grant of an
option. The term of any stock appreciation rights granted under the Plan cannot
exceed ten years from the date of the grant. The exercise price of stock
appreciation rights granted under the Plan will be determined by the Board. A
stock appreciation right may be exercised in whole or in such installments and
at such times as determined by the Board.
Performance Shares. The Plan permits grants of performance shares, which
may be granted in the form of actual shares of Common Stock or Common Stock
units having an equal value. The maximum value of performance shares granted
under the Plan shall be established by the Board at the time of the grant,
however, the maximum number of performance shares to each participant is 750,000
for each 12 months during the performance period. A participant's receipt of
such amount will be contingent upon achievement of performance goals during the
performance period established by the Board. The performance goals may be based
upon one or more of the following factors: revenue, revenue growth, earnings
before interest, taxes, depreciation and amortization ("EBITDA"), EBITDA growth,
funds from operations, funds from operations per share and per share growth,
cash available for distribution, cash available for distribution per share and
per share growth, net earnings, earnings per share and per share growth, return
on equity, return on assets, share price performance on an absolute basis and
relative to an index, improvements in Chaparral's or its subsidiaries attainment
of expense levels, addition of proved reserves, and implementing or completion
of critical projects. Within 90 days after the commencement of the performance
period, the Board will determine the relevant performance conditions. Following
the end of the performance period, the Board will determine the amount payable
to the participant, not to exceed the maximum value of the incentive award,
based on the achievement of the performance conditions for such performance
period.
Share Purchases. The Board may authorize eligible participants to purchase
Common Stock in Chaparral at a price equal to, below, or above the fair market
value of the Common Stock at the time of grant, subject to the terms imposed by
the Board. Chaparral may make loans available to the eligible participants in
connection with the purchase of Common Stock, the terms of which will be
determined by the Board in its sole discretion.
Share Awards. Subject to such performance and employment conditions as the
Board may determine, awards of Common Stock or awards based on the value of the
Common Stock may be granted either alone or in addition to other Awards granted
under the Plan.
17
Effective Date.
The Plan became effective on May 1, 2001, subject to stockholder approval,
and will remain in effect for a term of 10 years unless otherwise terminated by
the Board.
Administration.
The Plan will be administered by the committee comprised of at least two
non-employee, independent directors (the "2001 Plan Committee"). The 2001 Plan
Committee has full authority, subject to the terms of the Plan, to establish
rules and regulations for the proper administration of the Plan, to determine
which participants will receive an Award, the time or times when such Award will
be made, the type of the Award and the number of shares of Common Stock to be
issued under the Award or the value or amount of the Award.
Eligibility.
All officers, employees, directors and consultants of Chaparral and its
affiliates (including an employee who may also be a director of Chaparral) will
be eligible to receive Awards under the Plan, however, only employees of
Chaparral and its subsidiaries may be granted Incentive Stock Options.
Number of Shares Subject to the Plan.
The aggregate number of shares that may be subject to Awards under the Plan
is 2,143,000 shares of Common Stock. This limit may be adjusted by the Board in
its sole discretion in the event of stock dividends, stock splits and certain
other events as specified in the Plan. During the term of the Plan, no
participant may be granted Awards denominated in shares of Common Stock with
respect to more than 750,000 shares of Common Stock that may be subject to
Awards under the Plan. If an Award lapses or the rights of a participant in an
Award terminate, any shares of Common Stock subject to the Award will again be
available for grant under the Plan. Any shares of Common Stock that remain
unissued and are not subject to outstanding Awards at the termination of the
Plan will cease to be subject to the Plan.
Change In Control.
The Plan provides that, upon a change in control (as defined in the Plan),
all outstanding Awards granted automatically become fully vested, any
restrictions with respect to such Awards lapse and any performance goals with
respect to such Awards are deemed to have been met in full (at the maximum
performance level).
Amendments.
The Board may from time to time amend, suspend or terminate the Plan, or
any portion thereof, at any time, provided that (a) no amendment shall be made
without stockholder approval if such approval is necessary to comply with any
applicable law, regulation or stock exchange rule and (b) no amendment shall be
made that would adversely affect the rights of a participant under an Award
previously granted, without such participant's written consent.
Federal Income Tax Consequences.
Incentive Stock Options. Options that constitute incentive stock options
within the meaning of Section 422(b) of the Code are subject to special federal
income tax treatment. An employee who has been granted an incentive stock option
will not realize taxable income at the time of the grant or exercise of such
option, and Chaparral will not be entitled to a deduction at either such time,
18
if the employee makes no disposition of shares acquired pursuant to such
incentive stock option (a) within two years after the option was granted or (b)
within one year after exercising such option (collectively, the "Holding
Periods"). However, the employee must include the difference between the
exercise price and the fair market value of the Common Stock on the date of
exercise in alternative minimum taxable income. If the employee exercises an
incentive stock option and disposes of the stock in the same year and the amount
realized is less than the fair market value on the exercise date, only the
difference between the amount realized and the adjusted basis of the stock will
be included in alternative minimum taxable income. Upon disposition of the
shares of Common Stock received upon exercise of an incentive stock option after
the Holding Periods, the difference between the amount realized and the exercise
price should constitute a long-term capital gain or loss. Under such
circumstances, however, Chaparral will not be entitled to any deduction for
federal income tax purposes.
If an employee disposes of shares acquired pursuant to the exercise of an
incentive stock option prior to the end of the Holding Periods, the disposition
would be treated as a disqualifying disposition. The employee will be treated as
having received, at the time of disposition, compensation taxable as ordinary
income equal to the excess of the fair market value of the shares at the time of
exercise (or in the case of a sale in which a loss would be recognized, the
amount realized on the sale, if less) over the exercise price and any amount
realized in excess of the fair market value of the shares at the time of
exercise would be treated as a short-term or long-term capital gain, depending
on the holding period of the shares of Common Stock. In the event of a
disqualifying disposition, and subject to the application of Section 162(m) of
the Code as discussed below, Chaparral may claim a deduction for compensation
paid at the same time and in the same amount as taxable compensation is treated
as received by the employee. However, Chaparral will not be entitled to any
deduction in connection with any loss to the employee or a portion of any gain
that is taxable to the employee as short-term or long-term capital gain.
Nonqualified Stock Options. Nonqualified stock options (options that are
not incentive stock options within the meaning of Section 422(b) of the Code)
will not qualify for special federal income tax treatment. As a general rule, no
federal income tax is imposed on the optionee upon the grant of a nonqualified
stock option and Chaparral is not entitled to a tax deduction by reason of such
grant. Upon exercise of a nonqualified stock option, the optionee will realize
ordinary income in an amount equal to the excess, if any, of the fair market
value of the shares on the date of exercise over the option exercise price, and,
subject to the application of Section 162(m) of the Code as discussed below,
Chaparral will be entitled to a corresponding deduction assuming any federal
income tax reporting requirements are satisfied. Ordinary income realized upon
the exercise of a nonqualified stock option is not an adjustment for alternative
minimum tax purposes. In the case of an option holder subject to Section 16(b)
of the Exchange Act, subject to certain exceptions, ordinary income will be
recognized by the optionee (and, subject to the application of Section 162(m) of
the Code, and assuming any federal income tax reporting requirements are
satisfied, a deduction by Chaparral) upon the exercise of the nonqualified stock
option if the exercise occurs more than six months after the date of grant of
the nonqualified stock option. Upon a subsequent disposition of shares received
upon exercise of a nonqualified stock option, the optionee will realize a
short-term or long-term capital gain or loss to the extent of any intervening
appreciation or depreciation. However, Chaparral will not be entitled to any
further deduction at that time.
Section 162(m) of the Code. Section 162(m) of the Code precludes a public
corporation from taking a deduction for annual compensation in excess of $1
million paid to its chief executive officer or any of its four other
highest-paid officers. However, compensation that qualifies under Section 162(m)
of the Code as "performance-based" is specifically exempt from the deduction
limit. Based on Section 162(m) of the Code and the regulations thereunder,
Chaparral's ability to deduct compensation income generated in connection with
the exercise of stock options or stock appreciation rights granted under the
Plan may be limited by Section 162(m) of the Code. The Plan has been designed to
provide flexibility with respect to whether restricted Common Stock and
19
performance shares will qualify as performance-based compensation under Section
162(m) of the Code and, therefore, be exempt from the deduction limit. If the
forfeiture restrictions relating to a such awards are based solely upon the
satisfaction of one of the performance goals set forth in the Plan, then
Chaparral believes that the compensation expense relating to such an award will
be deductible by Chaparral if the awards become vested. However, compensation
expense deductions relating to such awards will be subject to the Section 162(m)
deduction limitation if such awards become vested based upon any other criteria
set forth in such award (such as the occurrence of a Change in Control or
vesting based upon continued employment with Chaparral).
Withholding. Chaparral has the right to deduct from any or all Awards any
taxes required by law to be withheld and to require any payments necessary to
enable it to satisfy its withholding obligations.
The Plan is not qualified under section 401(a) of the Code.
The comments set forth in the above paragraphs are only a summary of
certain of the Federal income tax consequences relating to the Plan. No
consideration has been given to the effects of state, local, or other tax laws
on the Plan or Award recipients.
Inapplicability of ERISA.
Based upon current law and published interpretations, Chaparral does not
believe the Plan is subject to any of the provisions of the Employee Retirement
Income Security Act of 1974, as amended.
Anticipated Grants.
Up to 2,143,000 shares of Chaparral's Common Stock are available for the
grant of Awards under the Plan. As of May 15, 2001, the market value of the
common stock underlying the Plan is approximately $6,215,000. The Board has not
made any grants under the proposed Plan, but anticipates making the following
initial awards of qualified and non-qualified options, with an exercise price
equal to the fair market value of Chaparral's Common Stock on the date of grant,
to be as follows:
Number of
Name and Position Shares
----------------- ------
John G. McMillian, Co-Chairman and CEO 585,000
James A. Jeffs, Co-Chairman 585,000
Michael B. Young, Treasurer & Controller 150,000
W. Merwyn Pittman, Consultant 175,000
All Current Executive Officers, as a group 1,320,000
All Directors who are not Executive Officers, as a group 110,000
All Employees, including officers, who are not Executive Officers 310,000
Stockholder Approval.
Stockholder approval of the Plan is required for listing of the shares for
trading on The Nasdaq SmallCap Stock Market and as a condition to the
effectiveness of the Plan. Stockholder approval is also required so that
incentive stock options under the Plan will qualify under Section 422 of the
Code and so that certain awards under the Plan will qualify as performance-based
compensation under Section 162(m) of the Code.
20
Recommendation of the Board.
The Board recommends that stockholders vote FOR Chaparral's 2001 Stock
Incentive Plan.
PROPOSAL THREE
RATIFICATION OF INDEPENDENT AUDITORS
The Board has appointed Ernst & Young LLP, certified public accountants, as
auditors to examine the consolidated financial statements of Chaparral for the
fiscal years ending December 31, 2000 and 2001, and to perform other appropriate
audit and advisory services and is requesting ratification of such appointment
by the stockholders. In the event that the stockholders do not ratify the
appointment of Ernst & Young LLP, the adverse vote will be considered as a
direction to the Board to select other auditors for the next fiscal year.
However, because of the difficulty and expense of making any substitution of
auditors after the beginning of the current fiscal year, it is contemplated that
the appointment for the fiscal year ending December 31, 2001, will be permitted
to stand, unless the Board finds other reasons for making a change. It is
understood that even if the selection of Ernst & Young LLP is ratified, the
Board, in its discretion, may direct the appointment of a new independent
accounting firm at any time during the year if the Board feels that such a
change would be in the best interests of Chaparral and its stockholders.
Representatives of Ernst & Young LLP will be present at the Annual Meeting,
will have an opportunity to make a statement if they desire to do so and will be
available to respond to appropriate questions. This proposal will be approved if
it receives the affirmative vote of holders of a majority of the shares of
Common Stock voted or represented and entitled to vote at the Annual Meeting.
Recommendation of the Board.
The Board recommends that stockholders vote FOR the proposal to ratify the
appointment of Ernst & Young LLP as Chaparral's independent auditors for fiscal
year 2001.
OTHER BUSINESS
Management knows of no other business to be presented for action at the
meeting. If other matters properly come before the meeting or any adjournment of
the meeting, the persons named as proxies will vote upon them in accordance with
their best judgment.
By Order of the Board of Directors,
/s/ Alan D. Berlin
------------------
Alan D. Berlin
Secretary
Houston, Texas
May 24, 2001
21
Appendix A
CHAPARRAL RESOURCES, INC.
2001 STOCK INCENTIVE PLAN
1. Purpose. The purpose of the Chaparral Resources, Inc. 2001 Stock Incentive
Plan (the "Plan") is to enhance the ability of Chaparral Resources, Inc.
(the "Company") and its subsidiaries to attract and retain officers,
employees, directors and consultants of outstanding ability and to provide
selected officers, employees, directors and consultants with an interest in
the Company parallel to that of the Company's shareholders. The term
"Company" as used in this Plan with reference to employment shall include
the Company and its Subsidiaries, as appropriate.
2. Definitions.
(a) "Award" shall mean an award determined in accordance with the terms of
the Plan.
(b) "Board" shall mean the Board of Directors of the Company.
(c) "Cause" shall mean (i) if a Participant is party to an employment
agreement or similar agreement with the Company and such agreement
includes a definition of Cause, the definition contained therein or
(ii) if no such employment or similar agreement exists, it shall mean
(A) the Participant's failure to perform the duties reasonably
assigned to him or her by the Company, (B) a good faith finding by the
Company of the Participant's dishonesty, gross negligence or
misconduct, (C) a material breach by the Participant of any written
Company employment policies or rules or (D) the Participant's
conviction for, or his or her plea of guilty or nolo contendere to, a
felony or for any other crime which involves fraud, dishonesty or
moral turpitude.
(d) "Change in Control" shall mean the occurrences of:
(i) An acquisition (other than directly from the Company) of any
voting securities of the Company (the "Voting Securities") by any
"Person" (as the term person is used for purposes of Section
13(d) or 14(d) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act")), immediately after which such Person has
"Beneficial Ownership" (within the meaning of Rule 13d-3
promulgated under the Exchange Act) of thirty percent (30%) or
more of the then outstanding shares of Common Stock or the
combined voting power of the Company's then outstanding Voting
Securities; provided, however, in determining whether a Change in
Control has occurred, shares of Common Stock or Voting Securities
which are acquired in a "Non-Control Acquisition" (as hereinafter
defined) shall not constitute an acquisition which would cause a
Change in Control. A "Non-Control Acquisition" shall mean an
acquisition by (A) an employee benefit plan (or a trust forming a
part thereof) maintained by (1) the Company or (2) any
corporation or other Person of which a majority of its voting
power or its voting equity securities or equity interest is
owned, directly or indirectly, by the Company (for purposes of
this definition, a "Subsidiary"), (B) the Company or its
Subsidiaries, or (C) any Person in connection with a "Non-Control
Transaction" (as hereinafter defined);
(ii) The individuals who, as of the Effective Date are members of the
Board (the "Incumbent Board"), cease for any reason to constitute
at least two-thirds of the members of the Board; provided,
however, that if the election, or nomination for election by the
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Company's common stockholders, of any new director was approved
by a vote of at least two-thirds of the Incumbent Board, such new
director shall, for purposes of this Plan, be considered as a
member of the Incumbent Board; provided, further, however, that
no individual shall be considered a member of the Incumbent Board
if such individual initially assumed office as a result of either
an actual or threatened "Election Contest" (as described in Rule
14a-11 promulgated under the Exchange Act) or other actual or
threatened solicitation of proxies or consents by or on behalf of
a Person other than the Board (a "Proxy Contest") including by
reason of any agreement intended to avoid or settle any Election
Contest or Proxy Contest; or
(iii) The consummation of:
(A) A merger, consolidation or reorganization with or into the
Company or in which securities of the Company are issued,
unless such merger, consolidation or reorganization is a
"Non-Control Transaction." A "Non-Control Transaction" shall
mean a merger, consolidation or reorganization with or into
the Company or in which securities of the Company are issued
where:
(1) the stockholders of the Company, immediately before
such merger, consolidation or reorganization, own
directly or indirectly immediately following such
merger, consolidation or reorganization, at least fifty
percent (50%) of the combined voting power of the
outstanding voting securities of the corporation
resulting from such merger or consolidation or
reorganization (the "Surviving Corporation") in
substantially the same proportion as their ownership of
the Voting Securities immediately before such merger,
consolidation or reorganization,
(2) the individuals who were members of the Incumbent Board
immediately prior to the execution of the agreement
providing for such merger, consolidation or
reorganization constitute at least two-thirds of the
members of the board of directors of the Surviving
Corporation, or a corporation beneficially directly or
indirectly owning a majority of the Voting Securities
of the Surviving Corporation, and
(3) no Person other than (a) the Company, (b) any
Subsidiary, (c) any employee benefit plan (or any trust
forming a part thereof) that, immediately prior to such
merger, consolidation or reorganization, was maintained
by the Company or any Subsidiary, or (d) any Person
who, immediately prior to such merger, consolidation or
reorganization had Beneficial Ownership of thirty
percent (30%) or more of the then outstanding Voting
Securities or shares of Common Stock, has Beneficial
Ownership of thirty percent (30%) or more of the
combined voting power of the Surviving Corporation's
then outstanding voting securities or its common stock.
(B) A complete liquidation or dissolution of the Company; or
(C) The sale or other disposition of all or substantially all of
the assets of the Company to any Person (other than a
transfer to a Subsidiary).
Notwithstanding the foregoing, a Change in Control shall not be deemed to
occur solely because any Person (the "Subject Person") acquired Beneficial
Ownership of more than the permitted amount of the then outstanding Shares
or Voting Securities as a result of the acquisition of shares of Common
Stock or Voting Securities by the Company which, by reducing the number of
shares of Common Stock or Voting Securities then outstanding, increases the
proportional number of shares Beneficially Owned by the Subject Persons,
provided that if a Change in Control would occur (but for the operation of
this sentence) as a result of the acquisition of shares of Common Stock or
Voting Securities by the Company, and after such share acquisition by the
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Company, the Subject Person becomes the Beneficial Owner of any additional
shares of Common Stock or Voting Securities which increases the percentage
of the then outstanding shares of Common Stock or Voting Securities
Beneficially Owned by the Subject Person, then a Change in Control shall
occur.
(e) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(f) "Committee" shall mean a committee of at least two members of the
Board appointed by the Board to administer the Plan and to perform the
functions set forth herein and who are "non-employee directors" within
the meaning of Rule 16b-3 as promulgated under Section 16 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and
who are also "outside directors" within the meaning of Section 162(m)
of the Code.
(g) "Common Stock" shall mean the common stock of the Company.
(h) "Continuous Service" means that the Participant's service as an
employee, director or consultant with the Company or a Subsidiary
which is not interrupted or terminated. The Participant's Continuous
Service shall not be deemed to have terminated merely because of a
change in the capacity in which the Participant renders service to the
Company or a Subsidiary as an employee, director or consultant or a
change in the entity for which the Participant renders such service;
provided, that, there is no interruption or termination of the
Participant's Continuous Service other than an approved leave of
absence. The Committee, in its sole discretion, may determine whether
Continuous Service shall be considered interrupted.
(i) "Covered Employee" shall have the meaning set forth in Section
162(m)(3) of the Code.
(j) "Disability" shall have the same meaning as provided in any long-term
disability plan maintained by the Company or any Subsidiary that a
Participant then participates (the "LTD Plans"); provided, that, if no
such plan exists, it shall have the meaning set forth in Section
22(e)(3) of the Code.
(k) "Fair Market Value" per share as of a particular date shall mean,
unless otherwise determined by the Board, the last reported sale price
(on the day immediately preceding such date) of the Common Stock on
the New York Stock Exchange (or any other exchange or national market
system upon which price quotations for the Company's Common Stock is
regularly available).
(l) "Immediate Family Member" shall mean, except as otherwise determined
by the Committee, a Participant's spouse, ancestors and descendants.
(m) "Incentive Stock Option" shall mean a stock option which is intended
to meet the requirements of Section 422 of the Code.
(n) "Nonqualified Stock Option" shall mean a stock option which is not
intended to be an Incentive Stock Option.
(o) "Option" shall mean either an Incentive Stock Option or a Nonqualified
Stock Option.
(p) "Participant" shall mean an officer, employee, director or consultant
of the Company or its Subsidiaries who is selected to participate in
the Plan in accordance with Section 5.
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(q) "Retirement" shall mean a Participant's retirement upon (i) the
attainment of age 65 or (ii) the attainment of combined years of age
and years of service with the Company equal to or exceeding 85 or
(iii) the attainment of age 62 with 5 years of service with the
Company.
(r) "Subsidiary" shall mean any affiliate of the Company selected by the
Board; provided, that, with respect to Incentive Stock Options, it
shall mean any subsidiary of the Company that is a corporation and
which at the time qualifies as a "subsidiary corporation" within the
meaning of Section 424(f) of the Code.
3. Shares Subject to the Plan. Subject to adjustment in accordance with
Section 18, the total of the number of shares of Common Stock which shall
be available for the grant of Awards under the Plan shall not exceed
2,143,000 shares of Common Stock; provided, that, for purposes of this
limitation, any Common Stock subject to an Option which is canceled or
expires without exercise shall again become available for Award under the
Plan. Upon forfeiture of Awards in accordance with the provisions of the
Plan and the terms and conditions of the Award, such shares shall again be
available for subsequent Awards under the Plan. Subject to adjustment in
accordance with Section 18, no employee shall be granted, during any
calendar year, Options to purchase more than 750,000 shares of Common
Stock. Common Stock available for issue or distribution under the Plan
shall be authorized and unissued shares or shares reacquired by the Company
in any manner.
4. Administration.
(a) The Plan shall be administered by the Committee. All references to the
Committee hereinafter shall mean the Board if no such Committee has
been appointed.
(b) The Committee shall (i) approve the selection of Participants, (ii)
determine the type of Awards to be made to Participants, (iii)
determine the number of shares of Common Stock subject to Awards, (iv)
determine the terms and conditions of any Award granted hereunder
(including, but not limited to, any restriction and forfeiture
conditions on such Award) and (v) have the authority to interpret the
Plan, to establish, amend, and rescind any rules and regulations
relating to the Plan, to determine the terms and provisions of any
agreements entered into hereunder, and to make all other
determinations necessary or advisable for the administration of the
Plan. The Committee may correct any defect, supply any omission or
reconcile any inconsistency in the Plan or in any Award in the manner
and to the extent it shall deem desirable to carry it into effect.
(c) Any action of the Committee shall be final, conclusive and binding on
all persons, including the Company and its Subsidiaries and
shareholders, Participants and persons claiming rights from or through
a Participant.
(d) The Committee may delegate to officers or employees of the Company or
any Subsidiary, and to service providers, the authority, subject to
such terms as the Committee shall determine, to perform administrative
functions with respect to the Plan and Award agreements.
(e) Members of the Committee and any officer or employee of the Company or
any Subsidiary acting at the direction of, or on behalf of, the
Committee shall not be personally liable for any action or
determination taken or made in good faith with respect to the Plan,
and shall, to the extent permitted by law, be fully indemnified by the
Company with respect to any such action or determination.
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5. Eligibility. Individuals eligible to receive Awards under the Plan shall be
the officers, employees, directors and consultants of the Company and its
Subsidiaries selected by the Committee; provided, that, only employees of
the Company and its Subsidiaries may be granted Incentive Stock Options.
6. Awards. Awards under the Plan may consist of Options, restricted Common
Stock, restricted Common Stock units, performance shares, performance share
units, purchases, share awards, stock appreciation rights or other awards
based on the value of the Common Stock. Awards shall be subject to the
terms and conditions of the Plan and shall be evidenced by an agreement
containing such additional terms and conditions, not inconsistent with the
provisions of the Plan, as the Committee shall deem desirable.
7. Options. Options may be granted under the Plan in such form as the
Committee may from time to time approve pursuant to terms set forth in an
Option agreement. The Committee may alter or waive, at any time, any term
or condition of an Option that is not mandatory under the Plan.
(a) Types of Options. Each Option agreement shall state whether or not the
Option will be treated as an Incentive Stock Option or Nonqualified
Stock Option. The aggregate Fair Market Value of the Common Stock for
which Incentive Stock Options granted to any one employee under this
Plan or any other incentive stock option plan of the Company or of any
of its Subsidiaries may by their terms first become exercisable during
any calendar year shall not exceed $100,000, determining Fair Market
Value as of the date each respective Option is granted. In the event
such threshold is exceeded in any calendar year, such excess Options
shall be automatically deemed to be Nonqualified Stock Options.
(b) Option Price. The purchase price per share of the Common Stock
purchasable under an Option shall be determined by the Committee;
provided, however, the exercise price for Incentive Stock Options will
be not less than 100% of the Fair Market Value of the Common Stock on
the date of the grant and in the case of Incentive Stock Options
granted to an employee owning stock possessing more than 10% of the
total combined voting power of all classes of shares of the Company
and its Subsidiaries (a "10% Shareholder") the price per share
specified in the agreement relating to such Option shall not be less
than 110% of the Fair Market Value per share of the Common Stock on
the date of grant.
(c) Option Period. The term of each Option shall be fixed by the
Committee, but no Option shall be exercisable after the expiration of
ten (10) years from the date the Option is granted; provided, that, in
the case of Incentive Stock Options granted to 10% Shareholders, the
term of such Option shall not exceed 5 years from the date of grant.
(d) Exercisability. Each Option shall vest and become exercisable at a
rate determined by the Committee on the date of grant.
(e) Method of Exercise. Options may be exercised, in whole or in part, by
giving written notice of exercise to the Company specifying the number
shares of Common Stock to be purchased. Such notice shall be
accompanied by the payment in full of the Option purchase price. Such
payment shall be made: (i) in cash, or (ii) to the extent authorized
by the Committee and permissible under applicable law, by a note fully
secured by the Common Stock, or (iii) to the extent authorized by the
Committee, by surrender of Common Stock owned by the holder of the
Option for at least six (6) months prior to exercise of the Options,
or (iv) through simultaneous sale through a broker of shares acquired
on exercise, as permitted under Regulation T of the Federal Reserve
Board, or (v) through additional methods prescribed by the Committee,
or (vi) by a combination of any such methods. A Participant's
subsequent transfer or disposition of any Common Stock acquired upon
exercise of an Option shall be subject to any Federal and state laws
then applicable, specifically securities law, and the terms and
conditions of this Plan.
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8. Restricted Common Stock. The Committee may from time to time award
restricted Common Stock under the Plan to eligible Participants. Shares of
restricted Common Stock may not be sold, assigned, transferred or otherwise
disposed of, or pledged or hypothecated as collateral for a loan or as
security for the performance of any obligation or for any other purpose,
for such period (the "Restricted Period") as the Committee shall determine.
The Committee may define the Restricted Period in terms of the passage of
time or in any other manner it deems appropriate. The Committee may alter
or waive at any time any term or condition of restricted Common Stock that
is not mandatory under the Plan.
Unless otherwise determined by the Committee, upon termination of a
Participant's Continuous Service with the Company for any reason prior to
the end of the Restricted Period, the restricted Common Stock shall be
forfeited and the Participant shall have no right with respect to the
Award.
Except as restricted under the terms of the Plan and any Award agreement,
any Participant awarded restricted Common Stock shall have all the rights
of a shareholder including, without limitation, the right to vote
restricted Common Stock.
If a share certificate is issued in respect of restricted Common Stock, the
certificate shall be registered in the name of the Participant, but shall
be held by the Company for the account of the Participant until the end of
the Restricted Period.
The Committee may also award restricted Common Stock in the form of
restricted Common Stock units having a value equal to an identical number
of shares of Common Stock. Payment of restricted Common Stock units shall
be made in Common Stock or in cash or in a combination thereof (based upon
the Fair Market Value of the Common Stock on the day the Restricted Period
expires), all as determined by the Committee in its sole discretion.
9. Performance Shares. Performance shares may be granted in the form of actual
shares of Common Stock or Common Stock units having a value equal to an
identical number of shares of Common Stock. In the event that a share
certificate is issued in respect of performance shares, such certificate
shall be registered in the name of the Participant but shall be held by the
Company until the time the performance shares are earned. The performance
conditions and the length of the performance period shall be determined by
the Committee, but in no event may a performance period be less than twelve
months. The Committee shall determine in its sole discretion whether
performance shares granted in the form of Common Stock units shall be paid
in cash, Common Stock, or a combination of cash and Common Stock.
Awards of performance shares to a Covered Employee shall be subject to
performance goals. Performance goals may be expressed in terms of one or
more of the following: revenue, revenue growth, earnings before interest,
taxes, depreciation and amortization ("EBITDA"), EBITDA growth, funds from
operations, funds from operations per share and per share growth, cash
available for distribution, cash available for distribution per share and
per share growth, net earnings, earnings per share and per share growth,
return on equity, return on assets, share price performance on an absolute
basis and relative to an index, improvements in the Company's or its
Subsidiary's attainment of expense levels, and implementing or completion
of critical projects. The Committee shall establish the relevant
performance conditions within 90 days after the commencement of the
performance period (or such later date as may be required or permitted by
Section 162(m) of the Code). The Committee may, in its discretion, reduce
or eliminate the amount of payment with respect to an Award of performance
shares to a Covered Employee, notwithstanding the achievement of a
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specified performance condition. Subject to Section 18, the maximum number
of performance shares subject to any Award to a Covered Employee is 750,000
for each 12 months during the performance period (or, to the extent the
Award is paid in cash, the maximum dollar amount of any such Award is the
equivalent cash value, based on the Fair Market Value of the Common Stock,
of such number of shares of Common Stock on the last day of the performance
period). An Award of performance shares to a Participant who is a Covered
Employee shall (unless the Committee determines otherwise) provide that in
the event of the Participant's termination of Continuous Service prior to
the end of the performance period for any reason, such Award will be
payable only (A) if the applicable performance conditions are achieved and
(B) to the extent, if any, as the Committee shall determine.
10. Share Purchases. The Committee may authorize eligible individuals to
purchase Common Stock in the Company at a price equal to, below or above
the Fair Market Value of the Common Stock at the time of grant. Any such
offer may be subject to the conditions and terms the Committee may impose.
The Company may make loans available to eligible Participants in connection
with the purchase of Common Stock, as the Committee, in its discretion, may
determine. The terms and conditions of any such loans shall be determined
by the Committee, in its sole discretion.
11. Stock Appreciation Rights. The Committee may in its discretion, either
alone or in connection with the grant of another Award, grant stock
appreciation rights in accordance with the Plan, the terms and conditions
of which shall be set forth in an Agreement. If granted in connection with
an Option, a Stock Appreciation Right shall cover the same number of shares
of Common Stock covered by the Option (or such lesser number of shares as
the Committee may determine) and shall, except as provided in this Section
8, be subject to the same terms and conditions as the related Option.
(a) Time of Grant. A stock appreciation right may be granted (i) at any
time if unrelated to an Option, or (ii) if related to an Option,
either at the time of grant, or at any time thereafter during the term
of the Option.
(b) Stock Appreciation Right Related to an Option.
(i) A stock appreciation right granted in connection with an Option
shall be exercisable at such time or times and only to the extent
that the related Options are exercisable, and will not be
transferable except to the extent the related Option may be
transferable. A stock appreciation right granted in connection
with an Incentive Stock Option shall be exercisable only if the
Fair Market Value of a share of Common Stock on the date of
exercise exceeds the purchase price specified in the related
Incentive Stock Option Agreement.
(ii) Upon the exercise of a stock appreciation right related to an
Option, the Participant shall be entitled to receive an amount
determined by multiplying (A) the excess of the Fair Market Value
of a share of Common Stock on the date preceding the date of
exercise of such stock appreciation right over the per share
purchase price under the related Option, by (B) the number of
shares of Common Stock as to which such stock appreciation right
is being exercised. Notwithstanding the foregoing, the Committee
may limit in any manner the amount payable with respect to any
stock appreciation right by including such a limit in the
Agreement evidencing the stock appreciation right at the time it
is granted.
(iii) Upon the exercise of a stock appreciation right granted in
connection with an Option, the Option shall be canceled to the
extent of the number of shares as to which the stock appreciation
right is exercised, and upon the exercise of an Option granted in
connection with a stock appreciation right, the stock
appreciation right shall be canceled to the extent of the number
of Shares as to which the Option is exercised or surrendered.
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(c) Stock Appreciation Right Unrelated to an Option. The Committee may
grant to Participant Stock Appreciation Rights unrelated to Options.
Stock appreciation rights unrelated to Options shall contain such
terms and conditions as to exercisability, vesting and duration as the
Committee shall determine, but in no event shall they have a term of
greater than ten (10) years. Upon exercise of a stock appreciation
right unrelated to an Option, the Participant shall be entitled to
receive an amount determined by multiplying (i) the excess of the Fair
Market Value of a share on the date preceding the date of exercise of
such stock appreciation right over the per share exercise price of the
stock appreciation right, by (ii) number of shares of Common Stock as
to which the stock appreciation right is being exercised.
Notwithstanding the foregoing, the Committee may limit in any manner
the amount payable with respect to any stock appreciation right by
including such a limit in the Agreement evidencing the stock
appreciation right at the time it is granted.
(d) Method of Exercise. Stock appreciation rights shall be exercised by a
Participant only by a written notice delivered in person or by mail to
the Company at the Company's principal executive office, specifying
the number of shares of Common Stock with respect to which the stock
appreciation right is being exercised. If requested by the Committee,
the Participant shall deliver the Agreement evidencing the stock
appreciation right being exercised and the Agreement evidencing any
related Option to the Company who shall endorse thereon a notation of
such exercise and return such Agreement to the Participant.
(e) Form of Payment. Payment of the amount determined under this Section
11 may be made in the discretion of the Committee solely in whole
shares of Common Stock in a number determined at their Fair Market
Value on the date preceding the date of exercise of the stock
appreciation right, or solely in cash, or in a combination of cash and
shares. If the Committee decides to make full payment in shares in
Common Stock and the amount payable results in a fractional share,
payment for the fractional share will be made in cash.
12. Share Awards. Subject to such performance and employment conditions as the
Committee may determine, awards of Common Stock or awards based on the
value of the Common Stock may be granted either alone or in addition to
other Awards granted under the Plan. Any Awards under this Section 12 and
any Common Stock covered by any such Award may be forfeited to the extent
so provided in the Award agreement, as determined by the Committee. Payment
of Common Stock awards made under this Section 12 which are based on the
value of Common Stock may be made in Common Stock or in cash or in a
combination thereof (based upon the Fair Market Value of the Common Stock
on the date of payment), all as determined by the Committee in its sole
discretion.
13. Change in Control. Upon the occurrence of a Change in Control, all Options
and stock appreciation rights shall automatically become vested and
exercisable in full and all restrictions or performance conditions, if any,
on any Common Stock awards, restricted Common Stock, restricted Common
Stock units, performance shares or performance share units granted
hereunder shall automatically lapse. The Committee may, in its discretion,
include such further provisions and limitations in any agreement
documenting such Awards as it may deem equitable and in the best interests
of the Company.
14. Withholding. Upon (a) disposition of shares of Common Stock acquired
pursuant to the exercise of an Incentive Stock Option granted pursuant to
the Plan within two years of the granting of the Incentive Stock Option or
within one year after exercise of the Incentive Stock Option, or (b)
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exercise of a Nonqualified Stock Option (or an Incentive Stock Option
treated as a Nonqualified Stock Option), exercise of a stock appreciation
right or the vesting or payment of any other Award under the Plan, or (c)
under any other circumstances determined by the Committee in its sole
discretion, the Company shall have the right to require any Participant,
and such Participant by accepting the Awards granted under the Plan agrees,
to pay to the Company the amount of any taxes which the Company shall be
required to withhold with respect thereto. In the event of clauses (a), (b)
or (c), with the consent of the Committee, at its sole discretion, such
Participant may elect to pay to the Company an amount equal to the amount
of the taxes which the Company shall be required to withhold by delivering
to the Company shares of Common Stock having a Fair Market Value equal to
the amount of the withholding tax obligation as determined by the Company;
provided, however, that no shares of Common Stock are withheld with a value
exceeding the minimum amount of tax required to be withheld by law. Such
shares so delivered to satisfy the minimum withholding obligation may be
either shares withheld by the Company upon the exercise of the Option or
other shares. At the Committee's sole discretion, a Participant may elect
to have additional taxes withheld and satisfy such withholding with cash or
shares of Common Stock held for at least six (6) months prior to exercise,
if, in the opinion of the Company's outside accountants, doing so, would
not result in a charge against earnings. In addition, at the Committee's
sole discretion, a Participant may satisfy such withholding obligation by
executing a promissory note fully secured by the Common Stock.
15. Nontransferability, Beneficiaries. Unless otherwise determined by the
Committee with respect to the transferability of Nonqualified Stock Options
by a Participant to his Immediate Family Members (or to trusts or
partnerships or limited liability companies established for such family
members), no Award shall be assignable or transferable by the Participant,
otherwise than by will or the laws of descent and distribution or pursuant
to a beneficiary designation, and Options shall be exercisable, during the
Participant's lifetime, only by the Participant (or by the Participant's
legal representatives in the event of the Participant's incapacity). Each
Participant may designate a beneficiary to exercise any Option held by the
Participant at the time of the Participant's death or to be assigned any
other Award outstanding at the time of the Participant's death. If no
beneficiary has been named by a deceased Participant, any Award held by the
Participant at the time of death shall be transferred as provided in his
will or by the laws of descent and distribution. Except in the case of the
holder's incapacity, an Option may only be exercised by the holder thereof.
16. No Right to Continuous Service. Nothing contained in the Plan or in any
Award under the Plan shall confer upon any Participant any right with
respect to the continuation of service with the Company or any of its
Subsidiaries, or interfere in any way with the right of the Company or its
Subsidiaries to terminate his or her Continuous Service at any time.
Nothing contained in the Plan shall confer upon any Participant or other
person any claim or right to any Award under the Plan.
17. Governmental Compliance. Each Award under the Plan shall be subject to the
requirement that if at any time the Committee shall determine that the
listing, registration or qualification of any shares issuable or
deliverable thereunder upon any securities exchange or under any Federal or
state law, or the consent or approval of any governmental regulatory body,
is necessary or desirable as a condition thereof, or in connection
therewith, no such grant or award may be exercised or shares issued or
delivered unless such listing, registration, qualification, consent or
approval shall have been effected or obtained free of any conditions not
acceptable to the Committee.
18. Adjustments; Corporate Events.
(a) In the event of any dividend or other distribution (whether in the
form of cash, Common Stock, other securities, or other property),
recapitalization, reclassification, stock split, reverse stock split,
reorganization, merger, consolidation, split-up, spin-off,
A-9
combination, repurchase, liquidation, dissolution, or sale, transfer,
exchange or other disposition of all or substantially all of the
assets of the Company, or exchange of Common Stock or other securities
of the Company, issuance of warrants or other rights to purchase
Common Stock or other securities of the Company, or other similar
corporate transaction or event (an "Event"), and in the Committee's
opinion, such event affects the Common Stock such that an adjustment
is determined by the Committee to be appropriate in order to prevent
dilution or enlargement of the benefits or potential benefits intended
to be made available under the Plan or with respect to an Award, then
the Committee shall, in such manner as it may deem equitable,
including, without limitation, adjust any or all of the following: (i)
the number and kind of shares of Common Stock (or other securities or
property) with respect to which Awards may be granted or awarded; (ii)
the number and kind of shares of Common Stock (or other securities or
property) subject to outstanding Awards; and (iii) the grant or
exercise price with respect to any Award. The Committee determination
under this Section 18(a) shall be final, binding and conclusive.
(b) Upon the occurrence of an Event in which outstanding Awards are not to
be assumed or otherwise continued following such an Event, the
Committee may, in its discretion, terminate any outstanding Award
without a Participant's consent and (i) provide for either the
purchase of any such Award for an amount of cash equal to the amount
that could have been attained upon the exercise of such Award or
realization of the Participant's rights had such Award been currently
exercisable or payable or fully vested or the replacement of such
Award with other rights or property selected by the Committee in its
sole discretion and/or (ii) provide that such Award shall be
exercisable (whether or not vested) as to all shares covered thereby
for at least thirty (30) days prior to such Event.
(c) The existence of the Plan, the Award Agreement and the Awards granted
hereunder shall not affect or restrict in any way the right or power
of the Company or the shareholders of the Company to make or authorize
any adjustment, recapitalization, reorganization or other change in
the Company's capital structure or its business, any merger or
consolidation of the Company, any issue of stock or of options,
warrants or rights to purchase stock or of bonds, debentures,
preferred or prior preference stocks whose rights are superior to or
affect the Common Stock or the rights thereof or which are convertible
into or exchangeable for Common Stock, or the dissolution or
liquidation of the Company, or any sale or transfer of all or any part
of its assets or business, or any other corporate act or proceeding,
whether of a similar character or otherwise.
19. Award Agreement. Each Award under the Plan shall be evidenced by an
agreement setting forth the terms and conditions, as determined by the
Committee, which shall apply to such Award, in addition to the terms and
conditions specified in the Plan (each, an "Agreement").
20. Amendment. The Board may amend, suspend or terminate the Plan or any
portion thereof at any time, provided that (a) no amendment shall be made
without shareholder approval if such approval is necessary to comply with
any applicable law, regulation or stock exchange rule and (b) except as
provided in Section 18, no amendment shall be made that would adversely
affect the rights of a Participant under an Award theretofore granted,
without such Participant's written consent.
21. General Provisions.
(a) The Committee may require each Participant purchasing or acquiring
shares pursuant to an Award under the Plan to represent to and agree
with the Company in writing that such Participant is acquiring the
shares for investment and without a view to distribution thereof.
A-10
(b) All certificates for Common Stock delivered under the Plan pursuant to
any Award shall be subject to such stock-transfer orders and other
restrictions as the Committee may deem advisable under the rules,
regulations, and other requirements of the Securities and Exchange
Commission, any stock exchange upon which the Common Stock is then
listed, and any applicable Federal or state securities law, and the
Committee may cause a legend or legends to be put on any such
certificates to make appropriate reference to such restrictions. If
the Committee determines that the issuance of Common Stock hereunder
is not in compliance with, or subject to an exemption from, any
applicable Federal or state securities laws, such shares shall not be
issued until such time as the Committee determines that the issuance
is permissible.
(c) It is the intent of the Company that the Plan satisfy, and be
interpreted in a manner that satisfies, the applicable requirements of
Rule 16b-3 as promulgated under Section 16 of the Exchange Act so that
Participants will be entitled to the benefit of Rule 16b-3, or any
other rule promulgated under Section 16 of the Exchange Act, and will
not be subject to short-swing liability under Section 16 of the
Exchange Act. Accordingly, if the operation of any provision of the
Plan would conflict with the intent expressed in this Section 21(c),
such provision to the extent possible shall be interpreted and/or
deemed amended so as to avoid such conflict.
(d) Except as otherwise provided by the Committee in the applicable grant
or Award agreement, a Participant shall have no rights as a
shareholder with respect to any shares of Common Stocks subject to an
Award until a certificate or certificates evidencing shares of Common
Stock shall have been issued to the Participant and, subject to
Section 18, no adjustment shall be made for dividends or distributions
or other rights in respect of any share for which the record date is
prior to the date on which Participant shall become the holder of
record thereof.
(e) The law of the State of Delaware shall apply to all Awards and
interpretations under the Plan regardless of the effect of such
state's conflict of laws principles.
(f) Where the context requires, words in any gender shall include any
other gender.
(g) Headings of Sections are inserted for convenience and reference; they
do not constitute any part of this Plan.
22. Expiration of the Plan. Subject to earlier termination pursuant to Section
20, the Plan shall have a term of 10 years from its Effective Date.
23. Effective Date; Approval of Shareholders. The Plan is effective as of the
date it is approved by the Board (the "Effective Date") subject only to the
approval by the affirmative vote of the holders of a majority of the
securities of the Company present, or represented, and entitled to vote at
a meeting of stockholders duly held in accordance with the applicable laws
of the State of Delaware within twelve (12) months of the adoption of the
Plan by the Board.
A-11
Appendix B
CHAPARRAL RESOURCES, INC.
AUDIT COMMITTEE CHARTER
Organization and Statement of Policy
------------------------------------
The Audit Committee shall consist of at least three Directors including a
Chairman all of whom shall be appointed by the Board of Directors ("Board") to
assist the Board in monitoring (1) the integrity of the financial statements of
the Company, (2) the compliance by the Company with legal and regulatory
requirements (3) the independence and performance of the Company's independent
auditors and (4) such other matters as the Board or the Committee Chairman deems
appropriate. The members of the Audit Committee shall meet the independence and
experience requirements of the Securities and Exchange Commission and of the
Nasdaq Stock Market.
The Committee shall, through regular or special meetings with management
and the Company's independent auditor, provide oversight on matters relating to
accounting, financial reporting, internal control, auditing, and regulatory
compliance activities.
Authority and Responsibilities
------------------------------
The Audit Committee shall have the authority to retain, at the Company's
expense, special legal, accounting or other consultants or experts to advise the
Committee. The Audit Committee may request any officer or employee of the
Company or the Company's outside counsel or independent auditor to attend a
meeting of the Committee or to meet with any members of, or consultants to, the
Committee.
The Audit Committee shall make regular reports to the Board not less than
two times per year including the Board meeting following each Annual Meeting of
Shareholders. Representatives of the independent auditors may participate in
such reports as requested by the Audit Committee. The processes set forth below
are a guide with the understanding that the Audit Committee may supplement them
as appropriate.
The Audit Committee shall:
1. Review and reassess the adequacy of this Charter annually and
recommend any proposed changes to the Board for approval.
2. Review the annual audited financial statements and discuss with
management, and the independent auditors if necessary, prior to filing
or distribution. Such review should include major issues regarding
accounting and auditing principles and practices as well as the
adequacy of internal controls that could significantly affect the
Company's financial statements.
3. Review an analysis prepared by management and the independent auditor
of significant financial reporting issues, if any, and judgments made
in connection with the preparation of the Company's financial
statements.
4. Review the Company's quarterly financial statements prior to the
release of quarterly earnings and/or the filing or distribution of the
Company's quarterly financial statements.
B-1
5. Meet periodically with management to review the Company's major
financial risk exposures and the steps management has taken to
monitor, control and report such exposures.
6. Review major changes to the Company's auditing and accounting
principles and practices, if any, as suggested by the independent
auditor or management.
7. Recommend to the Board annually the appointment of the independent
auditor, which firm is ultimately accountable to the Audit Committee
and the Board.
8. Receive periodic reports from the independent auditor regarding the
auditor's independence, discuss such reports with the auditor, and if
so determined by the Audit Committee, recommend that the Board take
appropriate action to satisfy itself of the independence of the
auditor.
9. Evaluate together with the Board the performance of the independent
auditor and, if so determined by the Audit Committee, recommend that
the Board replace the independent auditor.
10. Prior to the audit, discuss the planning (including scope and reliance
upon management) and staffing of the audit with the independent
auditor.
11. Discuss with the independent auditor the matters required to be
discussed by Generally Accepted Auditing Standards relating to the
conduct of the audit.
12. Review with the independent auditor any problems or difficulties the
auditor may have encountered and any management letter provided by the
auditor and the Company's response to that letter. Such review should
include any difficulties encountered in the course of the audit work,
including any restrictions on the scope of activities or access to
required information and any changes required in the planned scope of
the audit.
13. Prepare the report required by the rules of the Securities and
Exchange Commission to be included in the Company's annual proxy
statement.
14. Review with the Company's counsel legal matters that may have a
material impact on the financial statements, the Company's compliance
policies and any material reports or inquiries received from
regulators or governmental agencies.
15. Meet at least annually with the chief financial officer and the
independent auditor. If so requested by either the Audit Committee or
the independent auditor, the meetings will be held in separate
sessions.
16. Perform any other activities consistent with this Charter, the
Company's Bylaws and applicable law, as the Audit Committee or Board
deems necessary or appropriate.
B-2
While the Audit Committee has the responsibilities and powers set forth in
this Charter, it is not the duty of the Audit Committee to plan or conduct
audits or to determine that the Company's financial statements are complete and
accurate and are in accordance with generally accepted accounting principles.
This is the responsibility of management and the independent auditor. Nor is it
the duty of the Audit Committee to conduct investigations, to resolve
disagreements, if any, between management and the independent auditor or to
assure compliance with laws and regulations.
/s/ Richard L. Grant
-------------------------------------
Richard L. Grant, Chairman
/s/ Ted Collins, Jr.
-------------------------------------
Ted Collins, Jr.
/s/ Judge Burton B. Roberts
-------------------------------------
Judge Burton B. Roberts
B-3
CHAPARRAL
CHAPARRAL RESOURCES, INC.
PROXY CARD
PROXY SOLICITED BY THE BOARD OF DIRECTORS
FOR ANNUAL MEETING OF STOCKHOLDERS, JUNE 21, 2001
The undersigned hereby appoints John G. McMillian and James A. Jeffs,
either of them, jointly and severally, with power of substitution, to represent
and to vote as designated all shares of Common Stock and Series A Preferred
Stock which the undersigned would be entitled to vote at the Annual Meeting of
Stockholders of Chaparral Resources, Inc., to be held June 21, 2001 at the
offices of Akin, Gump, Strauss, Hauer & Feld, L.L.P., located at 1900 Pennzoil
Place - South Tower, 711 Louisiana Street, Houston, Texas 77002, at 10:00 a.m.,
Central Daylight Time, or any adjournment thereof.
1. Election of directors.
a. John G. McMillian e. Richard L. Grant
b. James A. Jeffs f. Judge Burton B. Roberts
c. David A. Dahl
d. Ted Collins, Jr.
|_| FOR |_| AGAINST |_| ABSTAIN
INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, STRIKE A
LINE THROUGH OR OTHERWISE STRIKE THE NOMINEE'S NAME.
2. Approval of Chaparral's 2001 Stock Incentive Plan.
|_| FOR |_| AGAINST |_| ABSTAIN
3. Ratification of the selection of Ernst & Young, LLP as Chaparral Resources,
Inc.'s independent accountant for the fiscal year ending December 31, 2001.
|_| FOR |_| AGAINST |_| ABSTAIN
|_| If you plan to attend the Annual Meeting, please check here
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED BY THE
UNDERSIGNED STOCKHOLDER. UNLESS OTHERWISE SPECIFIED, THE SHARES WILL BE VOTED
FOR THE ELECTION OF ALL NOMINEES TO CHAPARRAL RESOURCES' BOARD OF DIRECTORS, FOR
THE APPROVAL OF CHAPARRAL'S 2001 STOCK INCENTIVE PLAN, AND FOR THE RATIFICATION
OF ERNST & YOUNG, LLP AS INDEPENDENT AUDITORS.
The undersigned acknowledges receipt of the Notice of Annual Meeting of
Stockholders and the accompanying Proxy Statement.
Please sign exactly as name appears hereon and date. If the shares are jointly
held, each holder should sign. When signing as an attorney, executor,
administrator, trustee, or as an officer signing for a corporation, please give
full title under signature.
____________________________________ Date: _______________
____________________________________ Date: _______________
Signatures of Stockholder(s)
(PLEASE DATE, SIGN AND RETURN THIS PROXY PROMPTLY USING THE ENCLOSED ENVELOPE)