<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
FEBRUARY 29, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ___________
______ TO _______________
COMMISSION FILE NUMBER 0-9147
FOUNTAIN OIL INCORPORATED
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
Delaware 91-0881481
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
1400 Broadfield Blvd., Suite 200, Houston, Texas 77084-5163
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
713-492-6992
(ISSUER'S TELEPHONE NUMBER)
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding of issuer's common stock on February 29, 1996
was 10,846,063.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT
Yes [ ] No [X]
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Fountain Oil Incorporated
We have made a review of the consolidated condensed balance sheet of Fountain
Oil Incorporated and subsidiaries as of February 29, 1996, and the related
consolidated condensed statement of operations for the three- and six-month
periods ended February 29, 1996, and the consolidated condensed statement of
cash flows for the six-month period ended February 29, 1996. These financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the consolidated condensed financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
The accompanying consolidated condensed financial statements have been prepared
assuming that Fountain Oil Incorporated will continue as a going concern. As
more fully described in Note 2 to the consolidated condensed financial
statements, the Company has incurred recurring operating losses and will require
substantial cash from external sources to finance its oil and gas ventures.
These conditions raise substantial doubt about the Company's ability to continue
as a going concern. Management's plans in regards to these matters are also
described in Note 2 to the consolidated condensed financial statements. The
consolidated condensed financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
Coopers & Lybrand L.L.P.
Houston, Texas
April 12, 1996
2
<PAGE>
PART I - FINANCIAL INFORMATION
FOUNTAIN OIL INCORPORATED AND SUBSIDIARIES
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
Unaudited
February 29, 1996
-----------------
<S> <C>
ASSETS
------
Cash and cash equivalents $ 1,724,296
Accounts receivable - affiliated
entities 1,806,282
Accounts receivable, other 159,884
Inventory 17,596
Prepaid expenses 358,156
------------
Total current assets 4,066,214
Capitalized financing costs 372,842
Property and equipment, net 4,150,813
Oil and gas properties, net, full cost
method (including $235,221 unevaluated) 535,445
Investment in and advances to oil and
gas ventures 3,504,392
------------
TOTAL ASSETS $ 12,629,706
------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Accounts payable $ 1,299,442
Accrued liabilities 310,226
Note payable 69,331
------------
Total current liabilities 1,678,999
Account payable - related party 242,927
8% Convertible subordinated debentures 3,750,000
Commitments and contingencies (Notes 2
and 11)
Stockholders' Equity:
Preferred stock, par value $0.10 per
share, 5,000,000 shares authorized:
no shares issued or outstanding --
Common stock, par value $0.10 per
share, 50,000,000 shares authorized:
10,846,063 shares issued and
outstanding 1,084,606
Capital in excess of par value 29,265,975
Accumulated deficit since October 31,
1988 when a deficit of $39,952,292 was
eliminated (23,392,801)
------------
Total stockholders' equity 6,957,780
------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 12,629,706
------------
</TABLE>
See accompanying notes to unaudited consolidated condensed financial statements.
3
<PAGE>
PART I - FINANCIAL INFORMATION
FOUNTAIN OIL INCORPORATED AND SUBSIDIARIES
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Unaudited Unaudited
-------------------------- ---------------------------
Three Months Ended Six Months Ended
FEBRUARY 29, February 28, FEBRUARY 29, February 28,
1996 1995 1996 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Operating Revenues:
Power unit rentals $ --- $ --- $ 1,913 $ 14,710
Equipment sales --- 338,679 --- 414,079
Consulting income 2,943 103,685 2,943 103,685
Oil & gas production 41,142 --- 75,402 ---
----------- ---------- ----------- ----------
44,085 442,364 80,258 532,474
----------- ---------- ----------- ----------
Operating Expenses:
Cost of sales --- 300,788 --- 327,952
Lease operating expense 41,107 --- 55,521 ---
General and administrative 1,289,126 1,203,848 2,309,187 1,522,145
Depreciation, depletion and
amortization 79,695 389,282 155,683 630,606
Impairment of oil and
gas properties 233,000 --- 233,000 ---
Research and development --- 12,432 --- 63,279
Geological and geophysical --- 26,040 --- 42,517
----------- ---------- ----------- ----------
1,642,928 1,932,390 2,753,391 2,586,499
----------- ---------- ----------- ----------
OPERATING LOSS 1,598,843 1,490,026 2,673,133 2,054,025
----------- ---------- ----------- ----------
Other Income (Expense):
Interest, net (57,730) (5,698) (9,987) (5,389)
Gain on settlement of
liabilities, net --- --- --- 1,171
Other 12,313 (2,023) 15,010 4,127
----------- ---------- ----------- ----------
TOTAL OTHER INCOME (EXPENSE) (45,417) (7,721) 5,023 (91)
----------- ---------- ----------- ----------
NET LOSS $ 1,644,260 $1,497,747 $ 2,668,110 $2,054,116
----------- ---------- ----------- ----------
Weighted average number of
common shares outstanding 10,837,755 6,473,238 10,835,909 6,222,396
----------- ---------- ----------- ----------
NET LOSS PER COMMON SHARE $(.15) $(.23) $(.25) $(.33)
----------- ---------- ----------- ----------
</TABLE>
See accompanying notes to unaudited consolidated condensed financial statements.
4
<PAGE>
PART I - FINANCIAL INFORMATION
FOUNTAIN OIL INCORPORATED AND SUBSIDIARIES
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Unaudited
-------------------------------
Six Months Ended
FEBRUARY 29, February 28,
1996 1995
------------- -----------
<S> <C> <C>
Cash Flows From Operating Activities:
Net loss $ (2,668,110) $ (2,054,116)
Depreciation and depletion 32,270 630,606
Amortization of financing cost 30,364 ---
Impairment of oil and gas properties 233,000 ---
Stock issued for compensation and
contract services --- 1,386,138
Accumulated currency translations --- (23,382)
Changes in assets and liabilities:
Increase in accounts receivable (122,146) (356,777)
Decrease in inventory 350 21,198
Increase (decrease) in prepaid 9,084 (692,334)
expenses
Increase (decrease) in accounts (1,211,656) 140,207
payable
Increase (decrease) in accrued (129,053) 24,810
liabilities
--------------- -------------
NET CASH USED IN OPERATING ACTIVITIES (3,825,897) (923,650)
--------------- -------------
Investing Activities:
Purchase of property & equipment (959,561) (621,016)
Investment in oil & gas ventures &
properties (1,520,839) ---
Advances to oil & gas ventures (201,304) ---
--------------- -------------
NET CASH USED IN INVESTING ACTIVITIES (2,681,704) (621,016)
--------------- -------------
Financing Activities:
Cash provided from issuance of stock,
net 18,000 8,689,035
Cash provided from issuance of
debentures, net 3,346,714 ---
Payments of note payable (41,060) (245,000)
Payments on account payable-related
party (10,867) ---
Proceeds from issuance of note payable 89,140 ---
Proceeds from issuance of account
payable - related party 38,325 ---
--------------- -------------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 3,440,252 8,444,035
--------------- -------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (3,067,349) 6,899,369
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD 4,791,645 1,520,061
--------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,724,296 $ 8,419,430
--------------- -------------
</TABLE>
See accompanying notes to unaudited consolidated condensed financial statements.
5
<PAGE>
PART I - FINANCIAL INFORMATION
FOUNTAIN OIL INCORPORATED AND SUBSIDIARIES
ITEM 1. FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SIX MONTHS ENDED FEBRUARY 29, 1996 (UNAUDITED)
(1) Nature of Business and Basis of Preparation and Presentation
The Company's primary focus is the acquisition of ownership interests in
domestic oil and gas fields and existing foreign oil and gas fields that
indicate a potential for increased production through rehabilitation of the
fields. To a lesser extent the Company provides the oil and gas industry
with equipment and services related to a proprietary thermal stimulation
process for heating heavy and paraffinic oil with electric current.
The consolidated condensed financial statements of Fountain Oil
Incorporated and subsidiaries (collectively the "Company") included herein
have been prepared by the Company, without audit. Certain information and
footnote disclosures normally included in the financial statements prepared
in accordance with generally accepted accounting principles have been
condensed or omitted, since the Company believes that the disclosures
included are adequate to make the information presented not misleading. In
the opinion of management, the consolidated condensed financial statements
include all adjustments necessary to present fairly the financial position,
results of operations, and cash flows as of the dates and for the periods
presented. These consolidated condensed financial statements should be
read in conjunction with the financial statements and the notes thereto
included in the Annual Report on Form 10-KSB for the fiscal year ended
August 31, 1995 and the Quarterly Report on Form 10-QSB for the quarter
ended November 30, 1995 filed with the Securities and Exchange Commission.
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation," which sets forth accounting
and disclosure requirements for stock-based compensation arrangements. The
new statement encourages, but does not require, companies to measure stock-
based compensation cost using a fair-value method, rather that the
intrinsic-value method prescribed by Accounting Principles Board ("APB")
Opinion No. 25. Companies choosing to continue to measure stock-based
compensation using the intrinsic-value method must disclose on a pro forma
basis net income and net income per share as if the fair-value method were
used. The Company adopted the disclosure requirements of SFAS No. 123 in
October 1995 which had no effect on the Company's financial results for the
six-month period ended February 29, 1996.
(2) Going Concern Assumption
The Company has adopted an aggressive growth strategy which, if fully
implemented, will require a substantial capital commitment during fiscal
1996 and beyond. Because the Company has incurred recurring operating
losses and because current operations are not generating positive cash
flows, the ability of the Company to continue as a going concern and to
pursue this growth strategy successfully is highly dependent upon
generating funds from external sources.
6
<PAGE>
Without sufficient funds from external sources, the Company's ability to
develop its oil and gas ventures and continue as a going concern is
doubtful. However, the Company's management believes that it will be able
to access external sources of funds through a combination of equity
financing by the Company and debt financing by the Company or the joint
ventures or other entities that are developing the projects. The Company
ultimately must achieve profitable operations in order to realize its
investments.
As of February 29, 1996, the Company had cash and cash equivalents of
approximately $1,724,000. As of that date, the Company had accounts
payable of approximately $1,299,000 and other current liabilities of
approximately $380,000, and the Company faces other cash demands, as well.
General and administrative expenses, which were principally cash items,
amounted to approximately $1,020,000 and $1,289,000 in the quarters ended
November 30, 1995 and February 29, 1996, respectively. The increase of
approximately $269,000 is attributable primarily to costs associated with
preparing and mailing the Company's Proxy Statement and Annual Report to
Stockholders and holding the Company's Annual Meeting of Stockholders and
the continued build-up of an organization and infrastructure for the
Company's operations. Effective February 1, 1996, the Company's executive
officers agreed to defer receipt of one-half of their respective salaries
and the directors of the Company have agreed to defer receipt of all of
their cash compensation until the earlier of completion of the next
significant equity or debt financing by the Company or July 31, 1996. This
action is expected to defer approximately $70,000 per month in cash flow.
During the six-month period ended February 29, 1996, the Company's
investment in and advances with respect to oil and gas ventures and
properties and property and equipment used cash averaging approximately
$1,341,000 per quarter. Management believes that through such deferral,
limiting the use of external services, and restricting funding of oil and
gas projects, the Company should be able to reduce the cash flows required
to fund general and administrative expenses, investments and advances to
approximately $1,100,000 per quarter while still maintaining adequate
progress in the Company's projects. There can be no assurances, however,
that the Company would be able to or, if able, would so reduce the cash
flows required to fund its general and administrative expenses, investment
and advances or that such funding will enable the projects to demonstrate
sufficient progress to establish and preserve the Company's rights.
Operations are not expected to generate significant revenue in fiscal 1996.
Thus, unless the Company is able to arrange additional equity or debt
financing or otherwise generate significant cash in the near future, the
Company may be required to scale back significantly or suspend its
activities and may not be able to meet its obligations as they come due.
While the Company's management believes that it will be able to access
external sources of funds through a combination of equity financing by the
Company and debt financing by the Company or the joint ventures or other
entities that are developing projects, no assurances can be given that the
Company will be able to arrange the necessary financing or otherwise
generate sufficient cash to fund its activities or meet its obligations.
The consolidated condensed financial statements do not give effect to any
impairment of its investments in oil and gas ventures or other adjustments
which would be necessary should the Company be unable to obtain sufficient
funds from external sources and continue as a going concern.
7
<PAGE>
(3) Use of Estimates
The preparation of the consolidated condensed financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated condensed financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
(4) Accounts Receivable - Affiliated Entities
Upon the acquisition of Gastron International Limited ("Gastron") in
October 1995, the Company recorded a receivable in the amount of $1,800,000
from Mostransgas Gas Transmission and Supply Enterprise, a Russian joint
stock company ("Mostransgas"). This receivable represents amounts due from
Mostransgas to reimburse the Company for costs incurred in connection with
the acquisition of two drilling rigs and related equipment which will
represent a joint capital contribution by the Company and Mostransgas to a
Russian joint stock company in which the Company acquired an interest
through its acquisition of Gastron. The Company's management believes
Mostransgas will repay the Company through the equipment supplier the
amounts advanced by the Company on its behalf following the delivery in
Russia of the drilling rigs and equipment to be shipped from the United
States.
The Company will have to pay outstanding accounts payable associated with
the drilling rigs and related equipment before shipping them to Russia.
Additionally, the Company will be required to pay shipping costs, supplies,
certain customs taxes and other amounts which, including the accounts
payable, the Company estimates to be between $1,500,000 and $2,100,000, in
the aggregate, in order to be able to deliver the equipment in Russia. The
collectibility of the account receivable from Mostransgas is dependent
upon, among other things, the Company obtaining the necessary funds to make
these payments. The Company does not anticipate shipping the rigs and
equipment until various matters relating to the project, including
financing for the project and completion of reserve studies, are
satisfactorily resolved.
(5) Property and Equipment
Approximately $3,515,000 of the approximately $4,151,000 recorded for
property and equipment, net, as of February 29, 1996 represents drilling
rigs and related equipment which the Company expects to ship to the
Republic of Adygea, Russian Federation, in connection with the development
of the Maykop Field. (Note 4)
(6) Oil and Gas Properties, Full Cost Method
As of February 29, 1996, the Company recognized an impairment of $233,000
on its oil and gas properties as a result of applying the full cost ceiling
test. Unevaluated properties and associated costs not currently being
amortized and included in oil and gas properties at February 29, 1996 were
$235,221.
8
<PAGE>
(7) Investment in and Advances to Oil and Gas Ventures
During the six months ended February 29, 1996, the Company capitalized
approximately $1,521,000 and made advances of approximately $201,300
associated with its proposed or completed acquisition of interests in
foreign joint ventures, corporations and similar associations which will be
the entities through which the development of oil and gas projects will be
implemented. The proposed acquisitions are in various stages of
finalization which involve negotiation and consummation of both
governmental concessions and the acquisition of private interests. The
Company has a policy of capitalizing that portion of management salaries,
consulting fees and expenses relating directly to the acquisition of
interests in these oil and gas projects. The amounts capitalized, including
advances, at February 29, 1996 are as follows:
<TABLE>
<CAPTION>
Capitalized
Venture Cost Advances Total
- ------- ----------- ---------- ----------
<S> <C> <C> <C>
Maykop Field, Republic of Adygea $ 757,900 $ --- $ 757,900
Gorischt-Kocul Field, Albania 476,100 --- 476,100
Boryslaw Field, Western Region, Ukraine 1,139,000 --- 1,139,000
Lelyaki Field, Pryluki Region, Ukraine 400,100 731,300 1,131,400
---------- ---------- ----------
$2,773,100 $ 731,300 $3,504,400
---------- ---------- ----------
</TABLE>
The Company has negotiated the principal elements of an agreement to
acquire 80% of the outstanding stock of UK-RAN Oil Corporation ("UK-RAN")
and is exploring the possibility of purchasing all or a portion of the
remaining 20%. There can be no assurance, however, that the acquisition of
any shares of UK-RAN will be consummated. UK-RAN owns 45% of the equity of
Kashtan Petroleum, Ltd., a Ukrainian joint venture formed to work over and
develop the Lelyaki Field in the Pryluki region of Central Ukraine. The
joint venture has been registered, and its application for a production
license is pending. Development activities in the Lelyaki Field await the
granting of the license and the satisfactory resolution of various matters
related to the project, including the availability of financing for the
project.
Advances in the amount of approximately $731,300 have been made in
connection with the proposed acquisition of an interest in the Lelyaki
Field. Of this amount, approximately $510,000 represents a loan to Zhoda
Corporation ("Zhoda"), the owner of 80% of the shares in UK-RAN, made
primarily to enable Zhoda to acquire shares representing an 8% interest in
UK-RAN. The remaining approximately $221,300 represents advances to fund
UK-RAN's activities in establishing the joint venture and pursuing the
production license for the joint venture. In the event the Company
acquires Zhoda's interest in UK-RAN, most of Zhoda's and UK-RAN's
indebtedness to the Company will be transformed into an investment in oil
and gas ventures. Absent such an acquisition, the Company believes that
the ability of Zhoda and UK-RAN to repay the Company's advances to such
entities will depend upon their ability to realize, through sale,
development or otherwise, on their respective interests in the Lelyaki
Field.
9
<PAGE>
(8) Convertible Subordinated Debentures
During the quarter ended February 29, 1996, the Company completed an
offering of its 8% Convertible Subordinated Debentures (the "Debentures")
due December 31, 1997. The Company issued $3,750,000 of Debentures at par
and received net proceeds of approximately $3,350,000 after commissions and
expenses. The Debentures, which are subordinated to indebtedness for
borrowed money, are convertible into shares of the Company's Common Stock
at a price equal to 82 1/2% of the average closing price of such shares on
the five trading days preceeding the date of conversion. A maximum of
309,500 shares of the Company's Common Stock is issuable upon conversion of
each $1,000,000 principal amount of the Debentures. No Debentures could be
converted prior to April 1, 1996, and then no more than one-third of the
Debentures may be converted prior to May 1, 1996, and no more than two-
thirds of the Debentures may be converted prior to June 5, 1996.
(9) Net Loss Per Common Share
Net loss per common share for the periods presented is based on the
weighted average number of common shares outstanding.
(10) Supplemental Cash Flow Information
Effective October 19, 1995, the Company acquired from Ribalta Holdings,
Inc. ("Ribalta"), the entire issued share capital of Gastron for nominal
consideration plus additional contingent consideration payable upon
satisfaction of various conditions. The Company's net investment in
Gastron includes the consideration paid for share capital plus its note
receivable of $2,450,000 from Gastron which is eliminated in consolidation.
The principal assets of Gastron, which was not actively engaged in
business, are (i) a 31% ownership interest in Intergas, a closed private
joint stock company incorporated in the Russian Federation ("Intergas"),
which has rights to develop the 12,500 acre Maykop gas condensate field in
the Republic of Adygea, Russian Federation, (ii) an interest in two
drilling rigs and related equipment undergoing testing and certification,
and (iii) an account receivable from an affiliated entity. See Note 4.
The assets acquired and liabilities assumed in conjunction with this
acquisition were as follows:
<TABLE>
<S> <C>
Cash and cash equivalents $ 2,846
Account receivable - affiliated entity 1,800,000
Property and equipment 2,731,818
----------
$4,534,664
----------
Accounts payable $1,844,195
Accrued liabilities 25,000
Account payable - related party 215,469
Note payable - Fountain Oil Incorporated 2,450,000
----------
$4,534,664
----------
</TABLE>
10
<PAGE>
These assets acquired and liabilities assumed were purchased for $1 plus
additional contingent consideration payable upon satisfaction of various
conditions. Thus, these balances have been excluded from the Consolidated
Condensed Statement of Cash Flows for the six months ended February 29,
1996.
(11) Commitments and Contingencies
The Company has outstanding obligations with respect to the acquisition and
development of oil and gas projects it is pursuing that require or may
require the Company to expend funds and to issue shares of its Common
Stock. Most of these obligations are subject to the satisfaction of
various conditions related to, among other things, the formalization of
project relationships and achievement of specified project performance
standards. At February 29, 1996, the Company had unconditional obligations
regarding the development of oil and gas projects amounting to
approximately $78,000. Commitments relating to acquisitions conditioned on
the formalization of project relationships, project performance and other
matters were $1,500,000 in cash and 1,550,000 shares of Common Stock. As
the Company develops current projects and undertakes additional projects,
significant additional obligations are expected to be incurred.
(12) Subsequent Event
On March 28, 1996, the Company borrowed $4,700,000 from a bank on a three
month note with interest at 1% above the London Interbank Offered Rate
("LIBOR"). The Company expects to negotiate with the bank for extensions
of this loan. The funds are presently placed in a blocked account, which
must be maintained to collateralize the loan, with interest at LIBOR. The
Company is discussing with the bank the conditions under which the funds
might be released from the blocked account.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Liquidity, Capital Resources, and Changes in Financial Condition
The Company had current assets at February 29, 1996 of approximately
$4,066,000, as compared to current assets of approximately $4,126,000 at
November 30, 1995. The reduction in current assets was attributable to a
reduction during the quarter in prepaid expenses of approximately $292,000,
reflecting primarily a reclassification of certain items from prepaid expenses
to investments in oil and gas ventures and properties, largely offset by an
increase in cash and cash equivalents. The increase in cash and cash equivalents
during the second fiscal quarter reflects (a) net cash proceeds of approximately
$3,365,000 from the issuance of convertible subordinated debentures and the
issuance of shares of Common Stock upon exercise of options, largely offset by
(b) a net loss for the quarter of approximately $1,644,000, most of which
reflects general and administrative expenses, which are principally cash items,
(c) an approximately $1,029,000 net reduction in accounts payable and accrued
liabilities reflecting primarily payments for purchased equipment, (d)
investments and advances related to oil and gas ventures and properties totaling
approximately $395,000, and (e) approximately $155,000 expended for additional
equipment relating to the drilling rigs intended for use in the Maykop Field in
the Republic of Adygea, Russian Federation.
The Company's current liabilities were reduced from approximately $2,733,000
at November 30, 1995 to approximately $1,679,000 at February 29, 1996. This
reduction included a partial payment of the accounts payable related to the
drilling rigs and equipment intended for use in the Maykop Field, reducing the
balance from approximately $2,059,000 at November 30, 1995 to approximately
$943,000 at February 29, 1996.
The Company will have to pay outstanding accounts payables associated with the
drilling rigs and related equipment before shipping them to Russia. (The
preceding sentence constitutes a forward looking statement [hereinafter
identified as "FLS"]. Each of the forward looking statements herein is subject
to various factors that could cause actual results to differ materially from the
results anticipated in such forward looking statement, as more fully discussed
in this Item 2 under "Forward Looking Statements".) Additionally, the Company
will be required to pay shipping costs, supplies, certain customs taxes and
other amounts which, including the accounts payable, the Company estimates to be
between $1,500,000 and $2,100,000 in the aggregate, in order to be able to
deliver the equipment in Russia. (FLS) The Company does not anticipate shipping
the rigs and equipment until various matters related to the Maykop Field
Project, on which said rigs are intended to be employed, are satisfactorily
resolved. (FLS)
The Company's working capital increased during the second quarter of fiscal
1996 from approximately $1,393,000 at November 30, 1995 to approximately
$2,387,000 at February 29, 1996. Certain components of working capital,
principally the $1,800,000 account receivable from an affiliated entity, are not
expected to be monetized as early as the current liabilities become due. (FLS)
Additionally, approximately $358,000 in prepaid expenses will not result in cash
monetization. The Company intends to address the condition of its working
capital by attempting to access external sources of funds through a combination
of equity financing by the Company and debt financing by the Company and the
joint ventures or other entities that are developing the projects. (FLS) There
can be no assurance that the Company will be able to arrange the
12
<PAGE>
necessary financing or that such financing will be available on terms that are
advantageous to the Company.
Advances to oil and gas ventures increased from approximately $530,000 at
November 30, 1995, to approximately $731,300 at February 29, 1996 as a result of
continued advances of funds related to the Lelyaki Field project in Ukraine. Of
the $731,300, approximately $510,000 represents a loan to Zhoda Corporation
("Zhoda"), the owner of 80% of the shares in UK-RAN Oil corporation ("UK-RAN"),
made primarily to enable Zhoda to acquire shares representing an 8% interest in
UK-RAN. The remaining approximately $221,300 represents advances to fund UK-
RAN's activities in establishing the joint venture and pursuing the production
license for the joint venture. In the event the Company acquires Zhoda's
interest in UK-RAN, most of Zhoda's and UK-RAN's indebtedness to the Company
will be transformed into an investment in oil and gas ventures. (FLS) Absent
such an acquisition, the Company believes that the ability of Zhoda and UK-RAN
to repay the Company's advances to such entities will depend upon their ability
to realize, through sale, development or otherwise, on their respective
interests in the Lelyaki Field. (FLS)
During the quarter ended February 29, 1996, the Company increased its
investments in oil and gas ventures by approximately $412,000 to approximately
$2,773,000 at February 29, 1996. Approximately $272,000 of this increase is
attributable to investments related to the Maykop Field Project. The investment
in oil and gas ventures at February 29, 1996 is wholly attributable to projects
in Eastern Europe.
The Company holds a 31% ownership interest in Intergas, a Russian joint stock
company ("Intergas"), which in turn has development rights in the Maykop gas
condensate field located in the Republic of Adygea, Russian Federation. As the
field operator designated by Intergas, the Company has executed a gas sales
agreement with Mostransgas Gas Transmission and Supply Enterprise, a Russian
joint stock company ("Mostransgas"), under which Mostransgas would purchase all
of Intergas' gas production from the Maykop Field for a ten year period. Under
the agreement, Intergas would receive $1.03 per thousand cubic feet ($36 per
thousand cubic meters) through the end of the second full calendar year after
production commences, and the price for subsequent periods would be adjusted
based upon then current Russian gas prices. (FLS) Pricing is net for gas
delivered at the field, with no additional transportation or transportation tax
charges. The agreement with Mostransgas is subject to ratification by the
Intergas Board of Directors, which is expected to act on the matter in May 1996.
(FLS) Mostransgas, which also has an equity interest in Intergas, is an
affiliate of Gasprom, the largest gas distribution group in Russia. Intergas
expects also to produce condensate from the Maykop Field, and the Company is
exploring opportunities related to the sale of that condensate. (FLS) Production
from the Maykop Field is expected to commence four to six months after the
Company ships to the Republic of Adygea drilling rigs and related equipment that
it is presently assembling and testing in Texas. (FLS) The Company does not
anticipate shipping that equipment until various matters related to the project,
including financing for the project and completion of reserve studies, are
satisfactorily resolved. (FLS)
A joint venture agreement with Albpetrol, the Albanian national oil company,
to develop the Gorischt-Kocul Field in Albania has been negotiated, and a
production license has been issued by the Minister of Mines and Energy and
forwarded to Albpetrol for execution. The joint venture agreement and license
will then be submitted to the Council of Ministers of Albania,
13
<PAGE>
which must give its approval before the initial phase of the project can begin.
(FLS) The Company presently expects the necessary license and approval during
the spring of 1996. (FLS)
A joint venture agreement with Ukrnafta, the Ukraine national oil company
("Ukrnafta"), for the development of the Boryslaw Field in Western Ukraine is
being negotiated. After a joint venture company is registered in Ukraine, a
production license must be obtained before development activities can commence.
The Company presently anticipates that such registration will be effected and
the license received during the second half of calendar 1996. (FLS)
The Company has negotiated the principal elements of an agreement to acquire
80% of the outstanding stock of UK-RAN and is exploring the possibility of
purchasing all or a portion of the remaining 20%. (FLS) The Company anticipates
completing its acquisition of UK-RAN stock during the spring of 1996. (FLS) UK-
RAN owns 45% of the equity of Kashtan Petroleum, Ltd., a Ukrainian joint venture
formed to work over and develop the Lelyaki Field in the Pryluki region of
Central Ukraine, with Ukrnafta holding the other 55%. The joint venture has been
registered, and its application for a production license is pending. (FLS)
Development activities in the Lelyaki Field await the granting of the license
and the satisfactory resolution of various matters related to the project,
including the availability of financing for the project. (FLS) Subject to such
resolution, the Company presently believes that such development activities
could commence during the summer or fall of 1996. (FLS)
While the discussion of various events and their timing in the preceding four
paragraphs represents management's assessment at the present time, no assurances
can be given regarding the occurrence or timing of any of these events.
The Company has adopted an aggressive growth strategy which, if fully
implemented, will require substantial capital commitments during fiscal 1996 and
beyond. (FLS) Developing the oil and gas projects in which the Company has
acquired or expects to acquire an interest is expected by the Company to require
a net cash outlay from the Company of approximately $12 million from April 1996
through the end of calendar 1996. (FLS) Additional cash outlays may be required
thereafter. (FLS) This estimate is based upon the Company's expectations
regarding various projects indicated above, and no assurance can be given that
those expectations will be met. The Company has some flexibility in postponing
or reducing the 1996 cash outlay by revising project programs or delaying
specific activities. (FLS)
The Company anticipates financing the net development costs of its oil and gas
projects, as well as the Company's current operating expenses, through a
combination of equity financing by the Company and debt financings either by the
Company or by the joint ventures or other entities that have the development
rights to such projects. (FLS) Debt financing will be sought both from
international development agencies, such as the European Bank of Reconstruction
and Development and the United States Overseas Private Investment Corporation,
and conventional lenders. (FLS) The consolidated condensed financial statements
have been prepared under the assumption of a going concern. Failure of the
Company to arrange such debt and equity financing on reasonable terms would have
a material adverse effect on the results of operations, financial condition,
cash flows, and prospects of the Company and ultimately its ability to continue
as a going concern. (FLS)
14
<PAGE>
As of February 29, 1996, the Company had approximately $1,724,000 in cash and
cash equivalents and had accounts payable of approximately $1,299,000. The
Company faces other cash demands, as well. General and administrative expenses
have been requiring cash flows in excess of $1,000,000 a quarter, and the
Company has been making substantial cash investments in and advances to oil and
gas ventures and properties. During the six-month period ended February 29,
1996, the Company's investments and advances used cash of approximately
$2,682,000. Management believes that through a deferral of a portion of salaries
of the Company's executive officers, limiting the use of external services and
restricting funding of oil and gas projects, the Company should be able to
reduce the cash required to fund general and administrative expenses and
investments in and advances to oil and gas ventures and properties to
approximately $1,100,000 per quarter while still maintaining adequate progess in
the projects. (FLS) There can be no assurances, however, that the Company would
so reduce the cash flows required to fund its general and administrative
expenses and investment in oil and gas ventures and properties or that such
funding would enable the projects to demonstrate sufficient progress to
establish and preserve the Company's rights.
Operations are not expected to generate significant revenue in fiscal 1996.
(FLS) Thus, unless the Company is able to arrange debt or equity financing or
otherwise to generate sufficient cash in the near future, the Company may be
required to scale back significantly or suspend its activities and may not be
able to meet its obligations as they come due. (FLS) While the Company's
management believes that it will be able to access external sources of funds
through a combination of equity financing by the Company and debt financing by
the Company or the joint ventures or other entities that are developing
projects, no assurances can be given that the Company will be able to arrange
the necessary financing or otherwise generate sufficient cash to fund its
activities or meet its obligations. (FLS)
The Company has outstanding obligations with respect to the acquisition and
development of oil and gas projects which it is pursuing that require or may
require the Company to expend funds and to issue shares of its Common Stock.
(FLS) Most of these obligations are subject to satisfaction of various
conditions related to, among other things, the formalization of project
relationships and achievement of specified project performance standards. At
February 29, 1996, the Company had unconditional obligations regarding the
development of oil and gas projects amounting to approximately $78,000.
Commitments on that date relating to acquisitions conditioned on the
formalization of project relationships, project performance, and other matters
were $1,500,000 and 1,550,000 shares of Common Stock. As the Company develops
current projects and undertakes additional projects, significant additional
commitments are expected to be incurred. (FLS)
Results of Operations
The Company recorded operating revenue of approximately $44,000 during the
quarter ended February 29, 1996, as compared with operating revenue of
approximately $442,000 for the same period last year. The revenue in the current
quarter is attributable primarily to a modest amount of oil and gas production
and primarily reflects the Company's effective 5% interest in the approximately
420 barrels per day of oil production from the Inverness Field in the Swan Hills
producing area in Alberta, Canada. Revenue during the quarter ended February 28,
1995, arose exclusively from the sale and rental of equipment related to the
Company's electrically enhanced oil recovery technology (the "EEOR Technology").
Approximately $3,000 of the revenue for the quarter ended February 29, 1996
related to the EEOR Technology.
15
<PAGE>
General and administrative expense increased from approximately $1,204,000 to
approximately $1,289,000 from the quarter ended February 28, 1995 to the quarter
ended February 29, 1996. This increase reflects additional compensation and
related expenses reflecting the continued build-up of an organization and
infrastructure for the Company's operations partially offset by lower charges
for financial public relations services and the capitalization of certain
expenses related to oil and gas ventures in the 1996 quarter.
Depreciation, depletion, and amortization expense dropped from approximately
$389,000 in the quarter ended February 28, 1995, to approximately $80,000 for
the quarter ended February 29, 1996. This reduction is attributable primarily to
the recognition at August 31, 1995 of the impairment of intangible assets on
which amortization had been charged at the rate of approximately $223,000 per
quarter during fiscal 1995, offset in part by the amortization of capitalized
financing costs related to the 1996 issuance of convertible subordinated
debentures amounting to approximately $30,000 for the quarter ended February 29,
1996.
As of February 29, 1996, the Company recognized an impairment of $233,000 on
its oil and gas properties as a result of applying the full cost ceiling test.
Interest expense, net, was higher in the quarter ended February 29, 1996, than
in the quarter ended February 28, 1995, as a result of greater average debt
outstanding during the 1996 period.
During the quarter ended February 29, 1996, the Company completed an offering
of its 8% Convertible Subordinated Debentures (the "Debentures") due December
31, 1997. The Company issued $3,750,000 of Debentures and received net proceeds
of approximately $3,350,000 after commissions and expenses. The Debentures,
which are subordinated to indebtedness for borrowed money, are convertible into
shares of the Company's Common Stock at a price equal to 82 1/2% of the average
closing price of such shares on the five trading days preceeding the date of
conversion. A maximum of 309,500 shares of the Company's Common Stock is
issuable upon conversion of each $1,000,000 principal amount of the Debentures.
No Debentures could be converted prior to April 1, 1996, and then no more than
one-third of the Debentures may be converted prior to May 1, 1996, and no more
than two-thirds of the Debentures may be converted prior to June 5, 1996. The
first interest payment date was March 31, 1996. For the quarter ended February
29, 1996, accrued interest was approximately $34,000.
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation," which sets forth accounting and
disclosure requirements for stock-based compensation arrangements. The new
statement encourages, but does not require, companies to measure stock-based
compensation cost using a fair-value method, rather that the intrinsic-value
method prescribed by Accounting Principles Board ("APB") Opinion No. 25.
Companies choosing to continue to measure stock-based compensation using the
intrinsic-value method must disclose on a pro forma basis net income and net
income per share as if the fair-value method were used. The Company adopted the
disclosure requirements of SFAS No. 123 in October 1995 and will continue to
measure stock-based compensation cost using the intrinsic-value approach
prescribed in APB Opinion No. 25. Adoption of the new standard did not have a
material effect on the Company's earnings for the six-month period ended
February 29, 1996.
16
<PAGE>
Forward Looking Statements
The forward looking statements contained in this Item 2 are subject to various
risks, uncertainties and other factors that could cause actual results to differ
materially from the results anticipated in such forward looking statements.
Included among the important risks, uncertainties and other factors are those
hereinafter discussed.
Few of the forward looking statements in this Item 2 deal with matters that
are within the unilateral control of the Company. Joint venture, acquisition,
financing and other agreements and arrangements must be negotiated with
independent third parties and, in some cases, must be approved by governmental
agencies. Such third parties generally have interests that do not coincide with
those of the Company and may conflict with the Company's interests. Unless the
Company and such third parties are able to compromise their respective
objectives in a mutually acceptable manner, agreements and arrangements will not
be consummated. Operating entities in various foreign jurisdictions must be
registered by governmental agencies, and production licenses for development of
oil and gas fields in various foreign jurisdictions must be granted by
governmental agencies. These governmental agencies generally have broad
discretion in determining whether to take or approve various actions and
matters. In addition, the policies and practices of governmental agencies may be
affected or altered by political, economic and other events occurring either
within their own countries or in a broader international context. It is
anticipated that the Company will not have a majority of the equity in the
entity that would be the licensed developer of any of the projects that the
Company is presently pursuing in Eastern Europe, even though the Company may be
the designated operator of the oil or gas field. Thus, the concurrence of co-
venturers may be required for various actions. Other parties influencing the
timing of events may have priorities that differ from those of the Company, even
if they generally share the Company's objectives. As a result of all of the
foregoing, among other matters, the forward looking statements regarding the
occurrence and timing of future events may well anticipate results that will not
be realized.
The availability of equity and debt financing to the Company is affected by,
among other things, world economic conditions, international relations, the
stability and policies of various governments, fluctuations in the price of oil
and gas and the outlook for the oil and gas industry, and the competition for
funds. Rising interest rates might affect the feasibility of debt financing that
is offered. Potential investors and lenders will be influenced by their
evaluations of the Company and its projects and comparisons with alternative
investment opportunities. The Company's ability to fund its oil and gas projects
is dependent upon obtaining additional equity or debt financing.
The development of oil and gas properties is subject to substantial risks.
Expectations regarding reserves, even if estimated by independent petroleum
engineers, may prove to be unrealized. Reserves, even if present, may not be
recoverable in the amount and at the rate anticipated and may not be recoverable
in commercial quantities or on an economically feasible basis. World and local
prices for oil and gas can fluctuate significantly, and a reduction in the
revenue realizable from the sale of production can affect the economic
feasibility of an oil and gas project. World and local political, economic and
other conditions could affect the Company's ability to proceed with or to
effectively operate projects in various foreign countries.
17
<PAGE>
Demands by or expectations of governments, co-venturers, customers and others
may affect the Company's strategy to limit cash expenditures on various projects
or on general and administrative expenses to support such projects or other
Company activities. Failure to meet such demands or expectations could adversely
affect the Company's participation in such projects or its ability to obtain or
maintain necessary licenses and other approvals.
18
<PAGE>
PART II - OTHER INFORMATION
FOUNTAIN OIL INCORPORATED AND SUBSIDIARIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
An Annual Meeting of Shareholders was held on February 12, 1996. Shareholders
voted (1) to elect six directors to serve until the next Annual Meeting of
Shareholders or until their successors are duly elected and qualified; (2) to
approve an amendment to the Company's Certificate of Incorporation to increase
the number of authorized shares of Common Stock from 25,000,000 to 50,000,000;
(3) to approve the 1995 Long-Term Incentive Plan which provides for the issuance
of up to 1,500,000 shares of Common Stock in connection with the grant of stock
options or stock appreciation rights to employees, directors, consultants and
advisors of the Company; and (4) to ratify the selection of Coopers & Lybrand
L.L.P. as independent public accountants of the Company for the fiscal year
ending August 31, 1996.
With respect to the election of the six directors, the tabulation of votes was
as follows:
<TABLE>
<CAPTION>
Nominee Votes For Withheld
- ------- --------- --------
<S> <C> <C>
Einar Bandlien 7,336,024 109,584
Robert A. Halpin 7,339,022 106,586
Stanley D. Heckman 7,333,808 111,800
Eugene J. Meyers 7,339,238 106,370
Oistein Nyberg 7,338,850 106,758
Nils N. Trulsvik 7,333,850 111,758
</TABLE>
With respect to the approval of the Increase in Authorized Shares, the
tabulation of votes was 6,485,954 shares voted in favor, 573,598 shares voted
against, and 49,148 shares abstained.
With respect to the approval of the 1995 Long-Term Incentive Plan, the
tabulation of votes was 3,823,037 shares voted in favor, 813,351 shares voted
against, 54,204 shares abstained, and 2,755,016 shares represented broker non-
votes.
With respect to the ratification of the selection of Coopers & Lybrand L.L.P.
as the Company's independent public accountant, the tabulation of votes was
7,327,839 shares voted in favor, 30,627 shares voted against, and 22,185 shares
abstained.
No other matters were submitted to a vote.
19
<PAGE>
PART II - OTHER INFORMATION
FOUNTAIN OIL INCORPORATED AND SUBSIDIARIES
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3(1) Registrant's Certificate of Incorporation and amendments
thereto.
4(1) Form of 8% Convertible Subordinated Debenture
10(1) 1995 Long-Term Incentive Plan
27 Financial Data Schedule (EDGAR filing only)
20
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
FOUNTAIN OIL INCORPORATED
Date: April 12, 1996 By: /s/ Arnfin Haavik
------------------------
Arnfin Haavik
Chief Financial Officer
21
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
FILED WITH
EXHIBIT THIS
NUMBER EXHIBIT REPORT
- ------- --------- ------
<S> <C> <C>
3(1) Registrant's Certificate of Incorporation and amendments thereto X
4(1) Form of 8% Convertible Subordinated Debenture X
10(1) 1995 Long-Term Incentive Plan X
27 Financial Data Schedule (EDGAR filing only) X
</TABLE>
22
<PAGE>
EXHIBIT 3(1)
CERTIFICATE OF INCORPORATION
OF EORI, INC.
First: The name of the Corporation is EORI, Inc. (hereinafter sometimes
referred to as the "Corporation").
Second: The address of the registered office of the Corporation in the
State of Delaware is 32 Loockerman Square, Suite L-100, Dover, Delaware 19904,
in the City of Dover, County of Kent. The name of the registered agent at that
address is The Prentice-Hall Corporation System, Inc.
Third: The purpose of the Corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of Delaware.
Fourth:
(a) The total number of shares of all classes of stock which the
Corporation shall have authority to issue is thirty million (30,000,000),
consisting of:
(1) Five million (5,000,000) shares of Preferred Stock, par value ten
cents ($.10) per share (the "Preferred Stock"); and
(2) Twenty-five million (25,000,000) shares of Common Stock, par value ten
cents ($.10) per share (the "Common Stock").
(b) The Board of Directors is authorized, subject to any limitations
prescribed by law, to provide for the issuance of the shares of Preferred
Stock in series, and by filing a certificate pursuant to the applicable law
of the State of Delaware, to establish from time to time the number of
shares to be included in each such series, and to fix the designation,
powers, preferences, and rights of the shares of each such series and any
qualifications, limitations or restrictions thereof, and to increase or
decrease the number of shares of any such series to the extent permitted by
the Delaware General Corporation Law, as amended, from time to time.
Fifth: The following provisions are inserted for the management of the
business and the conduct of the affairs of the Corporation, and for further
definition, limitation and regulation of the powers of the Corporation and of
its directors and stockholders:
<PAGE>
(a) The directors of the Corporation need not be elected by written
ballot unless the Bylaws of the Corporation so provide.
(b) The directors shall have the concurrent power with the stockholders
to adopt, amend or repeal the Bylaws of the Corporation.
Sixth: A director of this Corporation shall not be personally liable to
the Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the Delaware General Corporation
Law, or (iv) for any transaction from which the director derives an improper
personal benefit.
If the Delaware General Corporation Law is hereafter amended to authorize
the further elimination or limitation of the liability of a director, then the
liability of the directors of the Corporation shall be eliminated or limited to
the fullest extent permitted by the Delaware General Corporation Law, as so
amended.
Any repeal or modification of the foregoing provisions of the Article Sixth
by the stockholders of the Corporation shall not adversely affect any right or
protection of a director of the Corporation existing at the time of such repeal
or modification.
Seventh: The Corporation reserves the right to amend or repeal any
provision contained in this Certificate of Incorporation in the manner
prescribed by the laws of the State of Delaware and all rights conferred upon
stockholders are granted subject to this reservation.
Eighth: The name and mailing address of the sole incorporator are as
follows:
Name Address
---- -------
J.E. Costelloe 5670 Wilshire Blvd., Ste. 750
Los Angeles, CA 90071
I, THE UNDERSIGNED, being the incorporator, for the purpose of forming a
corporation under the laws of the State of Delaware, do make, file and record
this Certificate of Incorporation, do certify that the facts herein stated are
true, and accordingly, have hereto set by hand this 6th day of October, 1994.
/s/J.E. Costelloe
-----------------
J.E. Costelloe, Incorporator
<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
EORI, INC.
It is hereby certified that:
1. The name of the Corporation (hereinafter called the "Corporation") is
EORI, Inc.
2. The Corporation has not received any payment for any of its stock.
3. The certificate of incorporation of the Corporation is hereby amended
by striking out Article First thereof and by substituting in lieu of said
Article the following new Article First:
"First: The name of the Corporation is Fountain Oil
Incorporated."
4. The amendment of the certificate of incorporation of the Corporation
herein certified was duly adopted, pursuant to the provisions of Section 241 of
the General Corporation Law of the State of Delaware, by at least a majority of
the directors who have been elected and qualified.
Signed on November 10, 1994
Attest: /s/Eugene J. Meyers
-------------------
Eugene J. Meyers
President
/s/Susan E. Palmer
- ------------------
Susan E. Palmer
Secretary
<PAGE>
CERTIFICATE OF AMENDMENT
OF
ELECTROMAGNETIC OIL RECOVERY, INC.
(AN OKLAHOMA CORPORATION)
INTO
FOUNTAIN OIL INCORPORATED
(A DELAWARE CORPORATION)
In accordance with the provisions of Section 1083 of the Oklahoma General
Corporation Act and Section 253 of the Delaware General Corporation Law, it is
hereby certified that:
1. Electromagnetic Oil Recovery, Inc. ("EORI") is a corporation of the
State of Oklahoma, the laws of which permit a merger of a corporation of that
jurisdiction with a corporation of another jurisdiction.
2. EORI, as the owner of all of the outstanding shares of the capital
stock of Fountain Oil Incorporated, a Delaware corporation ("Fountain Oil"),
hereby mergers itself into Fountain Oil, which shall be the surviving
corporation.
3. Attached hereto as Exhibit A and incorporated herein by reference is a
copy of the resolutions duly adopted by the Board of Directors of EORI as of
November 17, 1994, approving the merger of EORI into Fountain Oil.
4. The merger of EORI into Fountain Oil has been approved by a majority of
the outstanding shares of common stock of EORI entitled to vote thereon at a
meeting thereof duly called and held after 20 days notice of the purpose of the
meeting mailed to each such shareholder at his address as it appears on the
records of EORI. The proposed merger has been adopted, approved, certified,
executed and acknowledged by EORI in accordance with the laws of the State of
Oklahoma.
5. Fountain Oil hereby agrees that it may be served with process in the
State of Oklahoma in any proceeding for enforcement of any obligation of any
constituent corporation of the State of Oklahoma, as well as for enforcement of
any obligation of Fountain Oil arising from the merger including, if applicable,
any suit or other proceeding to enforce the right of any shareholders as
determined in appraisal proceedings pursuant to the provisions of Section 1019
of the Oklahoma General Corporation Act.
<PAGE>
6. Fountain Oil hereby irrevocably appoints the Secretary of State of the
State of Oklahoma as its agent to accept service of process in any such suit or
other proceedings and a copy of such process may be mailed by the Secretary of
State to the following address:
Corporate Secretary
Fountain Oil Incorporated
1023 West 23rd Street
Tulsa, Oklahoma 74107-2819
IN WITNESS WHEREOF, each of EORI, the parent corporation, and Fountain Oil,
the surviving subsidiary corporation, has executed this Certificate of Ownership
and Merger this 15th day of December, 1994.
ELECTROMAGNETIC OIL RECOVERY, INC.
By: /s/Eugene J. Meyers
--------------------------
Eugene J. Meyers
Chairman of the Board
Attest:
/s/Susan E. Palmer
- ----------------------------
Susan E. Palmer, Secretary
FOUNTAIN OIL INCORPORATED
By: /s/Eugene J. Meyers
--------------------------
Eugene J. Meyers
Chairman of the Board
Attest:
/s/Susan E. Palmer
- ------------------
Susan E. Palmer, Secretary
<PAGE>
EXHIBIT A
TO
CERTIFICATE OF OWNERSHIP AND MERGER
OF
ELECTROMAGNETIC OIL RECOVERY, INC. (THE "COMPANY")
INTO
FOUNTAIN OIL INCORPORATED
NOW, THEREFORE, BE IT RESOLVED, that the Company establish a Delaware
corporation under the name Fountain Oil Incorporated ("Fountain") as a wholly
owned subsidiary in order to facilitate the Company's reincorporation in the
State of Delaware;
RESOLVED FURTHER, that the Company be merged with and into Fountain, that
Fountain shall be the surviving corporation and that the separate corporate
existence of the Company shall cease and the corporate existence of Fountain, as
governed by Delaware law, shall continue unimpaired and unaffected by the
merger.
RESOLVED FURTHER, that on the effective date of the merger, the shares of
Fountain Common Stock theretofore issued and outstanding shall be retired and
canceled;
RESOLVED FURTHER, that on the effective date of the merger, each twenty-
five (25) shares of the Company's Common Stock issued and outstanding shall be
converted by reason of the merger and without any action on the part of the
holders thereof into and become one (1) fully paid and nonassessable share of
Fountain Common Stock. No fractional shares shall be issued pursuant to the
merger. Each shareholder who would otherwise be entitled to receive a
fractional share shall receive, in lieu thereof, a cash payment equal to such
fraction multiplied by twenty-five (25) times the average of the low bid and
high asked prices for the Company's Common Stock as reported on the NASDAQ OTC
Electronic Bulletin Board for the twenty (20) consecutive trading days ending
with the last trading day preceding the merger. The shares of the Company's
Common Stock so converted shall cease to exist as such and shall exist only as
shares of Fountain Common Stock and, where applicable, the right to receive
payment in lieu of fractional shares.
RESOLVED FURTHER, that on and after the effective day of the merger, all of
the outstanding certificates which prior to that time represented shares of the
Common Stock of the Company shall be deemed for all purposes to evidence
ownership of and to and to represent the shares of Fountain into which the
shares of the Company represented by such certificates have been converted;
provided, however, that each outstanding stock certificate held by a shareholder
who holds fewer than twenty-five (25) shares of the Company's Common Stock shall
be deemed for all purposes to represent the amount of cash to which the holder
is entitled for payment of fractional shares.
<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
FOUNTAIN OIL INCORPORATED
It is hereby certified that:
1. The name of this corporation is Fountain Oil Incorporated.
2. Paragraph (a) of Article Fourth of this corporation's Certificate of
Incorporation is hereby amended to read in its entirety as follows:
"(a) The total number of shares of all classes of stock which the
Corporation shall have authority to issue is fifty-five million
(55,000,000), consisting of:
(1) Five million (5,000,000) shares of Preferred Stock, par value ten
cents ($.10) per share (the "Preferred Stock"); and
(2) Fifty million (50,000,000) shares of Common Stock, par value ten cents
($.10) per share (the "Common Stock").
3. The foregoing amendment of the Certificate of Incorporation of this
corporation was duly adopted by the Board of Directors and stockholders of this
corporation in accordance with Section 242 of the General Corporation Law of
the State of Delaware.
Executed this 19th day of February, 1996.
Attest: /s/Gary J. Plisga
-----------------
Gary J. Plisga
Executive Vice President, Americas
/s/Susan E. Palmer
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Susan E. Palmer
Secretary
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EXHIBIT 4(1)
THE DEBENTURE REPRESENTED HEREBY AND THE COMMON STOCK ISSUABLE UPON CONVERSION
OF THIS DEBENTURE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"), OR REGISTERED OR QUALIFIED UNDER THE SECURITIES LAWS OF ANY
OTHER JURISDICTION IN RELIANCE UPON THE PROVISIONS OF REGULATION S PROMULGATED
UNDER THE ACT AND EXEMPTIONS AFFORDED UNDER APPLICABLE LAWS OF OTHER
JURISDICTIONS. THE DEBENTURE REPRESENTED HEREBY AND THE COMMON STOCK ISSUABLE
UPON CONVERSION OF THIS DEBENTURE MAY NOT BE OFFERED OR SOLD IN THE UNITED
STATES OR TO OR FOR THE ACCOUNT OR BENEFIT OF A "U.S. PERSON" (AS DEFINED IN
REGULATION S) PRIOR TO EXPIRATION OF THE RESTRICTED PERIOD (AS DEFINED IN
REGULATION S) ASSOCIATED WITH THE DISTRIBUTION OF WHICH THE ORIGINAL ISSUANCE OF
THIS DEBENTURE WAS A PART. THE DEBENTURE REPRESENTED HEREBY AND THE COMMON STOCK
ISSUABLE UPON CONVERSION OF THIS DEBENTURE MAY NOT BE OFFERED, SOLD,
HYPOTHECATED OR OTHERWISE TRANSFERRED UNLESS REGISTERED UNDER THE ACT OR AN
EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE ACT IS APPLICABLE (IN WHICH
CASE THE ISSUER SHALL HAVE RECEIVED AN OPINION OF COUNSEL IN FORM AND SUBSTANCE
REASONABLY SATISFACTORY TO THE ISSUER TO SUCH EFFECT) AND THE PROVISIONS OF ALL
OTHER APPLICABLE SECURITIES LAWS ARE OBSERVED.
FOUNTAIN OIL INCORPORATED
8% CONVERTIBLE SUBORDINATED DEBENTURE DUE DECEMBER 31, 1997
$ December __, 1995
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No.
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FOR VALUE RECEIVED, Fountain Oil Incorporated, a Delaware corporation (the
"Company"), hereby promises to pay to , or registered assigns (the
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"Holder") on December 31, 1997 (the "Maturity Date") the principal sum of
Dollars ($ ), and to pay interest on the outstanding principal
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amount hereof, in such amounts, at such times and on such terms and conditions
as are specified herein. This Debenture (the "Debenture") is one of a series of
Debentures having identical terms except as to principal amount, date of
issuance and serial number (the "Debentures") being issued by the Company in an
aggregate principal amount not in excess of Seven Million Dollars ($7,000,000).
Article 1. Interest
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The Company shall pay interest on the unpaid principal amount of this Debenture
at the rate of Eight Percent (8%) per annum, payable quarterly in arrears on
each March 31, June 30, September 30 and December 31 commencing March 31, 1996
and continuing until the principal hereof is paid in full or has been converted
in full. Interest shall be payable to the registered Holder in whose name this
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Debenture is registered at the close of business on the business day next
preceding the interest payment date. Interest on the Debenture shall be paid to
the Holder at the principal executive offices of the Company or, at the option
of the Company, may be paid by check mailed to such Holder at the address for
such Holder reflected on the Register (as hereinafter defined) maintained by the
Company for the Debentures. In the event a Holder converts this Debenture or a
portion hereof on a date other than an interest payment date, interest accrued
through the conversion date on the principal amount being converted will be paid
on the Conversion Date (as hereinafter defined). In the event a Holder presents
this Debenture for prepayment of the unpaid principal amount as hereinafter
provided in Section 3(f), interest accrued through the date of prepayment will
be paid on the date of prepayment. Interest on this Debenture shall accrue from
the most recent date to which interest has been paid or, if no interest has been
paid, from the date of issuance. Interest shall be computed on the basis of a
year consisting of twelve (12) months of thirty (30) days each.
Article 2. Method of Payment
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This Debenture must be surrendered to the Company at its principal executive
offices in order for the Holder to receive payment of the principal amount
hereof. The Company shall pay the principal of and interest on this Debenture
in United States dollars and may pay such principal and interest by check
payable in such dollars. All payments hereunder shall be subject to such
withholding requirements as may be imposed on the Company under any applicable
governmental laws or regulations.
Article 3. Conversion
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Section 3.1. Conversion Privilege
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(a) The Holder of this Debenture shall have the right, at its option, to
convert the principal amount of this Debenture, in whole or in part, into
shares of the common stock, par value $0.10 per share ("Common Stock"), of
the Company at any time prior to the close of business on the Maturity
Date, subject to the limitations hereinafter set forth in this Section 3.1.
The number of shares of Common Stock issuable upon the conversion of the
principal amount of this Debenture shall be determined by dividing the
principal amount so to be converted, less any amount the Company is
required to withhold in connection with such conversion unless the amount
of such required withholding is deposited by Holder with the Company in
cash at the time of conversion, by the Conversion Price (as hereinafter
defined in paragraph (b) of this Section 3.1). Upon a conversion on a date
other than an interest payment date, as provided in Article 1 above, the
Company shall pay to the Holder accrued interest through the date of
conversion on the principal amount being converted.
(b) The Conversion Price is eighty-two and one-half percent (82 1/2%) of the
average of the Closing Prices for a share of Common Stock on the five (5)
trading days preceding (but not including) the Conversion Date, as
hereinafter defined. For purposes hereof, Closing Price on a trading day
shall mean (i) if the principal domestic market for Common Stock is then a
national securities exchange or the Nasdaq National Market System, the
price at which the last trade for shares of Common Stock in such principal
market was executed on such date, as reported in The Wall Street Journal
unless such report is demonstrably incorrect, or (ii) if the principal
domestic market for
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Common Stock is other than a national securities exchange or the Nasdaq
National Market System, the closing bid price for shares of Common Stock in
such principal market as reported by Bloomberg, L.P., unless such report is
demonstrably incorrect in which case it shall be the closing bid price as
determined in good faith by the Board of Directors of the Company. In no
event, however, shall the Conversion Price be less than the par value of
Common Stock.
(c) In any conversion of less than all of the then outstanding principal amount
of this Debenture, the principal amount to be converted into Common Stock
in such partial conversion shall be Ten Thousand Dollars ($10,000) or an
integral multiple thereof.
(d) No portion of this Debenture may be converted prior to the forty-fifth
(45th) day after the date (the "Certification Date") on which U.S. Sachem
Financial Consultants, L.P., the placement agent in connection with the
offering of the Debentures, certifies that the distribution of the
Debentures has been completed. The Company shall promptly advise the
Holder of the Certification Date. Not more than one-third (1/3) of the
original principal amount of this Debenture may be converted into Common
Stock prior to the seventy-fifth (75th) day after the Certification Date.
Not more than two-thirds (2/3) of the original principal amount of this
Debenture may be converted into Common Stock prior to the one hundred tenth
(110th) day after the Certification Date. Any (subject to subsection (c)
above) or all of the principal amount of this Debenture may be converted
into Common Stock on or after the one hundred tenth (110th) day after the
Certification Date.
(e) The Company shall reserve from its authorized but unissued Common Stock and
have available for issuance upon conversion of this Debenture thirty
thousand nine hundred fifty (30,950) shares of Common Stock for each One
Hundred Thousand Dollars ($100,000) in original principal amount of this
Debenture. Notwithstanding anything to the contrary stated or implied
herein, the original principal amount of this Debenture may not be
converted into a greater number of shares of Common Stock than that
computed by multiplying (i) 30,950 by (ii) the quotient determined by
dividing the original principal amount of this Debenture by 100,000. All
shares of Common Stock issued upon conversion of this Debenture shall, when
issued, be duly authorized, validly issued, fully paid and non-assessable.
(f) Subject to subsection (e) above, in the event any portion of the principal
amount of this Debenture remains outstanding on the Maturity Date, the then
unconverted portion of this Debenture will automatically be converted into
shares of Common Stock at the Conversion Price applicable in connection
with the Maturity Date being considered to be the Conversion Date, provided
the Conversion Price is then no less than the par value of Common Stock,
and thereafter such automatically converted principal amount of the
Debenture shall represent only the right to receive upon surrender of the
Debenture to the Company the shares of Common Stock into which it was so
converted. In the event any part of the unconverted portion of the
principal amount of this Debenture cannot be converted by reason of the
limitation set forth in subsections (b) and (e) above and subject to
subsection (g) below, such part of the principal amount shall be paid by
the Company to the Holder in United States currency either (i) at maturity
or (ii) in the event that all of the shares of Common Stock reserved for
issuance upon conversion of this Debenture have been so issued, at any time
following the issuance of such shares as the Holder delivers to the Company
a notice, accompanied by the surrender of this Debenture, demanding
prepayment of this Debenture.
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(g) In the event both (i) the Closing Price of shares of Common Stock exceeds
Six Dollars ($6.00) per share for twenty (20) consecutive trading days
subsequent to the one hundred tenth (110th) day after the Certification
Date and (ii) no portion of the original principal amount of this Debenture
had prior to such twentieth (20th) day been converted at a Conversion Price
less than Three Dollars and Twenty-Three and One-Tenth Cents ($3.231), then
notwithstanding anything to the contrary stated or implied herein including
in particular subsection (f) above, the Company shall have no obligation to
pay to the Holder with respect to the unpaid principal amount of this
Debenture any amount in United States currency, provided that the foregoing
provision shall not affect the obligation of the Company to make interest
payments otherwise required hereunder. In the event and from and after the
time said conditions (i) and (ii) set forth in the previous sentence are
satisfied, the Holder shall look only to the shares of Common Stock
reserved for issuance upon conversion of this Debenture to realize on the
unpaid principal amount of this Debenture.
(h) In the event this Debenture is divided into one or more replacement
Debentures, each of the replacement Debentures shall be considered to have
proportionately the same characteristics as the Debenture submitted for
division, including without limitation those regarding the extent to which
conversion has taken place and the percentage of reserved shares remaining
after such conversion.
Section 3.2. Conversion Procedure. To convert the principal amount of this
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Debenture or a portion thereof into Common Stock, the Holder must (a) complete
and execute a Notice of Conversion, in the form attached hereto, and deliver
said Notice of Conversion to the Company, (b) deliver the Debenture to the
Company for full or partial surrender upon conversion, (c) deposit with the
Company any transfer or similar tax required to be paid by the Holder in
accordance with the terms of Section 3.4 hereof. The date upon which all of the
foregoing requirements are satisfied is the Conversion Date. Within ten (10)
business days thereafter, the Company shall deliver to Holder a certificate for
the number of full shares of Common Stock issuable upon the conversion at the
Conversion Price and a check for any fraction of a share. The person in whose
name the certificate for shares of Common Stock is to be registered shall be
treated as a shareholder of record at and after the close of business on the
Conversion Date. If one person converts two or more Debentures at the same
time, the number of full shares issuable upon such conversion shall be based on
the total principal amount of Debentures so converted. Upon surrender of a
Debenture that is to be converted in part, the Company shall issue to the Holder
a new Debenture equal in principal amount to the unconverted portion of the
Debenture surrendered.
Section 3.3. Fractional Shares. The Company shall not issue any fractional
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shares of Common Stock upon the conversion of this Debenture. Instead, the
Company shall pay in lieu of any fractional share cash in an amount equal to the
product calculated by multiplying (i) such fraction by (ii) the Conversion Price
by (iii) one hundred twenty-one and twenty-one one-hundredths percent (121.21%).
Section 3.4. Taxes on Conversion. The Company shall pay any documentary, stamp
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or similar transfer tax due on the issue of shares of Common Stock upon the
conversion of this Debenture. The Holder, however, shall pay any such or other
tax which is due because the shares of Common Stock being issued upon conversion
are issued in a name other than the name of the Holder.
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Section 3.5. Restrictions on Transfer. This Debenture and the Common Stock
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issuable upon the conversion hereof have not been registered under the
Securities Act of 1933 (the "Act") and have been offered, issued and sold
pursuant to Regulation S promulgated under the Act ("Regulation S"). The
Debentures may not be transferred or resold in the United States, or to or for
the account or benefit of a U.S. Person (as defined in Regulation S) for a
period of forty (40) days from the Certification Date and thereafter may be
offered or sold in the United States or to or for the account or benefit of a
U.S. person (as defined in Regulation S) only pursuant to registration under the
Act or an exemption from the registration requirements of the Act.
Section 3.6. Mergers, Etc. If the Company merges or consolidates with another
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corporation or sells or transfers all or substantially all of its assets to
another corporation or other entity or person and the holders of the Common
Stock are entitled to receive cash, stock, securities or property in respect of
or in exchange for or conversion of shares of Common Stock, then as a condition
of such merger, consolidation, sale or transfer, the Company and any such
successor, purchaser or transferee shall require that such successor, purchaser
or transferee assume this Debenture on a basis that it may thereafter be
converted only into the kind and amount of cash, stock, securities or property
that was receivable upon such merger, consolidation, sale or transfer with
respect to a share of Common Stock at the Conversion Price that would be
applicable treating the date of such merger, consolidation, sale or transfer as
the Conversion Date.
Section 3.7 Anti-Dilution Protection. In the event the Company distributes a
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stock dividend on Common Stock in the form of additional shares of Common Stock
or in a stock split, reverse stock split or recapitalization divides or combines
shares of Common Stock into a greater or lesser number of shares, the number of
shares reserved for issuance upon conversion of this Debenture shall be
proportionately adjusted, as determined in good faith by the Board of Directors
of the Company.
Article 4. Mergers
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The Company shall not consolidate with or merge into another corporation, or
sell or transfer all or substantially all of its assets to another corporation
or other entity or person, unless such person assumes the obligations of the
Company under this Debenture and immediately after such transaction no Event of
Default exists. Any reference herein to the Company shall following any such
consolidation, merger, sale or transfer refer to such surviving or transferee
corporation, entity or person which so assumes the obligations of the Company
hereunder, and upon such assumption the obligations of the Company hereunder
shall terminate.
Article 5. Reports
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The Company will mail to the Holder of this Debenture at the Holder's address as
shown on the Register a copy of each annual, quarterly or other report or proxy
statement that it provides to the holders of Common Stock generally, at the time
such report or statement is sent to such stockholders.
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Article 6. Defaults and Remedies
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Section 6.1. Events of Default. The Company shall be deemed to be in default
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hereunder upon any of the following occurrences, each of which shall constitute
an Event of Default:
(a) the Company fails to pay the unpaid principal amount of any of the
Debentures when the same shall become due and payable, whether at maturity,
upon acceleration or otherwise;
(b) the Company fails to make a payment of interest on any of the Debentures
when such interest becomes due and payable, and such failure continues for
a period of twenty (20) days after written notice thereof from a holder of
one of the Debentures to the Company;
(c) the Company fails to issue shares of Common Stock upon conversion of any of
the Debentures as provided herein, and such failure continues for a period
of twenty (20) days after written notice thereof from the holder of a
converted Debenture for which shares were not issued;
(d) the Company fails in any material respect to comply with its other
agreements in the Debentures, and such failure continues for a period of
thirty (30) days after written notice thereof from a holder of one of the
Debentures to the Company;
(e) the Company pursuant to or within the meaning of any Bankruptcy Law (as
hereinafter defined): (i) commences a voluntary case; (ii) consents to the
entry of an order for relief against it in an involuntary case; (iii)
consents to the appointment of a Custodian (as hereinafter defined) of it
or for all or substantially all of its property; (iv) makes a general
assignment for the benefit of its creditors; or (v) a court of competent
jurisdiction enters an order or decree under any Bankruptcy Law that: (A)
is for relief against the Company in an involuntary case; (B) appoints a
Custodian of the Company or for all or substantially all of its property;
or (C) orders the liquidation of the Company; and the order or decree
remains unstayed and in effect for 60 days. The term "Bankruptcy Law"
means Title 11 of the United States Code or any similar federal, state or
foreign law for the relief of debtors. The term "Custodian" means any
receiver, trustee, assignee, liquidator or similar official under any
Bankruptcy Law.
Section 6.2. Acceleration. If an Event of Default occurs and is continuing
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under subsection (a), (b), (c) or (e) of Section 6.1, in addition to all other
remedies available at law or in equity the Holder hereof by written notice to
the Company may declare the principal of and accrued interest on this Debenture
to be due and payable. Upon such declaration, the principal and interest hereof
shall be due and payable immediately. If an Event of Default occurs and is
continuing under subsection (d) of Section 6.1, the holders of a majority in
aggregate principal amount of outstanding Debentures by written notice to the
Company may declare the principal of and accrued interest on the Debentures to
be due and payable. Upon such declaration, the principal and interest hereof
and all other Debentures shall be due and payable immediately.
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Article 7. Registered Debentures
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Section 7.1. Series. This Debenture is one of a numbered series of Debentures
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having an aggregate principal amount of not more than Seven Million Dollars
($7,000,000). Each of the Debentures is identical except as to the serial
number, principal amount and date of issuance thereof. Such Debentures are
referred to herein collectively as the "Debentures."
Section 7.2. Record Ownership. The Company shall maintain a register of the
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holders of the Debentures (the "Register") showing their names and addresses,
the serial numbers and principal amounts of Debentures issued to or transferred
of record by them from time to time, the outstanding principal amount of such
Debentures, and the number of shares of Common Stock issued upon conversion or
partial conversion of such Debentures. The Register may be maintained in
electronic, magnetic or other computerized form. The Company may treat the
person named as the Holder of this Debenture in the Register as the sole owner
of this Debenture. The Holder of this Debenture is the person exclusively
entitled to receive payments of interest on this Debenture, receive
notifications with respect to this Debenture, convert it into Common Stock and
otherwise exercise all of the rights and powers as the absolute owner hereof.
Section 7.3. Registration of Transfer. Transfers of this Debenture shall be
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registered in the Register. Transfers shall be registered when (a) this
Debenture is presented to the Company with a request to register the transfer
hereof, (b) the Debenture is duly endorsed by the appropriate person, with the
endorsement guaranteed by a bank, trust company, member firm of a national
securities exchange or other medallion guarantor or other reasonable assurances
satisfactory to the Company in its sole discretion are given that the
endorsements are genuine and effective, and (c) the Company has no reasonable
basis to question whether such transfer is rightful and in compliance with all
applicable laws, including tax and securities laws. When this Debenture is duly
transferred hereunder, it shall be canceled and one or more new Debentures
showing the names of the transferees as the record holders thereof shall be
issued in lieu hereof. When this Debenture is presented to the Company with a
request to exchange it for an equal principal amount of Debentures of other
denominations, the Company shall make such exchange and shall cancel this
Debenture and issue in lieu thereof Debentures having a total principal amount
equal to this Debenture in denominations requested by the Holder, provided that
except to the extent necessary to issue a principal amount of Debentures equal
to the principal amount of the Debenture presented for transfer or exchange,
each of the Debentures issued hereunder shall be in a principal amount of Fifty
Thousand Dollars ($50,000) or an integral multiple thereof. The Company may
charge a reasonable fee for any registration of transfer or exchange other than
one occasioned by a notice of conversion hereof.
Section 7.4. Worn and Lost Debentures. If this Debenture becomes worn, defaced
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or mutilated but is still substantially intact and recognizable, the Company
shall issue a new Debenture in lieu hereof upon its surrender. Where the Holder
of this Debenture claims that the Debenture has been lost, destroyed or
wrongfully taken, the Company shall issue a new Debenture in place of the
original Debenture if the Holder so requests by written notice to the Company
actually received by the Company before it is notified that the Debenture has
been acquired by a bona fide purchaser and the Holder has delivered to the
Company an indemnity bond in such amount and issued by such surety as the
Company reasonably deems satisfactory together with an affidavit of the Holder
setting forth the
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facts concerning such loss, destruction or wrongful taking and
such other information in such form with such proof or verification as the
Company may request.
Article 8. Subordination
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Section 8.1. Senior Indebtedness. Subject to the qualifications set forth
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below, the term "Senior Indebtedness" means the principal of, premium, if any,
and interest on, and any other payment due pursuant to any of the following,
whether outstanding on the date this Debenture is issued or thereafter incurred
or created:
(a) all indebtedness of the Company for money borrowed (including, without
limitation, any indebtedness secured by a mortgage or other security
interest or lien which is (i) given to secure all or part of the purchase
price of property subject thereto, whether given to the vendor of such
property or to another, or (ii) existing on property at the time of
acquisition thereof);
(b) all indebtedness of the Company consisting of reimbursement obligations due
and owing with respect to letters of credit;
(c) all lease obligations of the Company which are capitalized on the books of
the Company in accordance with generally accepted accounting principles;
(d) all indebtedness consisting of obligations of the Company due and payable
under interest rate and currency swaps, floors, caps or other similar
arrangements intended to fix interest rate obligations;
(e) all indebtedness and obligations of others of the kinds described in the
preceding clauses (a), (b), (c) and (d) assumed or guaranteed in any manner
by the Company; and
(f) all renewals, extensions, refundings, deferrals, amendments or
modifications of indebtedness or obligations of the kinds described in any
of the preceding clauses (a) through (e);
unless the instrument or other document creating or evidencing such indebtedness
or obligations expressly provides that such indebtedness or obligations are not
superior in right of payment to the Debentures. Notwithstanding the foregoing,
Senior Indebtedness shall not include any indebtedness or obligations of any
kind of the Company to any subsidiary of the Company, a majority of the voting
stock of which is owned, directly or indirectly, by the Company.
Section 8.2. Subordination. The Company and the Holder covenant and agree, and
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the Holder accepts this Debenture with the agreement and understanding,
expressly for the benefit of the present and future holders of Senior
Indebtedness that the payment of principal of, interest on and any other amounts
due under this Debenture is expressly subordinated in right of payment to the
prior
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payment in full of all Senior Indebtedness as of and following either of
the circumstances hereafter described:
(i) any distribution of assets of the Company upon any dissolution, winding-up,
liquidation or reorganization of the Company, or (ii) any event of default
with respect to any Senior Indebtedness, as such event of default is
defined in the instrument under which such Senior Indebtedness is
outstanding, unless and until such default shall have been cured or waived
or shall have ceased to exist.
The Company shall promptly deliver notice of the occurrence of either such
circumstance to the Holder and each other registered holder of Debentures.
Upon receipt by Holder of notice of the occurrence of any such described
circumstance, the Holder shall not be entitled to receive thereafter any
payments of principal of, interest on or other amounts due under this Debenture
other than as specified herein unless and until, if the circumstance was an
event of default with respect to Senior Indebtedness, the Senior Indebtedness
shall have been paid in full or defaults thereunder shall have been cured by the
Company or waived by the holders of the then outstanding Senior Indebtedness;
provided, however, that any payment received by the Holder prior to such notice
shall remain for the account of the Holder and not be subject to any claim by
holders of Senior Indebtedness.
The Company shall not pay to the Holder any amounts with respect to the
obligations owing under this Debenture while either of the circumstances
described above in this Section 8.2 exists and notice thereof has been given to
Holder. If while either of such circumstances exists and after notice thereof
has been given to Holder the Holder shall receive any payment, property,
security interest, or lien with respect to such obligations, such payment,
property, security interest, or lien shall be received by the Holder in trust
for the holders of the Senior Indebtedness and forthwith will be delivered and
transferred to the holders of the Senior Indebtedness which holders shall be
entitled to the entire benefit thereof to the extent of such Senior
Indebtedness. The Holder shall not be deemed to owe any fiduciary duty to the
holders of the Senior Indebtedness, but shall only have the duties to them that
are expressly set forth in this Article 8. Notwithstanding the foregoing, the
Holder shall be entitled to retain any shares of Common Stock received upon
conversion of the principal amount of this Debenture despite the existence at
the time of such conversion of either of the circumstances described above in
this Section 8.2.
Section 8.3. Obligations Unimpaired. It is understood that the provisions of
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this Debenture pertaining to subordination are, and are intended to be, solely
for the purpose of defining the relative rights of the Holder on the one hand
and the holders of the Senior Indebtedness on the other hand. Nothing contained
in this Article 8 shall or is intended to impair, as between the Company, its
creditors other than the holders of Senior Indebtedness and the Holder of this
Debenture, the unconditional and absolute obligation of the Company to pay the
Holder the principal of and interest on this Debenture as and when the same
shall become due and payable in accordance with its terms, or affect the
relative rights of the Holder and the creditors of the Company, other than the
holders of the Senior Indebtedness; nor shall anything herein prevent the Holder
from exercising all remedies otherwise permitted by applicable law upon default
under this Debenture, subject to the rights, if any, of the
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holders of the Senior Indebtedness, in respect to payment, property, security
interest or lien received upon the exercise of any such remedy. The
subordination herein provided applies to payments or distributions by the
Company only and shall not affect the right of the Holder to collect and retain
payment from any co-obligor, guarantor or surety. Upon any payment or
distribution of assets of the Company, the Holder shall be entitled to rely upon
any final order or decree made by any court of competent jurisdiction in which
such dissolution, winding-up, liquidation or reorganization proceedings are
pending, or upon a certificate of the liquidating trustee or agent or other
person making any distribution to the Holder for the purpose of ascertaining the
persons entitled to participate in such distribution, the holders of Senior
Indebtedness and other indebtedness of the Company, the amounts thereof or
payable thereon, the amount or amounts paid or distributed thereon, and all
other facts pertinent thereto.
Article 9. Notices
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Any notice which is required or convenient under the terms of this Debenture
shall be considered duly given if it is in writing and delivered in person or
sent via a recognized overnight courier service, prepaid and directed to the
Holder of the Debenture at its address as it appears on the Register or if to
the Company to its principal executive offices. The time when such notice is
delivered in person or by the courier service shall be deemed to be the time the
notice is given.
Article 10. Time
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Where this Debenture authorizes or requires the payment of money or the
performance of a condition or obligation on a Saturday, Sunday, public holiday
or a day on which banks are authorized to close in the jurisdiction where such
payment or performance is to take place, or authorizes or requires the payment
of money or the performance of a condition or obligation within, before or after
a period of time computed from a certain date, and such period of time ends on a
Saturday, Sunday, public holiday, or a day on which banks are authorized to
close in the jurisdiction where such payment or performance is to take place,
such payment may be made or condition or obligation performed on the next
succeeding business day, with the same force and effect as if made or performed
in accordance with the terms of this Debenture. Where time is extended by
virtue of the provisions of this Article 10, such extended time shall not be
included in the computation of interest.
Article 11. Waivers
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The holders of a majority in aggregate principal amount of the outstanding
Debentures may waive a default or rescind the declaration of an Event of Default
and its consequences except for an Event of Default described in subsections
(a), (b), (c) and (e) of Section 6.1 hereof.
Article 12. Rules of Construction
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In this Debenture, unless the context otherwise requires, words in the singular
number include the plural, and in the plural include the singular, and words of
the masculine gender include the feminine and the neuter, and when the sense so
indicates, words of the neuter gender may refer to any gender. The numbers and
titles of sections contained in this Debenture are inserted for convenience of
10
<PAGE>
reference only, and they neither form a part of this Debenture nor are they to
be used in the construction or interpretation hereof. Wherever, in this
Debenture, a determination of the Company is required or allowed, such
determination shall be made by a majority of the Board of Directors of the
Company and if it is made in good faith, it shall be conclusive and binding upon
the Company and the Holder of this Debenture.
Article 13. Governing Law
-------------
The validity, terms, performance and enforcement of this Debenture shall be
governed and construed by the provisions hereof and in accordance with the laws
of the State of Delaware applicable to agreements that are negotiated, executed,
delivered and performed solely in the State of Delaware.
In Witness Whereof, the Company has duly executed this Debenture as of the date
first written above.
FOUNTAIN OIL INCORPORATED
By
---------------------------------
Name
-------------------------------
Title
------------------------------
11
<PAGE>
NOTICE OF CONVERSION
[To be completed and signed only upon conversion of Debenture]
The undersigned Holder of this Debenture ("Holder"), hereby (i) certifies that
Holder has complied with all of the obligations of Holder under or with respect
to the Subscription Agreement pursuant to which this Debenture was originally
issued, a copy of which is on file at the principal executive offices of
Fountain Oil Incorporated, and (ii) irrevocably elects to exercise the right to
convert this Debenture, in whole or in part, into the Common Stock, par value
$0.10 per share, of Fountain Oil Incorporated as follows:
[Complete with Dollars ($ )*
amount in both --------------------------------------------------
words and ($10,000 or integral multiples of $10,000 unless
numbers] converting entire principal amount)
[Signature must be --------------------------------------------------
guaranteed if (Name of Issuee of shares if different than
issuee of stock registered Holder of Debenture)
differs from
registered Holder
of Debenture]
--------------------------------------------------
(Address of Issuee if different than address of
registered Holder of Debenture)
--------------------------------------------------
(Social Security Number or EIN of Issuee of
shares if to be issued in a name different from
name of Holder of Debenture, provided such Issuee
has such a number)
*If the principal amount of the Debenture to be converted is less than the
entire principal amount thereof, a new Debenture for the balance of the
principal amount shall be issued and returned to the Holder of the
Debenture.
Date: Sign:
----------- ----------------------------------------
(Signature must conform in all respects
to name of Holder shown on the face of
this Debenture)
Signature Guaranteed:
12
<PAGE>
ASSIGNMENT OF DEBENTURE
The undersigned Holder of this Debenture ("Holder"), hereby (i) sells, assigns
and transfers unto the assignee hereinafter identified the principal amount of
this Debenture hereinafter identified and (ii) certifies that Holder is
delivering to Fountain Oil Incorporated along with this Assignment of Debenture
the undertaking of said assignee required under Section 3(i) of the Subscription
Agreement pursuant to which this Debenture was originally issued, a copy of
which is on file at the principal executive offices of Fountain Oil
Incorporated:
-------------------------------------------------------------------------------
(Name of Assignee)
-------------------------------------------------------------------------------
(Address of Assignee)
-------------------------------------------------------------------------------
(Social Security Number or EIN of Assignee, provided Assignee has such a number)
Dollars ($ )
- -----------------------------------------------------------------------------
($50,000 or integral multiple of $50,000, unless entire principal
amount of Debenture)
of principal amount of this Debenture together with all accrued interest hereon.
Date: Sign:
--------- ------------------------------------------
(Signature must conform in all respects to
name of Holder shown on the face of this
Debenture)
Signature Guaranteed:
13
<PAGE>
EXHIBIT 10(1)
FOUNTAIN OIL INCORPORATED
1995 LONG-TERM INCENTIVE PLAN
(EFFECTIVE NOVEMBER 14, 1995)
<PAGE>
1. PURPOSE
2. DEFINITIONS 1
(a) "Award" 1
(b) "Award Agreement" 1
(c) "Board" 1
(d) "Code" 1
(e) "Committee" 1
(f) "Common Stock" 1
(g) "Compensation Committee" 1
(h) "Corporation" 1
(i) "Director" 1
(j) "Employee" 2
(k) "Exchange Act" 2
(l) "Exercise Price" 2
(m) "Fair Market Value" 2
(n) "For Cause" 2
(o) "Incentive Stock Option" 3
(p) "Non-qualified Stock Option" 3
(q) "Option" 3
(r) "Participant" 3
(s) "Plan" 3
(t) "Purchase Price" 3
(u) "Pyramiding" 3
(v) "Reload" 3
(w) "Share" 3
(x) "Stock Appreciation Right" 4
(y) "Subsidiary" 4
(z) "Ten Percent Stockholder" 4
(aa) "Total and Permanent
Disability" 4
(bb) "Vest" or "Vesting" 4
(cc) "Voting Power" 4
3. EFFECTIVE DATE 5
4. ADMINISTRATION 5
(a) Administration by the Board or
the Committee 5
(b) Composition of the Committee 5
(c) The Committee 5
(d) Powers of the Committee 5
(e) Committee's Interpretation of
the Plan 7
5. PARTICIPATION 7
(a) Eligibility for Participation 7
(b) Eligibility for Awards 7
6. SHARES OF STOCK OF THE CORPORATION 7
(a) Shares Subject to This Plan 7
(b) Adjustment of Shares 7
(c) Awards Not to Exceed Shares 8
Available
i
<PAGE>
TABLE OF CONTENTS
7. TERMS AND CONDITIONS OF OPTIONS 8
(a) Eligibility for Incentive Stock
Options 8
(b) Award Agreements 8
(c) Number of Shares Covered by an
Option 8
(d) Exercise of Options 8
(e) Vesting of Options 8
(f) Term and Expiration of Options 9
(g) Exercise Price 9
(h) Medium and Time of Payment of
Purchase Price 10
(i) Nontransferability of Options 10
(j) Termination of Employee, 10
Director, Independent Contractor or
Consultant Status for Any Reason
Other Than Death, Total and
Permanent Disability or For Cause
(k) Death of Participant 11
(l) Total and Permanent Disability
of Participant 11
(m) Termination For Cause 12
(n) Rights as a Stockholder 12
(o) Modification, Extension, and
Renewal of Options 12
(p) Other Provisions 12
(q) No Disqualification of
Incentive Stock Options 12
(r) Limitation on Incentive Stock
Options 13
8. STOCK APPRECIATION RIGHTS 13
(a) Stock Appreciation Right Award
Agreements 13
(b) Number of Shares Covered by a
Stock Appreciation Right 13
(c) Stock Appreciation Rights
Issued and Exercised Without
Payment of Consideration 13
(d) Exercise of Stock Appreciation
Rights 13
(e) Vesting 13
(f) Term and Expiration of Stock
Appreciation Rights 14
(g) Exercise and Settlement of a
Stock Appreciation Right 14
(h) Nontransferability of Stock
Appreciation Rights 14
(i) Termination of Employee,
Director, Independent Contractor or
Consultant Status for any Reason
Other Than Death, Total and
Permanent Disability or For Cause 15
(j) Death of Participant 15
(k) Total and Permanent Disability
of Participant 16
(l) Termination For Cause 16
(m) Rights as a Stockholder 16
(n) Modification, Extension, and
Renewal of Stock Appreciation Rights 16
(o) Other Provisions 16
9. TERM OF PLAN 17
10. RECAPITALIZATION, DISSOLUTION, AND
CHANGE OF CONTROL 17
(a) Recapitalization 17
(b) Dissolution 17
(c) Determination by the Committee 18
ii
<PAGE>
TABLE OF CONTENTS
(d) Limitation on Rights of
Participants 18
(e) No Limitation on Rights of
Corporation 18
11. SECURITIES LAW REQUIREMENTS 18
(a) Legality of Issuance 18
(b) Restrictions on Transfer;
Representations of Participant;
Legends 18
(c) Registration or Qualification
of Securities 19
(d) Exchange of Certificates 19
12. EXERCISE OF UNVESTED OPTIONS 19
(a) Purpose of Section 12 19
(b) Exercise of Non-Vested Awards
and Issuance of Restricted Stock 20
13. AMENDMENT OF THE PLAN 20
14. PAYMENT FOR SHARE PURCHASES 21
15. APPLICATION OF FUNDS 22
16. APPROVAL OF SHAREHOLDERS 22
17. WITHHOLDING OF TAXES 22
(a) General 22
(b) Stock Withholding 22
18. RIGHTS AS AN EMPLOYEE, DIRECTOR,
INDEPENDENT CONTRACTOR OR CONSULTANT 23
19. INSPECTION OF RECORDS 23
iii
<PAGE>
FOUNTAIN OIL INCORPORATED
1995 LONG-TERM INCENTIVE PLAN
-----------------------------
1. PURPOSE.
--------
This Plan is intended to provide employees and directors of Fountain Oil
Incorporated ("Corporation") and advisors and consultants rendering services to
the Corporation (collectively "Participants") an opportunity to acquire an
equity interest in the Corporation. The Corporation intends to use the Plan to
attract and retain Participants' services, motivate Participants to increase the
Corporation's value, and have flexibility in compensating Participants.
The Plan allows the Corporation to reward Participants with (i) options to
purchase shares of common stock of the Corporation, and (ii) stock appreciation
rights with respect to shares of common stock of the Corporation. All awards
shall be subject to the terms and conditions provided in this Plan.
2. DEFINITIONS.
------------
(a) "Award" shall mean any award granted under the Plan, including any
Option or Stock Appreciation Right.
(b) "Award Agreement" shall mean, with respect to each Award granted to a
Participant, the signed written agreement between the Corporation and the
Participant setting forth the terms and conditions of the Award.
(c) "Board" shall mean the Board of Directors of the Corporation.
(d) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(e) "Committee" shall mean the committee appointed by the Board in
accordance with Section 4 to administer the Plan, which shall be the
Compensation Committee unless the Board appoints a special Committee to
administer the Plan, as provided in Section 4(a)(i), or the Board, itself,
administers the Plan as provided in Section 4(a)(ii).
(f) "Common Stock" shall mean the voting common stock of the Corporation.
(g) "Compensation Committee" shall mean the Compensation Committee
appointed by the Board.
(h) "Corporation" shall mean Fountain Oil Incorporated.
(i) "Director" shall mean a member of the Board.
1
<PAGE>
(j) "Employee" shall mean any individual who is employed, within the
meaning of Section 3401 of the Code and the regulations thereunder, by the
Corporation or any Subsidiary. The Committee shall be responsible for
determining when an Employee's period of employment is deemed to be continued
during an approved leave of absence.
(k) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
(l) "Exercise Price" shall mean:
(i) With respect to an Option, the price per Share at which the Option
may be exercised, as determined by the Committee and as specified in the
Participant's Award Agreement; or
(ii) With respect to a Stock Appreciation Right, the price per Share
which is the base price for determining the future value of the Stock
Appreciation Right, as determined by the Committee and as specified in the
Participant's Award Agreement.
(m) "Fair Market Value" shall mean the value of each Share determined as of
any specified date as follows:
(i) If the Shares are traded on any recognized United States
securities exchange, the value per Share shall be the closing price of the
Common Stock on the business day immediately preceding such specified date (or,
if there are no sales on that day the last preceding day on which there was a
sale) on the principal exchange on which the Common Stock is traded;
(ii) If the Shares are not traded on any United States securities
exchange but are traded on any formal over-the-counter quotation system in
general use in the United States, the value per Share shall be the mean between
the closing bid and asked quotations of the Common Stock on the business day
immediately preceding such specified date (or, if there are no such quotations
on that day, the last preceding day on which there were such quotations) on the
principal system on which the Common Stock is traded; or
(iii) If neither Paragraph (i) nor (ii) applies, the value per Share
shall be determined by the Committee in accordance with Section 4(f) in good
faith and based on uniform principles consistently applied. Such determination
shall be conclusive and binding on all persons.
(n) "For Cause" shall mean the termination of a Participant's status with
the Corporation as an Employee, Director, advisor or consultant for any of the
following reasons, as determined by the Committee in accordance with Section
4(d)(xii):
(i) The Participant commits a violation of any law, a breach of any
fiduciary duty or an act of dishonesty, fraud, misrepresentation or moral
turpitude which may have a material detrimental impact on the Corporation's
business or prevent the Participant from effectively performing his or her
duties as an Employee, Director, advisor or consultant for the Corporation; or
2
<PAGE>
(ii) The Participant, as determined in the sole discretion of the
Committee, willfully and habitually neglects to perform the duties which the
Participant is required to perform for the Corporation or performs such duties
other than in good faith and the Participant fails to correct such conduct
within ten (10) days following the Corporation's delivery to the Participant of
a written notice describing such conduct; or
(iii) The Committee determines that the reason for terminating the
Participant's status with the Corporation constitutes "for cause" under the
Corporation's policies or under any contract between the Participant and the
Corporation.
(o) "Incentive Stock Option" shall mean an Option of the type which is
described in Section 422(b) of the Code.
(p) "Non-qualified Stock Option" shall mean an Option which is not of the
type described in Section 422(b) or 423(b) of the Code.
(q) "Option shall mean any Option which is granted pursuant to the Plan to
purchase Shares of Common Stock, whether granted as an Incentive Stock Option or
as a Non-qualified Stock Option.
(r) "Participant" shall mean any individual to whom an Award has been
granted under the Plan, and such term shall include where appropriate the duly
appointed conservator or other legal representative of a mentally incompetent
Participant and the allowable transferee of a deceased Participant as provided
Sections 7(i) and/or 8(h).
(s) "Plan" shall mean this Fountain Oil Incorporated 1995 Long-Term
Incentive Plan, as amended. The Plan is effective November 14, 1995.
(t) "Purchase Price" shall mean, at any specified time, the Exercise Price
of an Option to purchase one Share times the number of Shares subject to such
Option being exercised.
(u) "Pyramiding" shall mean, if the Committee in its sole discretion
permits, a Participant's payment, in whole or in part, of the Exercise Price of
an Option made by exchanging a Share or Share(s) of Common Stock that the
Participant had acquired pursuant to the exercise of another Option during the
preceding six months (under this Plan or any other plan or program of the
Corporation) or had otherwise acquired from the Corporation during the preceding
six months without paying full consideration for such Share(s).
(v) "Reload" shall mean the grant of new Options to a Participant who
exercises an Option with previously acquired Shares, with the number of new
Options being equal to the number of Shares the Participant submits to the
Corporation to pay for Options just exercised.
(w) "Share" shall mean one authorized share of Common Stock.
3
<PAGE>
(x) "Stock Appreciation Right" shall mean a right issued to a Participant
to receive all or any portion of the future appreciation in the Fair Market
Value of one Share of Common Stock over the Exercise Price of such right. A
Stock Appreciation Right may be settled in cash or Shares in accordance with the
terms and conditions set forth in Section 8.
(y) "Subsidiary" shall mean any corporation (other than the Corporation) in
an unbroken chain of corporations beginning with the Corporation if, at the time
of granting an Option, each of the corporations (other than the last corporation
in the unbroken chain) owns stock possessing 50% or more of the voting power in
one of the other corporations in such chain.
(z) "Ten Percent Stockholder" shall mean, for purposes of granting
Incentive Stock Options, any person who owns stock of the Corporation possessing
more than 10% of the combined voting power of all classes of outstanding stock
of the Corporation or any Subsidiary. For purposes of determining whether a
person is a Ten Percent Stockholder:
(i) A person shall be considered the owner of stock that is owned,
directly or indirectly, by or for his or her brothers or sisters, spouse,
ancestors, and lineal descendants;
(ii) Stock owned, directly or indirectly, by or for a corporation,
partnership, estate or trust shall be considered as being owned proportionally
by or for its shareholders, partners or beneficiaries, respectively; and
(iii) The term "outstanding stock" shall include all shares of stock
actually issued and outstanding, but shall not include any shares of stock
subject to stock options.
(aa) "Total and Permanent Disability" shall mean with respect to a
Participant who is either an Employee or Director:
(i) The mental or physical disability, either occupational or non-
occupational in cause, which satisfies the definition of "total disability" in
the disability policy or plan provided by the Corporation covering the
Participant; or
(ii) If no such policy or plan is then covering the Participant, the
mental or physical disability which, in the opinion of the Committee, on the
basis of medical evidence satisfactory to it, prevents the Participant from
indefinitely performing the principal duties of the position the Participant
performed when the disability commenced.
(bb) "Vest" or "Vesting" shall mean the date, event or act prior to which
an Award, in whole or in part, is not exercisable, and as a consequence of which
the Award, in whole or in part, becomes exercisable for the first time.
(cc) "Voting Power" shall mean the total combined rights to cast votes at
elections for members of the Corporation's Board of Directors.
4
<PAGE>
3. EFFECTIVE DATE.
---------------
The Plan was adopted by the Corporation effective November 14, 1995,
subject to the approval of the Corporation's shareholders in accordance with
Section 16.
4. ADMINISTRATION.
---------------
(a) Administration by the Board or the Committee.
----------------------------------------------
The Board may appoint the Compensation Committee as the Committee to
administer the Plan, provided all members of the Compensation Committee satisfy
the criteria set forth in Section 4(b). If any member of the Compensation
Committee does not satisfy all such criteria, the Board may appoint a special
Committee, consisting solely of persons who satisfy all such criteria, to
administer the Plan. In the event the Board elects to administer the Plan, the
Board shall have the powers and authority otherwise delegated to the Committee
in this Plan document and all acts to be performed by the Committee under this
Plan shall be performed by the Board.
(b) Composition of the Committee.
-----------------------------
If appointed by the Board, the Committee shall consist of not less
than two members, all of whom shall be a Director and a "disinterested person"
within the meaning of Rule 16b-3(c)(ii)(i) promulgated by the Securities
Exchange Commission under the Exchange Act.
(c) The Committee.
--------------
(i) The Committee shall hold meetings at such times and places as it
may determine. For a Committee meeting, if the Committee has two members, both
members must be present to constitute a quorum, and if the Committee has three
or more members, a majority of the Committee shall constitute a quorum. Acts by
a majority of the members present at a meeting at which a quorum is present and
acts approved in writing by all the members of the Committee shall constitute
valid acts of the Committee.
(ii) Members of the Committee may vote on any matters affecting the
administration of the Plan or the grant of any Award pursuant to the Plan,
subject to the remainder of this Section 4(c). No member shall act upon the
granting of an Award to himself or herself (except as otherwise specifically
allowable under paragraphs (c)(2)(i)(A), (B), or (C) of Rule 16b-3 of the
Exchange Act).
(d) Powers of the Committee.
------------------------
On behalf of the Corporation and subject to the provisions of the
Plan, the Committee shall have the authority and discretion to:
(i) Prescribe, amend and rescind rules and regulations relating to the
Plan;
5
<PAGE>
(ii) Select Participants to receive Awards;
(iii) Determine the form and terms of Awards;
(iv) Determine the number of Shares or other consideration subject to
Awards;
(v) Determine whether Awards will be granted singly, in combination or
in tandem with, in replacement of, or as alternatives to, other Awards under the
Plan or any other incentive or compensation plan of the Corporation;
(vi) Construe and interpret the Plan, any Award Agreement and any
other agreement or document executed pursuant to the Plan;
(vii) Correct any defect or omission, or reconcile any inconsistency
in the Plan, any Award or any Award Agreement;
(viii) Determine whether an Award has been earned and/or Vested;
(ix) Determine whether a Participant who is either an Employee or a
Director has incurred a Total and Permanent Disability;
(x) Accelerate or, with the consent of the Participant, defer the
Vesting of any Award and/or the exercise date of any Award;
(xi) Determine if a period of service performed by a consultant, an
advisor or a Director is "continuous" for purposes of the Plan;
(xii) Determine whether a Participant's status with the Corporation
as an Employee, Director, advisor, or consultant has been terminated For Cause;
(xiii) Authorize any person to execute on behalf of the Corporation
any instrument required to effectuate the grant of an Award as made by the
Committee;
(xiv) With the consent of the Participant, reprice, cancel and
reissue, or otherwise adjust the terms of an Award previously issued to the
Participant;
(xv) Determine, upon review of relevant information, the Fair Market
Value of the Common Stock ; and
(xvi) Make all other determinations deemed necessary or advisable for
the administration of the Plan.
6
<PAGE>
(e) Committee's Interpretation of the Plan.
---------------------------------------
The Committee's interpretation and construction of any provision of
the Plan, of any Award granted under the Plan, or of any Award Agreement shall
be final and binding on all persons claiming an interest in an Award granted or
issued under the Plan. No member of the Committee nor any Director shall be
liable for any action or determination made in good faith with respect to the
Plan, and the Corporation shall indemnify and defend a member of the Committee
to the fullest extent provided by law.
5. PARTICIPATION.
--------------
(a) Eligibility for Participation. Subject to the conditions of Section
5(b), all Employees, Directors, consultants, and advisors of the Corporation are
eligible to be selected as Participants by the Committee, in its discretion;
provided however, that any Director who is not also an Employee shall
participate only in the "Outside Directors Sub-Plan" which has been adopted
under this Plan for such outside Directors, as such Sub-Plan may be amended from
time-to-time. The Committee's determination of an individual's eligibility for
participation shall be final.
(b) Eligibility for Awards. The Committee has the authority, in its
discretion, to grant Awards to Participants. A Participant may be granted more
than one Award under the Plan.
6. SHARES OF STOCK OF THE CORPORATION.
-----------------------------------
(a) Shares Subject to This Plan.
----------------------------
Awards which are granted or issued under this Plan shall be with
respect to the authorized but unissued or reacquired Shares of the Corporation's
Common Stock. The aggregate number of Shares which may be issued upon the
exercise of Options and/or which may be utilized with respect to Stock
Appreciation Rights settled in cash or in Shares under this Plan shall not
exceed one million five hundred thousand (1,500,000) Shares, subject to
adjustment under Section 10.
(b) Adjustment of Shares.
---------------------
In the event of an adjustment described in Section 10, then (i) the
number of Shares reserved for issuance under the Plan, (ii) the Exercise Prices
of and number of Shares subject to outstanding Options, (iii) the Exercise Price
of and number of Shares with respect to which there are outstanding Stock
Appreciation Rights, and (iv) any other factor pertaining to outstanding Awards
shall be duly and proportionately adjusted, subject to any required action by
the Board or the shareholders of the Corporation and compliance with applicable
securities laws; provided, however, that fractions of a Share shall not be
issued but shall either be paid in cash at Fair Market Value or shall be rounded
up to the nearest Share, as determined by the Committee; and provided, further,
that the Exercise Price of any Option may not be decreased to below the par
value, if any, of the Shares.
7
<PAGE>
(c) Awards Not to Exceed Shares Available.
--------------------------------------
The number of Shares subject to Awards which have been granted under
this Plan at any time during the Plan's term shall not, in the aggregate at any
time, exceed the number of Shares authorized for issuance under the Plan. The
number of Shares subject to a Stock Appreciation Right that is settled in cash
shall count as Shares issued under the Plan and shall not again be available for
grant or issuance under the Plan. The number of Shares subject to an Award
which expires, is canceled, is forfeited or is terminated for any reason, shall
again be available for issuance under the Plan.
7. TERMS AND CONDITIONS OF OPTIONS.
--------------------------------
(a) Eligibility for Incentive Stock Options.
----------------------------------------
(i) Subject to Section 7(a)(ii), Incentive Stock Options may be
granted only to Employees (irrespective of whether an Employee is also a
Director). Advisors, consultants and Directors who are not also Employees are
not eligible to be awarded Incentive Stock Options.
(ii) Any Employee who is a Ten Percent Stockholder is eligible to be
granted an Incentive Stock Option only if: (A) the Exercise Price of each Share
subject to such Incentive Stock Option, when granted, is equal to or exceeds
110% of the Fair Market Value of a Share; and (B) the term of the Incentive
Stock Option does not exceed five years.
(b) Stock Option Award Agreements.
------------------------------
Each Option shall be evidenced by a written Award Agreement which
shall set forth the terms and conditions pertaining to such Option, provided
that all such terms shall be subject to and consistent with this Plan.
(c) Number of Shares Covered by an Option.
--------------------------------------
Each Option Award Agreement shall state the number of Shares for which
the Option is exercisable, subject to adjustment of such Shares pursuant to
Section 10.
(d) Exercise of Options.
--------------------
Only a Participant may exercise an Option, and the Participant may
exercise an Option only on or after the date on which the Option Vests, as
provided in Section 7(e) below, and only on or before the date on which the term
of the Option expires, as provided in Section 7(f) below.
(e) Vesting of Options.
-------------------
Each Award Agreement shall include a Vesting schedule describing the
date, event or act upon which an Option shall Vest, in whole or in part, with
respect to all or a specified
8
<PAGE>
portion of the Shares covered by such Option. The condition shall not impose
upon the Corporation any obligation to retain the Participant in its employ for
any period.
(f) Term and Expiration of Options.
-------------------------------
Subject to Section 7(q), except as otherwise specifically provided in
a Participant's Award Agreement, the term of an Option shall expire on the first
to occur of the following events:
(i) The tenth anniversary of the date the Option was granted
(substituting "fifth anniversary" for "tenth anniversary" for an Incentive Stock
Option granted to a Ten Percent Stockholder);
(ii) The date determined under Section 7(j)(ii) for a Participant who
ceases to be an Employee, Director, advisor, or consultant of the Corporation
for any reason, other than by reason of death, Total and Permanent Disability or
For Cause;
(iii) The date determined under Section 7(k) for a Participant who
ceases to be an Employee, Director, advisor or consultant of the Corporation by
reason of the Participant's death;
(iv) The date determined under Section 7(l) for a Participant who
ceases to be an Employee or Director of the Corporation by reason of the
Participant's Total and Permanent Disability;
(v) The date determined under Section 7(m) for a Participant who
ceases to be an Employee, Director, advisor or consultant For Cause;
(vi) On the effective date of a transaction described in Section
10(b); or
(vii) The expiration date specified in the Award Agreement pertaining
to the Option.
(g) Exercise Price.
---------------
Each Award Agreement shall state the Exercise Price for the Shares to
which the Option pertains, subject to the following conditions:
(i) The Exercise Price of an Incentive Stock Option shall not be less
than 100% of the Fair Market Value of the Shares on the date the Option is
granted (substituting "110%" for "100%" for any Incentive Stock Option granted
to a Ten Percent Stockholder); and
(ii) Notwithstanding Section 7(g)(i) above, the Exercise Price of an
Option may not be below the par value, if any, of the Shares.
9
<PAGE>
(h) Medium and Time of Payment of Purchase Price.
---------------------------------------------
A Participant may exercise an Option by delivering notice to the
Corporation. A Participant exercising an Option shall pay the Purchase Price
for the Shares to which such exercise pertains in full in cash (in U.S. dollars)
as a condition of such exercise, unless the Committee in its discretion allows
the Participant to pay the Purchase Price in a manner allowed under Section 14,
so long as the sum of cash so paid and such other consideration equals the
Purchase Price. The sequential exercise of an Option through Pyramiding is
specifically allowable under the Plan, subject to the consent of the Committee,
in its discretion. The granting of Reload Options is also allowable under the
Plan, subject to the consent of the Committee, in its discretion.
(i) Nontransferability of Options.
------------------------------
An Option granted to a Participant shall, during the lifetime of the
Participant, be exercisable only by the Participant and shall not be assignable
or transferable. In the event of the Participant's death, an Option is
transferable by the Participant only by will or the laws of descent and
distribution.
(j) Termination of Employee, Director, Advisor or Consultant Status for Any
-----------------------------------------------------------------------
Reason Other Than Death, Total and Permanent Disability or For Cause.
- ---------------------------------------------------------------------
(i) For purposes of this Section 7(j), Employee, Director, advisor or
consultant status will be treated as continuing intact while the Participant is
an Employee, Director, advisor or consultant or is on military leave, sick leave
or other bona fide leave of absence, as determined by the Committee, in its
discretion in accordance with Sections 2(j) or 4(d)(xi). The preceding sentence
notwithstanding, for determinations pertaining to Incentive Stock Options,
Employee status shall be deemed to terminate on the date that a Participant is
no longer eligible to receive an Incentive Stock Option pursuant to Section
7(a).
(ii) If a Participant ceases to be an Employee, Director, advisor or
consultant for any reason other than death, Total and Permanent Disability or
For Cause, then: (A) the Participant's Options which are not Vested at the time
that the Participant ceases to be an Employee, Director, advisor or consultant
shall be forfeited; and (B) the Participant's Options which are Vested at the
time the Participant ceases to be an Employee, Director, advisor or consultant
shall expire at 12:00 Midnight on the 30th day following the date that the
Participant ceases to be an Employee, Director, advisor or consultant (but not
beyond the date that the term of the Option would earlier have expired pursuant
to Section 7(f)), subject to the following:
(A) Pursuant to Section 4(d)(iii), the Committee may provide in a
Director's Award Agreement that a longer specified period may be substituted for
the thirty-day period described above;
(B) Pursuant to Section 7(o), the Committee may, in its sole
discretion, grant an extension of the thirty-day expiration period described
above in order to favor a
10
<PAGE>
Participant, provided that such extension shall be made in writing and shall
provide that all unexercised Options shall expire at 12:00 Midnight on the last
day of such extension; and
(C) Any unexercised Incentive Stock Option shall in any event expire
at 12:00 Midnight on the three month anniversary of the date the Participant
ceases to be an Employee.
(k) Death of Participant.
---------------------
If a Participant dies while an Employee, Director, advisor or
consultant, any Option granted to the Participant may be exercised, to the
extent it was Vested on the date of the Participant's death or became Vested as
a result of the Participant's death, at any time within six (6) months after the
Participant's death (but not beyond the date that the term of the Option would
earlier have expired pursuant to Section 7(f) had the Participant's death not
occurred), subject to the following:
(i) Pursuant to Section 7(o), the Committee may, in its sole
discretion, grant an extension of the six-month expiration period described
above in order to favor a Participant, provided that such extension shall be
made in writing and shall provide that all unexercised Options shall expire at
12:00 Midnight on the last day of such extension; and
(ii) Any unexercised Incentive Stock Option shall in any event expire
at 12:00 Midnight on the one year anniversary of the Participant's death.
(l) Total and Permanent Disability of Participant.
----------------------------------------------
If a Participant ceases to be an Employee or Director as a consequence
of Total and Permanent Disability, any Option granted to the Participant may be
exercised, to the extent it was Vested on the date that the Participant ceased
to be an Employee or Director or became Vested as a result of Participant's
Total and Permanent Disability, at any time within six (6) months after such
date (but not beyond the date that the term of the Option would earlier have
expired pursuant to 7(f) had the Participant's Total and Permanent Disability
not occurred), subject to the following:
(i) Pursuant to Section 7(o), the Committee may, in its sole
discretion, grant an extension of the six-month expiration period described
above in order to favor a Participant, provided that such extension shall be
made in writing and shall provide that any unexercised Option shall expire at
12:00 Midnight on the last day of such extension; and
(ii) Any unexercised Incentive Stock Option shall expire at 12:00
Midnight on the one year anniversary of the date the Participant ceases to be an
Employee by reason of Total and Permanent Disability.
11
<PAGE>
(m) Termination For Cause.
----------------------
If a Participant ceases to be an Employee, Director, advisor or
consultant For Cause, any Vested Option granted to the Participant may be
exercised no later than 12:00 Midnight on the date such termination For Cause
occurs.
(n) Rights as a Stockholder.
------------------------
A Participant shall have no rights as a stockholder of the Corporation
with respect to any Shares for which an Option is exercisable or has been
exercised until the date a stock certificate for such Shares is issued to the
Participant. No adjustment shall be made for dividends (ordinary or
extraordinary or whether in currency, securities, or other property),
distributions, or other rights for which the record date is prior to the date
such stock certificate is issued.
(o) Modification, Extension, and Renewal of Options.
------------------------------------------------
Within the limitations of the Plan, the Committee may, in its
discretion, modify, extend or renew any outstanding Option or accept the
cancellation of outstanding Options for the granting of a new Option in
substitution therefore. Notwithstanding the preceding sentence, no modification
of an Option shall:
(i) Without the consent of the Participant, alter or impair any rights
or obligations under any Option previously granted or cause an Incentive Stock
Option previously granted to fail to satisfy all the conditions required to
qualify as an Incentive Stock Option; or
(ii) Exceed or otherwise violate any limitation set forth in this
Section 7.
(p) Other Provisions.
-----------------
An Award Agreement may contain such other provisions as the Committee
in its discretion deems advisable which are not inconsistent with the terms of
the Plan, including but not limited to:
(i) Restrictions on the exercise of the Option;
(ii) Submission by the Participant of such forms and documents as the
Committee may require; and/or
(iii) Procedures to facilitate the payment of the Exercise Price of
an Option under any method allowable under Section 14.
(q) No Disqualification of Incentive Stock Options.
-----------------------------------------------
Notwithstanding any other provision of the Plan, the Plan shall not be
interpreted, amended or altered, nor shall any discretion or authority granted
under the Plan be exercised, so
12
<PAGE>
as to disqualify the Plan under Section 422 of the Code or, without the consent
of the Participant affected, disqualify any Incentive Stock Option under Section
422 of the Code (except as provided in Section 7(r)).
(r) Limitation on Incentive Stock Options.
--------------------------------------
The aggregate Fair Market Value (determined with respect to each
Incentive Stock Option as of such Incentive Stock Option's date of grant) of all
Shares with respect to which a Participant's Incentive Stock Options become
Vested during any calendar year (under the Plan and under other incentive stock
option plans of the Corporation, if any) shall not exceed US$100,000. Any
purported Incentive Stock Options in excess of such limitation shall be
recharacterized as Non-qualified Stock Options.
8. STOCK APPRECIATION RIGHTS.
--------------------------
(a) Stock Appreciation Right Award Agreements.
------------------------------------------
Each Stock Appreciation Right shall be evidenced by a written Award
Agreement which shall set forth the terms and conditions pertaining to such
Stock Appreciation Right, provided that all such terms shall be subject to and
consistent with this Plan.
(b) Number of Shares Covered by a Stock Appreciation Right.
-------------------------------------------------------
Each Stock Appreciation Right Award Agreement shall state the number
of Shares to which it pertains and the Exercise Price which is the basis for
determining future appreciation, subject to adjustment pursuant to Section 10.
(c) Stock Appreciation Rights Issued and Exercised Without Payment of
-----------------------------------------------------------------
Consideration.
- --------------
A Stock Appreciation Right shall be issued to and exercised by a
Participant without payment by the Participant of any consideration.
(d) Exercise of Stock Appreciation Rights.
--------------------------------------
Only a Participant may exercise a Stock Appreciation Right, and the
Participant may exercise a Stock Appreciation Right only on or after the date on
which the Stock Appreciation Right vests, as provided in Section 8(e), below,
and only on or before the date on which the Stock Appreciation Right expires, as
provided in Section 8(f) below.
(e) Vesting of Stock Appreciation Rights.
-------------------------------------
Each Award Agreement shall include a Vesting schedule describing the
date, event or act upon which the Stock Appreciation Right to which it pertains
Vests, in whole or in part.
13
<PAGE>
This condition shall not impose upon the Corporation any obligation to retain
the Participant in its employ for any period.
(f) Term and Expiration of Stock Appreciation Rights.
-------------------------------------------------
Except as otherwise specifically provided in a Participant's Award
Agreement, the term of a Stock Appreciation Right shall expire on the first to
occur of the following events:
(i) The tenth anniversary of the date the Right was granted;
(ii) The date determined under Section 8(i)(ii) for a Participant who
ceases to be an Employee, Director, advisor or consultant for any reason, other
than by reason of death, Total and Permanent Disability or For Cause;
(iii) The date determined under Section 8(j) for a Participant who
ceases to be an Employee, Director, advisor or consultant of the Corporation by
reason of the Participant's death;
(iv) The date determined under Section 8(k) for a Participant who
ceases to be an Employee or Director of the Corporation by reason of the
Participant's Total and Permanent Disability;
(v) The date determined under Section 8(l) for a Participant who
ceases to be an Employee, Director, advisor or consultant For Cause;
(vi) On the effective date of a transaction described in Section
10(b); or
(vii) The expiration date specified in the Award Agreement pertaining
to the Stock Appreciation Right.
(g) Exercise and Settlement of a Stock Appreciation Right.
------------------------------------------------------
A Participant may exercise a Vested Stock Appreciation Right by
delivering notice to the Corporation. The Stock Appreciation Right may be
settled in the form of cash (either in a lump sum payment or in installments),
whole Shares, or a combination thereof, as the Award Agreement prescribes.
(h) Nontransferability of Stock Appreciation Rights.
------------------------------------------------
A Stock Appreciation Right granted to a Participant shall, during the
lifetime of the Participant, be exercisable only by the Participant and shall
not be assignable or transferable. In the event of the Participant's death, a
Stock Appreciation Right is transferable by the Participant only by will or the
laws of descent and distribution.
14
<PAGE>
(i) Termination of Employee, Director, Advisor or Consultant Status for any
-----------------------------------------------------------------------
Reason Other Than Death, Total and Permanent Disability or For Cause.
- ---------------------------------------------------------------------
(i) For purposes if this Section 8(i)(i), Employee, Director, advisor
or consultant status will be treated as continuing intact while the Participant
is an Employee, Director, advisor or consultant or is on military leave, sick
leave or other bona fide leave of absence, as determined by the Committee, in
its discretion in accordance with Sections 2(j) or 4(d)(xi).
(ii) If a Participant ceases to be an Employee, Director, advisor or
consultant for any reason other than death, Total and Permanent Disability or
For Cause, then: (A) the Participant's Stock Appreciation Rights which are not
Vested at the time that the Participant ceases to be an Employee, Director,
advisor or consultant shall be forfeited; and (B) the Participant's Stock
Appreciation Rights which are Vested at the time the Participant ceases to be an
Employee, Director, advisor or consultant shall expire at 12:00 Midnight on the
30th day following the date that the Participant ceases to be an Employee,
Director, advisor or consultant (but not beyond the date that the term of the
Stock Appreciation Right would earlier have expired pursuant to Section 8(f),
subject to the following:
(A) Pursuant to Section 4(d)(iii), the Committee may provide in a
Director's Award Agreement that a longer specified period may be substituted for
the thirty-day period described above; and
(B) Pursuant to Section 8(n), the Committee may, in its sole
discretion, grant an extension of the thirty-day expiration period described
above in order to favor a Participant, provided that such extension shall be
made in writing and shall provide that all unexercised Stock Appreciation Rights
shall expire at 12:00 Midnight on the last day of such extension.
(j) Death of Participant.
---------------------
If a Participant dies while an Employee, Director, advisor or
consultant, any Stock Appreciation Right granted to the Participant may be
exercised, to the extent it was Vested on the date of the Participant's death or
became Vested as a consequence of the Participant's death, at any time within
six (6) months after the Participant's death (but not beyond the date that the
term of the Stock Appreciation Right would earlier have expired pursuant to
Section 8(f) had the Participant's death not occurred), provided that pursuant
to Section 8(n), the Committee may, in its sole discretion, grant an extension
of the six-month expiration period described above in order to favor a
Participant, provided that such extension shall be made in writing and shall
provide that all unexercised Stock Appreciation Rights shall expire at 12:00
Midnight on the last day of such extension.
15
<PAGE>
(k) Total and Permanent Disability of Participant.
----------------------------------------------
If a Participant ceases to be an Employee or Director as a consequence
of Total and Permanent Disability, any Stock Appreciation Right granted to the
Participant may be exercised, to the extent it was Vested on the date that the
Participant ceased to be an Employee or Director or became Vested as a
consequence of the Participant's Total and Permanent Disability, at any time
within six (6) months after such date (but not beyond the date that the term of
the Stock Appreciation Right would earlier have expired pursuant to 8(f) had the
Participant's Total and Permanent Disability not occurred), provided that
pursuant to Section 8(n), the Committee may, in its sole discretion, grant an
extension of the six-month expiration period described above in order to favor a
Participant, provided that such extension shall be made in writing and shall
provide that any unexercised Option shall expire at 12:00 Midnight on the last
day of such extension.
(l) Termination For Cause.
----------------------
If a Participant ceases to be an Employee, Director, advisor or
consultant For Cause, any Vested Stock Appreciation Right granted to the
Participant may be exercised no later than 12:00 Midnight on the date such
termination For Cause occurs.
(m) Rights as a Stockholder.
------------------------
A Participant shall have no rights as a shareholder of the Corporation
with respect to any Shares to which a Stock Appreciation Right pertains, except
for Stock Appreciation Rights settled in Shares and then not until the date a
stock certificate for such Shares is issued to the Participant. No adjustment
shall be made for dividends (ordinary or extraordinary or whether in currency,
securities, or other property), distributions, or other rights for which the
record date is prior to the date such stock certificate is issued.
(n) Modification, Extension, and Renewal of Stock Appreciation Rights.
------------------------------------------------------------------
Within the limitations of the Plan, the Committee may, in its
discretion, modify, extend or renew any outstanding Stock Appreciation Right or
accept the cancellation of an outstanding Stock Appreciation Right for the
granting of a new Stock Appreciation Right in substitution therefore.
Notwithstanding the preceding sentence, no modification of a Stock Appreciation
Right shall, without the consent of the Participant, alter or impair any rights
or obligations under any Stock Appreciation Right previously granted.
(o) Other Provisions.
-----------------
An Award Agreement may contain such other provisions as the Committee
in its discretion deems advisable which are not inconsistent with the terms of
the Plan, including but not limited to:
(i) Restrictions on the exercise of the Stock Appreciation Right;
and/or
16
<PAGE>
(ii) Submission by the Participant of such forms and documents as the
Committee may require.
9. TERM OF PLAN.
-------------
Awards may be granted pursuant to the Plan through the period ending
on November 13, 2005. All Awards which are outstanding on such date shall
remain in effect until they are exercised or expire by their terms. The Plan
shall expire for all purposes on November 13, 2015. The Board is authorized to
extend the Plan for an additional term at any time; however, no Incentive Stock
Options may be granted under the Plan during a term resulting from such
extension unless the extension is approved by the stockholders of the
Corporation within one year of such extension.
10. RECAPITALIZATION, DISSOLUTION, AND CHANGE OF CONTROL.
-----------------------------------------------------
(a) Recapitalization.
-----------------
Notwithstanding any other provision of the Plan to the contrary, but
subject to any required action by the stockholders of the Corporation and
compliance with any applicable securities laws, the Committee shall make any
adjustments to the class and/or number of Shares covered by the Plan, the number
of Shares for which each outstanding Award pertains, the Exercise Price of an
Option, the Exercise Price of a Stock Appreciation Right, and/or any other
aspect of this Plan to prevent the dilution or enlargement of the rights of
Participants under this Plan in connection with any increase or decrease in the
number of issued Shares resulting from the payment of a Common Stock dividend,
stock split, reverse stock split, recapitalization, combination, or
reclassification or any other event which results in an increase or decrease in
the number of issued Shares without receipt of adequate consideration by the
Corporation (as determined by the Committee).
(b) Dissolution, Merger, Consolidation, or Sale or Lease of Assets.
---------------------------------------------------------------
Upon the (i) dissolution or liquidation of the Corporation, (ii)
merger of consolidation of the Corporation with another corporation or other
entity pursuant to which the Corporation is not the surviving entity, (iii) sale
or lease of all or substantially all the business assets of the Corporation, or
(iv) the sale of more than 80% of the outstanding Common Stock of the
Corporation, unless the surviving or acquiring corporation or entity agrees to
assume outstanding Awards, each Award granted hereunder shall expire as of the
effective date of such transaction; provided, however, that the Committee may,
in its discretion, give written notice of such event to any Participant who
shall then have the right to exercise his or her Vested Awards prior to the
effective date of such transaction, subject to earlier expiration pursuant to
Sections 7 or 8 (as applicable).
17
<PAGE>
(c) Determination by the Committee.
-------------------------------
All adjustments described in this Section 10 shall be made by the
Committee in its discretion, and such determination shall be conclusive and
binding on all persons.
(d) Limitation on Rights of Participants.
-------------------------------------
Except as expressly provided in this Section 10, no Participant shall
have any rights by reason of any reorganization, dissolution, change of control,
merger or acquisition. Any issuance by the Corporation of Awards shall not
affect, and no adjustment by reason thereof shall be made with respect to, any
Awards previously issued under the Plan.
(e) No Limitation on Rights of Corporation.
---------------------------------------
The grant of an Award pursuant to the Plan shall not affect in any way
the right or power of the Corporation to make adjustments, reclassifications,
reorganizations, or changes of its capital or business structure, or to merge or
consolidate, or to dissolve, liquidate, sell or transfer all or any part of its
business or assets.
11. SECURITIES LAW REQUIREMENTS.
----------------------------
(a) Legality of Issuance.
---------------------
No Share shall be issued upon the exercise of any Award unless and
until the Committee has determined that:
(i) The Corporation and the Participant have taken all actions
required to register the Shares under the Securities Act of 1933, as amended
(the "Act"), or to perfect an exemption from registration requirements of the
Act, or to determine that the registration requirements of the Act do not apply
to such exercise;
(ii) Any applicable listing requirement of any stock exchange on which
the Share is listed has been satisfied; and
(iii) Any other applicable provision of state, federal or foreign law
has been satisfied.
(b) Restrictions on Transfer; Representations of Participant; Legends.
------------------------------------------------------------------
Regardless of whether the offering and sale of Shares under the Plan
have been registered under the Act or have been registered or qualified under
the securities laws of any state, the Corporation may impose restrictions upon
the sale, pledge, or other transfer of such Shares (including the placement of
appropriate legends on stock certificates) if, in the judgment of the
Corporation and its counsel, such restrictions are necessary or desirable to
achieve compliance with the provisions of the Act, the securities laws of any
state, or any other law. If the offering
18
<PAGE>
and/or sale of Shares under the Plan is not registered under the Act and the
Corporation determines that the registration requirements of the Act apply but
an exemption is available which requires an investment representation or other
representation, the Participant shall be required, as a condition to acquiring
such Shares, to represent that such Shares are being acquired for investment,
and not with a view to the sale or distribution thereof, except in compliance
with the Act, and to make such other representations as are deemed necessary or
appropriate by the Corporation and its counsel. Stock certificates evidencing
Shares acquired pursuant to an unregistered transaction to which the Act applies
shall bear a restrictive legend substantially in the following form and such
other restrictive legends as are required or deemed advisable under the Plan or
the provisions of any applicable law:
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
("ACT"). THEY MAY NOT BE TRANSFERRED, SOLD OR OFFERED FOR SALE UNLESS A
REGISTRATION STATEMENT UNDER THE ACT IS IN EFFECT AS TO SUCH TRANSFER OR IN
THE OPINION OF COUNSEL FOR THE ISSUER EITHER SUCH REGISTRATION IS
UNNECESSARY IN ORDER FOR SUCH TRANSFER TO COMPLY WITH THE ACT OR THE
REGISTRATION PROVISIONS OF THE ACT DO NOT APPLY TO SUCH PROPOSED TRANSFER.
Any determination by the Corporation and its counsel in connection with any of
the matters set forth in this Section 11 shall be conclusive and binding on all
persons.
(c) Registration or Qualification of Securities.
--------------------------------------------
The Corporation may, but shall not be obligated to, register or
qualify the offering or sale of Shares under the Act or any other applicable
law.
(d) Exchange of Certificates.
-------------------------
If, in the opinion of the Corporation and its counsel, any legend
placed on a stock certificate representing Shares issued pursuant to the Plan is
no longer required, the Participant or the holder of such certificate shall be
entitled to exchange such certificate for a certificate representing the same
number of Shares but lacking such legend.
12. EXERCISE OF UNVESTED OPTIONS.
-----------------------------
(a) Purpose of Section 12.
----------------------
This Section 12 is intended to apply for the benefit of a Participant
prior to the time Shares held by the Participant are freely transferable under
applicable federal and state securities laws without the Participant holding the
Shares for a minimum period of time (such as the holding period requirement of
Rule 144 adopted by the Securities and Exchange Commission under the Act). It
provides that a Participant with a non-Vested Award may commence this holding
period for the Shares subject to the Award by exercising the non-Vested Award
and
19
<PAGE>
receiving Shares of restricted stock which will Vest on the same date as the
Award would have Vested. Any restricted stock issued under this Section 12 for
non-vested Awards which expire pursuant to Section 7 or Section 8, as
applicable, shall be reconveyed to the Corporation at the Exercise Price, if
any, paid by the Participant to the Corporation to acquire such Shares (in cash
and/or in Shares as paid by the Participant), subject, however, to complying
with any legal requirement relating to the Corporation's ability to repurchase
its own securities. In this way, the Participant is able to begin the holding
period for the Shares prior to the date the Award would have Vested.
(b) Exercise of Unvested Awards and Issuance of Restricted Stock.
-------------------------------------------------------------
The Committee, in its sole discretion may:
(i) Grant any Participant the right to exercise any Award prior to the
Vesting of such Award, provided that the Shares issued upon such exercise shall
remain subject to Vesting, as restricted stock, at the same rate as under the
Award so exercised; and/or
(ii) Require the Corporation and the Participant to establish an
escrow arrangement to facilitate the re-transfer to the Corporation of any
Shares of restricted stock which are not Vested and are to be reconveyed, on or
before the applicable date described in Section 7 or 8, as applicable, for
determining the expiration of the Award pursuant to which such Shares were
issued under this Section 12.
13. AMENDMENT OF THE PLAN.
----------------------
The Committee may, from time to time, terminate, suspend or discontinue the
Plan, in whole or in part, or revise or amend it in any respect whatsoever
including, but not limited to, the adoption of any amendment deemed necessary or
advisable to qualify the Awards under rules and regulations promulgated by the
Securities and Exchange Commission with respect to Employees who are subject to
the provisions of Section 16 of the Exchange Act, or to correct any defect or
supply any omission or reconcile any inconsistency in the Plan or in any Award
granted under the Plan, with or without approval of the stockholders of the
Corporation, but if any such action is taken without the approval of the
Corporation's stockholders, no such revision or amendment shall:
(a) Increase the number of Shares subject to the Plan, other than any
increase pursuant to Section 10;
(b) Change the designation of the class of persons eligible to receive
Incentive Stock Options; or
(c) Amend this Section 13 to defeat its purpose.
No amendment, termination or modification of the Plan shall, without the consent
of a Participant, adversely affect the Participant with respect to any Award
previously granted to the Participant.
20
<PAGE>
14. PAYMENT FOR SHARE PURCHASES.
----------------------------
Payment of the Purchase Price for any Shares purchased pursuant to the Plan
may be made in cash (in U.S. dollars) or, where expressly approved for the
Participant by the Committee, in its discretion, and where permitted by law:
(a) By check;
(b) By cancellation of indebtedness of the Corporation to the Participant;
(c) By surrender of Shares that either: (A) have been owned by Participant
for more than six months (unless the Committee permits a Participant to exercise
an Option by Pyramiding, in which event the six months holding period shall not
apply) and have been "paid for" within the meaning of SEC Rule 144 (and, if such
shares were purchased from the Corporation by use of a promissory note, such
note has been fully paid with respect to such Shares); or (B) were obtained by
Participant in the public market;
(d) By tender of a full recourse promissory note having such terms as may
be approved by the Committee and bearing interest at a rate sufficient to avoid
imputation of income under Sections 483 and 1274 of the Code; provided, however,
that Participants who are not Employees shall not be entitled to purchase Shares
with a promissory note unless the note is adequately secured by collateral other
than the Shares; provided, further, that the portion of the Purchase Price equal
to the par value of the Shares, if any, must be paid in cash if required by
state law;
(e) By waiver of compensation due or accrued to Participant for services
rendered;
(f) With respect only to purchases upon exercise of an Option, and provided
that a public market for the Corporation's stock exists:
(i) Through a "same day sale" commitment from the Participant and a
broker-dealer that is a member of the National Association of Securities Dealers
(an "NASD Dealer") whereby the Participant irrevocably elects to exercise the
Option and to sell a portion of the Shares so purchased to pay for the Exercise
Price, and whereby the NASD Dealer irrevocably commits upon receipt of such
Shares to forward the Exercise Price directly to the Corporation; or
(ii) Through a "margin" commitment from the Participant and an NASD
Dealer whereby the Participant irrevocably elects to exercise the Option and to
pledge the Shares so purchased to the NASD Dealer in a margin account as
security for a loan from the NASD Dealer in the amount of the Exercise Price,
and whereby the NASD Dealer irrevocably commits upon receipt of such Shares to
forward the Exercise Price directly to the Corporation; or
(iii) By any combination of the foregoing.
21
<PAGE>
15. APPLICATION OF FUNDS.
---------------------
The proceeds received by the Corporation from the sale of Common Stock
pursuant to the exercise of an Option shall be used for general corporate
purposes.
16. APPROVAL OF SHAREHOLDERS.
-------------------------
The Plan shall be subject to approval by the affirmative vote of the
holders of a majority of the outstanding shares present and entitled to vote at
the first annual meeting of shareholders of the Corporation following the
adoption of the Plan by the Board, and in no event later than
November 13, 1996. Prior to such approval, Options and/or Stock Appreciation
Rights may be granted but may not be exercised or settled. Pursuant to Section
13, certain amendments shall also be subject to approval by the Corporation's
shareholders.
17. WITHHOLDING OF TAXES.
---------------------
(a) General.
--------
Whenever Shares are to be issued under the Plan, the Corporation may
require the Participant to remit to the Corporation an amount sufficient to
satisfy foreign, federal, state and local withholding tax requirements prior to
the delivery of any certificate or certificates for such Shares. Whenever,
under the Plan, payments in satisfaction of Stock Appreciation Rights are to be
made in cash, such payment shall be net of an amount sufficient to satisfy
foreign, federal, state, and local withholding tax requirements.
(b) Stock Withholding.
-------------------
When, under applicable tax laws, a Participant incurs tax liability in
connection with the exercise of any Option or the exercise of a Stock
Appreciation Right that is settled in Shares that is subject to tax withholding
and the Participant is obligated to pay the Corporation the amount required to
be withheld, the Committee may at its sole discretion allow the Participant to
satisfy the minimum withholding tax obligation by electing to have the
Corporation withhold from the Shares to be issued the specific number of Shares
having a Fair Market Value equal to the minimum amount required to be withheld,
determined on the date that the amount of tax to be withheld is to be determined
(the "Tax Date"). All elections by a Participant to have Shares withheld for
this purpose shall be made in writing in a form acceptable to the Committee and
shall be subject to the following restrictions:
(i) The election must be made on or prior to the applicable Tax Date;
(ii) Once made, then except as provided below, the election shall be
irrevocable as to the particular Shares as to which the election is made;
(iii) All elections shall be subject to the consent or disapproval of
the Committee; and
22
<PAGE>
(iv) In the event that the Tax Date is deferred until six months after
the delivery of Shares under Section 83(b) of the Code, the Participant shall
receive the full number of Shares with respect to which the exercise occurs, but
(A) such Participant shall be unconditionally obligated to tender back to the
Corporation the proper number of Shares on the Tax Date, and (B) the Committee
may require the Corporation and the Participant to establish an escrow
arrangement to facilitate the re-transfer of such re-tendered Shares to the
Corporation.
18. RIGHTS AS AN EMPLOYEE, DIRECTOR, ADVISOR OR CONSULTANT.
-------------------------------------------------------
The Plan shall not be construed to give any individual the right to remain
in the employ of the Corporation (or a Subsidiary) or to affect the right of the
Corporation (or such Subsidiary) to terminate such individual's status as an
Employee, Director, advisor or consultant at any time, with or without cause.
The grant of an Award shall not entitle the Participant to, or disqualify the
Participant from, participation in the grant of any other Award under the Plan
or participation in any other plan maintained by the Corporation.
19. INSPECTION OF RECORDS.
----------------------
Copies of the Plan, records reflecting each Participant's Awards and any
other documents and records which a Participant is entitled by law to inspect
shall be open to inspection by the Participant and his or her duly authorized
representative at the office of the Corporation at any reasonable business hour
upon reasonable advance notice from the Participant.
23
<PAGE>
FOUNTAIN OIL INCORPORATED
1995 LONG-TERM INCENTIVE PLAN
SUB-PLAN FOR UNITED KINGDOM PARTICIPANTS
(EFFECTIVE NOVEMBER 14, 1995)
<PAGE>
FOUNTAIN OIL INCORPORATED
1995 LONG-TERM INCENTIVE PLAN
SUB-PLAN FOR UNITED KINGDOM PARTICIPANTS
1. PURPOSE.
--------
This Sub-Plan for United Kingdom Participants (the "United Kingdom Sub-
Plan") is established under the Fountain Oil Incorporated 1995 Long-Term
Incentive Plan (the "Plan"). This Sub-Plan sets forth special terms and
restrictions which apply to all Stock Options granted to a covered Participant
who, on the date the Award is granted, is a "United Kingdom Participant," as
defined as in Section 2(a) of this Sub-Plan. The Corporation has adopted this
Sub-Plan to provide United Kingdom Participants an opportunity to be granted
Stock Option(s) under the Plan which qualify for favorable tax treatment under
current Inland Revenue provisions.
All Stock Options granted pursuant to this Sub-Plan shall be subject to the
terms and conditions provided in the Plan and in this Sub-Plan; provided,
however that except as otherwise specifically provided or as the context
otherwise requires, the terms and conditions of this Sub-Plan shall govern in
the event of a conflict with the terms and conditions of the Plan.
2. DEFINITIONS.
------------
Capitalized terms shall have the meanings set forth in Section 2 of the
Plan, and the following additional terms shall have the meanings specified
below:
(a) "United Kingdom Participant" shall mean a Participant who, on the date
a Stock Option is granted to the Participant, is domiciled in the United
Kingdom, is subject to taxation under Inland Revenue provisions as an "employee
resident" or an "ordinarily resident" individual, as such terms are defined for
Inland Revenue purposes, and elects to be covered by this Sub-Plan with respect
to such Stock Option.
(b) "United Kingdom Sub-Plan" shall mean this Sub-Plan covering Awards
granted to United Kingdom Participants.
3. EFFECTIVE DATE.
---------------
This United Kingdom Sub-Plan was adopted by the Board effective November
14, 1995, as part of and subject to the terms of the Plan.
4. ADMINISTRATION.
---------------
This United Kingdom Sub-Plan shall be administered in accordance with
Section 4 of the Plan.
25
<PAGE>
5. COVERAGE OF THE UNITED KINGDOM SUB-PLAN.
----------------------------------------
The terms and conditions of this United Kingdom Sub-Plan shall apply only
to United Kingdom Participants who consent in writing to such coverage. A
United Kingdom Participant shall provide such written consent in the Award
Agreement issued with respect to the Award governed by this Sub-Plan, and such
consent shall be irrevocable with respect to such Award, except as specifically
authorized by the Committee in its discretion.
6. MAXIMUM TERM FOR STOCK OPTIONS.
-------------------------------
All Stock Options which are granted to the United Kingdom Participants and
which are covered by this Sub-Plan shall have a maximum term which in no event
exceeds seven years from the date of the grant of such Stock Options. This
restriction shall be set forth in the Award Agreements issued with respect to
such Stock Options.
7. AMENDMENTS.
-----------
The Committee may amend the terms of this United Kingdom Sub-Plan at such
time or times as it deems advisable. If the Committee determines that any
amendment may be applied retroactively or prospectively to an outstanding Stock
Option subject to the terms of this Sub-Plan, the Committee shall first obtain
the written consent of a United Kingdom Participant prior to applying such
amendment to a Stock Option previously issued to such Participant.
26
<PAGE>
FOUNTAIN OIL INCORPORATED
1995 LONG-TERM INCENTIVE PLAN
AUTOMATIC GRANT SUB-PLAN FOR OUTSIDE DIRECTORS
(EFFECTIVE NOVEMBER 14, 1995)
<PAGE>
FOUNTAIN OIL INCORPORATED
1995 LONG-TERM INCENTIVE PLAN
AUTOMATIC GRANT SUB-PLAN FOR OUTSIDE DIRECTORS
----------------------------------------------
1. PURPOSE
-------
This Automatic Grant Sub-Plan for Outside Directors (the "Outside Directors
Sub-Plan") is established under the Fountain Oil Incorporated 1995 Long-Term
Incentive Plan (the "Plan") to provide each non-Employee Director of the
Corporation (an "Outside Director") an opportunity to be granted Non-qualified
Stock Options under the Plan while maintaining the Outside Director's status as
a "disinterested person" within the meaning of Rule 16b-3(c)(ii)(i) promulgated
by the Securities and Exchange Commission under the Securities Exchange Act of
1934, as amended. The Corporation has adopted this Sub-Plan to attract and
retain qualified Outside Directors and to motivate Outside Directors to increase
the Corporation's value.
All Non-qualified Stock Options granted pursuant to this Sub-Plan shall be
subject to the terms and conditions provided in the Plan and in this Sub-Plan;
provided, however, that except as otherwise specifically provided or as the
context otherwise requires, the terms and conditions of this Sub-Plan shall
govern in the event of a conflict with the terms and conditions of the Plan.
2. DEFINITIONS.
------------
Capitalized terms shall have the meanings set forth in Section 2 of the
Plan, and the following additional terms shall have the meanings specified
below:
(a) "Outside Director" shall mean a Director who is not an Employee of the
-----------------
Corporation or any Subsidiary.
(b) "Outside Directors Sub-Plan" shall mean this Automatic Grant Sub-Plan
---------------------------
for Outside Directors, as amended.
3. EFFECTIVE DATE.
---------------
The Outside Directors Sub-Plan was adopted by the Board effective November
14, 1995.
4. ADMINISTRATION.
---------------
Except as provided in Section 7 of this Sub-Plan, the Outside Directors
Sub-Plan shall be administered by the Board in accordance with Section 4 of the
Plan.
28
<PAGE>
5. PARTICIPATION.
--------------
(a) Eligibility for Participation. Only Outside Directors shall
-----------------------------
participate in this Sub-Plan. The Board's determination of an individual's
eligibility for participation shall be final and binding.
(b) Commencement of Participation. An Outside Director shall commence
-----------------------------
participation in this Sub-Plan on the date elected or appointed as a Director
(or, for Outside Directors on the effective date of this Sub-Plan, the date
reelected as a Director). A Director who is an Employee at election or
appointment and who thereafter ceases to be an Employee (thereby becoming an
Outside Director) shall commence participation in this Sub-Plan on the date the
Director is next reelected or reappointed as a Director.
(c) Termination of Participation. An Outside Director's participation in
----------------------------
this Sub-Plan shall terminate on the earlier of (i) the date the Outside
Director's term as a Director expires or is otherwise terminated for any reason,
or (ii) on the date the Outside Director becomes an Employee.
6. AUTOMATIC GRANT OF NON-QUALIFIED STOCK OPTIONS TO OUTSIDE DIRECTORS.
--------------------------------------------------------------------
(a) Automatic Grant of Non-qualified Stock Options.
-----------------------------------------------
Non-qualified Stock Options shall be granted to Outside Directors
annually on such date(s) and in such amounts as specified in Section 6(b), at an
Exercise Price determined pursuant to Section 6(c), and subject to such terms as
set forth in Section 6(d).
(b) Dates of Grant and Number of Options Granted.
---------------------------------------------
(i) Seven thousand five hundred (7,500) Non-qualified Stock Options
shall be granted to each Outside Director on the date the Outside Director is
first elected or appointed to the Board (or the date reelected to the Board for
Directors who are Outside Directors on the effective date of this Sub-Plan);
(ii) Thereafter, seven thousand five hundred (7,500) Non-qualified
Stock Options shall be granted to each Outside Director on the date of each
meeting of the shareholders of the Corporation at which an Outside Director is
elected or re-elected, with such grant to be effective immediately following the
adjournment of such meeting; and
(iii) An additional seven thousand five hundred (7,500) Non-qualified
Stock Options shall be granted on each date an Outside Director is elected or
re-elected Chairman of the Board.
(c) Exercise Price.
---------------
The Exercise Price of each Non-qualified Stock Option granted pursuant
to this Sub-Plan shall be equal to 100% of the Fair Market Value of the Shares
on the date the Option is granted.
29
<PAGE>
(d) Term and Vesting of the Non-Qualified Stock Options.
----------------------------------------------------
Each Non-qualified Stock Option granted pursuant to this Sub-Plan
shall be governed by the following terms:
(i) The term of each Option shall expire on the first to occur of (A)
the third anniversary of the date the Option was granted, or (B) the first
anniversary of the date the Outside Director's term as Director terminates for
any reason;
(ii) Each Option shall become one hundred percent (100%) vested on the
six month anniversary of the date the Option was granted; and
(iii) An Outside Director may exercise a Vested Non-qualified Stock
Option at any time but not beyond the date that the term of the Option expires
as provided above.
7. LIMITATION ON THE FREQUENCY OF AMENDMENTS TO THE OUTSIDE
---------------------------------------------------------
DIRECTORS SUB-PLAN.
-------------------
The provisions of the Outside Directors Sub-Plan shall in no event be
amended more than once every six (6) months, other than to comport with changes
in the Code, the Employee Retirement Income Security Act of 1974, as amended, or
the rules thereunder.
30
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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