UNITED STATES
SECURITIES & EXCHANGE COMMISSION
WASHINGTON, DC 20549
SCHEDULE 14A
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)
(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Under Rule 14a - 12
FAR EAST ENERGY CORPORATION
(Name of Registrant as Specified in Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11
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previously. Identify the previous filing by registration statement number,
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[LOGO] FAR EAST ENERGY CORPORATION
-- PARTNERS IN CLEAN ENERGY
FAR EAST ENERGY CORPORATION
400 N. SAM HOUSTON PARKWAY EAST, SUITE 205
HOUSTON, TEXAS 77060
May 12, 2005
Houston, Texas
To the Stockholders of Far East Energy Corporation:
You are cordially invited to attend the annual meeting of stockholders of
Far East Energy Corporation, which will be held on Friday, May 27, 2005 at 10:00
a.m. (local time), at the Company's offices at 400 N. Sam Houston Parkway East,
Suite 205, Houston, Texas 77060, and at any adjournment or postponement thereof.
On the following pages you will find the notice of annual meeting and the proxy
statement with detailed information about the business to be considered at the
meeting. The proxy statement and proxy card are first being distributed to
stockholders on or about May 16, 2005.
All holders of the Company's shares of common stock, par value $0.001 per
share, at the close of business on March 31, 2005 will be entitled to vote at
the annual meeting of stockholders. To assure that you are represented at the
annual meeting, whether or not you plan to attend the meeting in person, please
read carefully the accompanying proxy statement. YOUR VOTE IS VERY IMPORTANT.
Please complete, date, sign and return the enclosed proxy card promptly.
Sincerely,
/s/ Michael R. McElwrath
Michael R. McElwrath
President and Chief Executive Officer
FAR EAST ENERGY CORPORATION
400 N. SAM HOUSTON PARKWAY EAST, SUITE 205
HOUSTON, TEXAS 77060
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD FRIDAY, MAY 27, 2005
The Annual Meeting of Stockholders of Far East Energy Corporation (the
"Company") will be held at the Company's offices at 400 N. Sam Houston Parkway
East, Suite 205, Houston, Texas 77060, on Friday, May 27, 2005, at 10:00 a.m.,
local time, to consider the following matters:
1. The election of six Directors for the ensuing year;
2. The approval of a Restructuring Plan pursuant to which the Company
would transfer all or substantially all of its assets relating to
its China operations to a new wholly-owned subsidiary of the
Company;
3. The approval of the Company's 2005 Stock Incentive Plan; and
4. To transact such other business as may be properly brought before
the meeting or any adjournment thereof. No other matters are
expected to be voted on at the meeting.
The Board of Directors has fixed the close of business on March 31, 2005,
as the record date for determining stockholders of record entitled to notice of,
and to vote at, the meeting or any adjournment thereof.
By Order of the Board of Directors,
/s/ Bruce N. Huff
Bruce N. Huff
Houston, Texas Chief Financial Officer,
May 12, 2005 Secretary and Treasurer
YOUR VOTE IS IMPORTANT!
PLEASE SIGN AND RETURN THE ACCOMPANYING PROXY.
TABLE OF CONTENTS
GENERAL INFORMATION....................................................... 1
CORPORATE GOVERNANCE...................................................... 4
PROPOSAL NO. 1 - ELECTION OF DIRECTORS.................................... 9
REPORT OF THE AUDIT COMMITTEE............................................. 10
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FEE INFORMATION............. 11
EXECUTIVE COMPENSATION.................................................... 14
REPORT OF THE COMPENSATION COMMITTEE...................................... 16
COMPANY PERFORMANCE....................................................... 19
CERTAIN TRANSACTIONS...................................................... 20
SECURITY OWNERSHIP........................................................ 24
PROPOSAL NO. 2 - APPROVAL OF RESTRUCTURING PLAN........................... 26
PROPOSAL NO. 3 - APPROVAL OF 2005 STOCK INCENTIVE PLAN.................... 34
OTHER BUSINESS............................................................ 41
Exhibit A - CHARTER OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS...... A-1
Exhibit B - AGREEMENT AND PLAN OF RESTRUCTURING........................... B-1
Exhibit C - FAR EAST ENERGY CORPORATION 2005 STOCK INCENTIVE PLAN......... C-1
FAR EAST ENERGY CORPORATION
400 N. SAM HOUSTON PARKWAY EAST, SUITE 205
HOUSTON, TEXAS 77060
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PROXY STATEMENT
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GENERAL INFORMATION
The Board of Directors of Far East Energy Corporation (the "Company")
solicits stockholders' proxies in the accompanying form for use at the Annual
Meeting of Stockholders to be held on Friday, May 27, 2005, at 10:00 a.m., local
time, at the Company's offices at 400 N. Sam Houston Parkway East, Suite 205,
Houston, Texas 77060, and at any adjournments thereof (the "Meeting"). This
Proxy Statement, the accompanying proxy card and the Company's 2004 Annual
Report to Stockholders are being mailed, beginning on or about May 16, 2005, to
all stockholders entitled to receive notice of, and to vote at, the Meeting.
The principal executive offices of the Company are located at 400 N. Sam
Houston Parkway East, Suite 205, Houston, Texas 77060. Any writing required to
be sent to the Company should be mailed to this address.
STOCKHOLDERS ENTITLED TO VOTE
The Board of Directors has fixed March 31, 2005 as the record date for
determining stockholders who are entitled to vote at the Meeting (the "Record
Date"). At the close of business on the Record Date, the Company had issued and
outstanding 77,444,910 shares of common stock, par value $0.001 (the "Common
Stock"), held of record by approximately 169 stockholders. Each share of Common
Stock is entitled to one vote on each matter properly coming before the Meeting.
VOTING OF PROXIES
Because many of the Company's stockholders are unable to attend the
Meeting, the Board of Directors solicits proxies by mail to give each
stockholder an opportunity to vote on all items of business scheduled to come
before the Meeting. Each stockholder is urged to:
(1) read carefully the material in this Proxy Statement;
(2) specify his or her voting instructions on each item by marking the
appropriate boxes on the accompanying proxy card; and
(3) sign, date and return the proxy card in the enclosed, postage
prepaid envelope.
The accompanying proxy card provides a space, with respect to the election
of Directors, for a stockholder to withhold voting for any or all nominees for
the Board of Directors, but does not permit a stockholder to vote for any
nominee not named on the proxy card. The card also allows a stockholder to
abstain from voting on any other item if the stockholder chooses to do so.
When the accompanying proxy card is properly executed and returned with
voting instructions with respect to any of the items to be voted upon, the
shares represented by the proxy will be voted in accordance with the
stockholder's directions by the persons named on the proxy card as proxies of
the stockholder. If a proxy card is signed and returned, but no specific voting
instructions are given, the shares represented by the proxy card will be voted:
(1) FOR the election of the six nominees for the Board of Directors named on the
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accompanying proxy card; (2) FOR the approval of the Restructuring Plan; (3) FOR
the approval of the Company's 2005 Stock Incentive Plan; and (4) with respect to
any other business that may be properly brought before the Meeting, by the proxy
holders as the Board of Directors recommends.
Unless otherwise indicated by the stockholder, returned proxy cards also
confer upon the persons named on the card, as proxies for the stockholder,
discretionary authority to vote all shares of stock represented by the proxy
card on any item of business that is properly presented for action at the
Meeting, even if not described in this Proxy Statement. If any of the nominees
for Director named below should be unable or unwilling to accept nomination, the
proxies will be voted for the election of such other person as may be
recommended by the Board of Directors. The Board of Directors, however, does not
expect that any other matters will be voted on at the Meeting or has any reason
to believe that any of the nominees for Director will be unavailable for
election.
REVOCATION OF PROXIES
If a stockholder executes a proxy, he or she may revoke it at any time
before it is voted by submitting a new proxy card bearing a later date to the
Secretary of the Company or by communicating his or her revocation in writing to
the Secretary of the Company. New proxies or revocations should be submitted to
the Secretary of the Company at 400 N. Sam Houston Parkway East, Suite 205,
Houston, Texas, 77060. A stockholder may not vote in person at the Meeting
regarding matters for which the stockholder has executed a proxy and has not
revoked it.
QUORUM AND VOTES REQUIRED TO APPROVE THE PROPOSALS
A "quorum" is necessary to hold the Meeting. The presence in person or by
executed proxy of the holders of at least a majority of the aggregate voting
power represented by the shares of Common Stock issued and outstanding and
entitled to vote at the Meeting shall constitute a quorum for transacting
business at the Meeting. If a quorum is not represented in person or by proxy,
at the Meeting, the stockholders representing a majority of the voting power of
the Company's capital stock entitled to vote at the Meeting who are present, in
person or by proxy, or the chairman of the Meeting, including any adjourned
meeting, whether or not a quorum is present, may adjourn the Meeting from time
to time until a quorum shall be represented. At any adjourned meeting at which a
quorum is represented, any business may be transacted which might have been
transacted as originally called.
Any shares that are withheld or abstain from voting will be counted for
the purpose of obtaining a quorum. Abstentions and shares held in "street name"
by brokers or nominees for a beneficial owner who do not vote on a particular
proposal because the nominee does not have discretionary voting power for that
particular item and has not received instructions from the beneficial owner
("broker non-votes") are counted as present and entitled to vote for purposes of
determining a quorum.
Directors will be elected by a plurality of the votes cast by the shares
of Common Stock entitled to vote in the election. The affirmative vote of the
holders of a majority of the shares of Common Stock present or represented at
the Meeting is required to approve the Restructuring Plan. The proposal to
approve the Company's 2005 Stock Incentive Plan will be approved by the
stockholders if the number of votes cast in favor of the proposal exceeds the
number of votes cast in opposition of the proposal.
The total number of votes cast "for" a proposal will be counted for
purposes of determining whether sufficient affirmative votes have been cast to
approve such proposal. Abstentions from voting on a proposal, as well as broker
non-votes, will be considered for purposes of determining the number of total
votes present at the Meeting. Abstentions and broker non-votes will have the
same effect as votes against the proposal to approve the Restructuring Plan and
will not be counted in determining the total number of votes cast and will have
no effect on the outcome of the other proposals.
Pursuant to a settlement agreement with a former director of the Company,
Thomas Cavanagh and Donald A. Juckett hold a proxy representing 7,230,000
shares, or 9.3%, of the Company's Common Stock entitled to vote at the Meeting.
The proxy is irrevocable and gives Thomas Cavanagh and Donald A. Juckett the
authority to vote the shares of Common Stock entitled to vote at the Meeting. At
the discretion of Thomas Cavanagh and Donald A. Juckett, the proxy may be used
to establish a quorum at the Meeting. Any
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determination to use the proxy at the Meeting must be made by both Thomas
Cavanagh and Donald A. Juckett. The proxy expires on December 31, 2006. For
further discussion of the terms of this settlement agreement and the proxy, see
"Certain Transactions -- Agreement with Former Director."
Any stockholder of record entitled to vote at the Meeting may attend the
Meeting and vote in person. However, a stockholder may not vote at the Meeting
on those matters for which the stockholder has executed a proxy and has not
revoked it. Furthermore, if a stockholder's shares are held of record by a
broker, bank or other nominee, that person is considered the beneficial owner of
shares held in street name. Since a beneficial owner is not the stockholder of
record, that person may not vote these shares in person at the Meeting unless he
or she obtains a "legal proxy" from the broker, bank or other nominee that holds
his or her shares, giving that person the right to vote the shares at the
Meeting. Brokers, banks or nominees have enclosed or provided voting
instructions for beneficial owner's to use in directing the broker, bank or
nominee how to vote his or her shares. If a stockholder does not intend to vote
his or her shares by proxy, he or she may attend the Meeting and vote in person
by following the procedures described below.
ATTENDING THE MEETING
A person is entitled to attend the Meeting only if that person was a
stockholder as of the close of business on March 31, 2005 or that person holds a
valid proxy for the Meeting. Any person attending the Meeting should be prepared
to present photo identification for admittance. In addition, the names of
stockholders of record will be verified against the list of stockholders of
record on the Record Date prior to being admitted to the Meeting. Anyone who is
not a stockholder of record but hold shares through a broker or nominee (i.e.,
in street name) should provide proof of beneficial ownership on the Record Date,
such as his or her most recent account statement prior to March 31, 2005, a copy
of the voting instruction card provided by his or her broker or nominee, or
other similar evidence of ownership together with a letter from the broker or
nominee appointing such stockholder as their proxy. Anyone who does not provide
photo identification or comply with the other procedures outlined above upon
request will not be admitted to the Meeting.
STOCKHOLDER PROPOSALS FOR 2006 ANNUAL MEETING
The Company currently expects that the 2006 Annual Meeting of Stockholders
will be held on Tuesday, May 23, 2006. The Company's Amended and Restated
Bylaws state that a stockholder must give the Secretary of the Company written
notice, at the Company's principal executive offices, of its intent to present a
proposal at the Company's 2006 Annual Meeting of Stockholders by February 26,
2006, but not before January 27, 2006. However, in the event that the 2006
Annual Meeting of Stockholders is advanced by more than 30 days or delayed by
more than 70 days from May 27, 2006, the proposal must be received no earlier
than the close of business on the 120th day prior to such annual meeting and not
later than the close of business on the latter of (1) the 90th day prior to such
annual meeting, or (2) the 10th day following the day the notice of such annual
meeting was first given. Additionally, in order for stockholder proposals which
are submitted pursuant to Rule 14a-8 of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), to be considered by the Company for inclusion in
the Company's proxy materials for the 2006 Annual Meeting of Stockholders, they
must be received by the Secretary of the Company at the Company's executive
offices no later than the close of business on January 16, 2006.
COST OF PROXY SOLICITATION
The cost of preparing, printing and mailing this Proxy Statement and of
the solicitation of proxies will be borne by the Company. Solicitation will be
made by mail and, in addition, may be made by directors, officers and employees
of the Company personally or by written communication, telephone, facsimile or
other means. The Company will request brokers, custodians, nominees and other
like parties to forward copies of proxy materials to beneficial owners of stock
and will reimburse these parties for their reasonable and
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customary charges or expenses in this connection. The Company has retained
D.F. King & Co., Inc. to aid in the solicitation of proxies for a fee of
approximately $4,000, plus reasonable costs and expenses.
CORPORATE GOVERNANCE
ROLE OF THE BOARD OF DIRECTORS
The Board of Directors has the responsibility for establishing broad
corporate policies and for the overall performance of the Company. However, it
is not involved in day-to-day operating details. Members of the Board are kept
informed of the Company's business through discussions with the Chief Executive
Officer and other officers and by reviewing analyses and reports sent to them,
as well as by participating in Board and committee meetings.
BOARD INDEPENDENCE
The Board of Directors has determined that each of the current directors
standing for election, except for Michael R. McElwrath and Tim Whyte, has no
material relationship with the Company (either directly or as a partner,
stockholder or officer of an organization that has a relationship with the
Company) and is independent within the meaning of The Nasdaq Stock Market's
("Nasdaq") listing standards.
COMMITTEES OF THE BOARD OF DIRECTORS
To assist in carrying out its duties, the Board of Directors established
three committees. The three committees are the Audit Committee, the Compensation
Committee and the Nominating and Corporate Governance Committee.
AUDIT COMMITTEE
The Audit Committee was established in accordance with Section 3(a)(58)(A)
of the Exchange Act and assists the Board of Directors and management of the
Company in ensuring that the Company consistently acts with integrity and
accuracy in financial reporting. The Audit Committee's responsibilities include:
- selecting and reviewing the Company's independent registered public
accounting firm and their services;
- reviewing and discussing with appropriate members of the Company's
management, the audited financial statements, related accounting and
auditing principles, practices and disclosures;
- reviewing and discussing the Company's quarterly financial
statements prior to the filing of those quarterly financial
statements;
- establishing procedures for the receipt of, and response to, any
complaints received regarding accounting, internal accounting
controls, or auditing matters, including anonymous submissions by
employees;
- reviewing the accounting principles and auditing practices and
procedures to be used for the Company's financial statements and
reviewing the results of those audits; and
- monitoring the adequacy of the Company's operating and internal
controls as reported by management and the independent registered
public accounting firm.
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Randall D. Keys is the chairman of the Audit Committee, and the other
members of the Audit Committee are John C. Mihm and Thomas E. Williams. The
Board of Directors has determined that each member of the Audit Committee is
independent within the meaning of the Nasdaq listing standards and satisfies the
Nasdaq listing standards financial literacy requirements. The Board of Directors
has determined that Randall D. Keys is an Audit Committee Financial Expert as
that term is defined under Item 401(h) of Regulation S-K. Additionally, the
Board of Directors has adopted a written charter for the Audit Committee. A copy
of the Audit Committee Charter is attached as Exhibit A to this Proxy Statement.
COMPENSATION COMMITTEE
The Compensation Committee's responsibilities include:
- establishing and reviewing the overall corporate policies, goals and
objectives for the compensation of the Company's chief executive
officer and other executive officers, including a review of the
relationship of executive compensation to corporate performance and
relative stockholder return, compensation at comparable companies,
past years compensation to our executives, and other relevant
factors;
- evaluating the performance of the Company's chief executive officer
and other executive officers in light of the corporate goals and
objectives and, based on that evaluation, determining the
compensation of the chief executive officer and other executives
officers, including individual elements of salary, bonus,
supplemental retirement, incentive and equity compensation, in light
of the corporate goals and the performance evaluation; and
- making recommendations to the Company's Board of Directors regarding
the salaries, benefits and other compensation of the Company's
non-employee directors, committee chairpersons, and committee
members.
John C. Mihm is the chairman of the Compensation Committee, and the other
members are Thomas Cavanagh and Thomas E. Williams. The Board of Directors has
determined that each member of the Compensation Committee is independent within
the meaning of the Nasdaq listing standards. Mr. Cavanagh has informed the
Company that he does not wish to stand as a nominee for election as a Director
at the Meeting in order to permit him additional time to pursue his business
endeavors.
NOMINATING AND CORPORATE GOVERNANCE COMMITTEE
The Nominating and Corporate Governance Committee is responsible for
assisting the Board of Directors by (1) identifying individuals qualified to
serve on the Company's Board of Directors and recommending to the Board of
Directors the nominees for election by stockholders at each annual meeting, (2)
recommending to the Board of Directors, director nominees for each committee of
the Board of Directors, (3) developing, recommending to the Board of Directors,
and assessing corporate governance policies for the Company, and (4) overseeing
an annual review of the Board of Directors' performance. The Nominating and
Corporate Governance Committee's responsibilities include:
- assessing, developing and communicating with the Board of Directors
concerning the appropriate criteria for nominating and appointing
directors;
- actively seeking individuals qualified to become members of the
Board of Directors for recommendation to the Board of Directors;
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- if and when requested by the Board of Directors, identifying and
recommending to the Board of Directors the appointees to be selected
by the Board of Directors for service on the committees of the Board
of Directors and for service as the Company's technical advisors;
- having sole authority to retain and terminate any search firm used
to identify director candidates and having sole authority to approve
the search firm's fees and other retention terms;
- developing, assessing and recommending corporate governance
policies, including the Company's Code of Business Conduct, to the
Board of Directors;
- reviewing, on behalf of the Board of Directors, the charter of each
committee of the Board of Directors and making recommendations to
the relevant committees with respect to these charters and to the
Board of Directors in connection with the Board of Directors' action
relating to these charters; and
- overseeing an annual review of the performance of the Board of
Directors.
Donald A. Juckett is the chairman of the Nominating and Corporate
Governance Committee, and the other members are Thomas Cavanagh and Randall D.
Keys. The Board of Directors has determined that each member of the Nominating
and Corporate Governance Committee is independent within the meaning of the
Nasdaq listing standards. The Board of Directors has adopted a written charter
for the Nominating and Corporate Governance Committee, and a current copy of the
charter is available on the Company's website at www.fareastenergy.com under the
"Investor Relations" caption. Mr. Cavanagh has informed the Company that he does
not wish to stand as a nominee for election as a Director at the Meeting in
order to permit him additional time to pursue his business endeavors.
CONSIDERATION OF DIRECTOR NOMINEES
DIRECTOR QUALIFICATIONS
The Nominating and Corporate Governance Committee reviews the
qualifications of various persons to determine whether they might make good
candidates for consideration for membership on the Board of Directors. In
identifying candidates for membership on the Board of Directors, the Nominating
and Corporate Governance Committee takes into account:
- Whether the director/potential director assists in achieving a mix
of Board members that represents a diversity of background and
experience (including with respect to age, gender, industry
knowledge and experience, including experience in China, and
financial expertise) that, at the then applicable stage in the life
of the Company, will result in the Board of Directors having the
necessary tools to perform its oversight function effectively.
- Personal individual characteristics, including strength of
character, inquiring mind, mature judgment, independence of thought,
ability to work collegially and effectively with others, high moral
standards, loyalty to the Company and its business plan, concern for
the Company's success and welfare, personal integrity, and high
performance standards.
- The Nominating and Corporate Governance Committee also reviews other
individual characteristics, including, ability to read and
understand basic financial statements, business experience with high
levels of responsibility, high accomplishments as a leader in his or
her field or in the companies he or she has been associated with,
superior credentials and recognition, commitment to enhancing
stockholder value, experience at the strategy/policy setting level,
experience dealing with complex problems or crisis response, the
time available
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to contribute special competencies to Board activities, service on
the boards of public and private companies, oil and gas industry
experience or the time available to enhance knowledge of the oil and
gas industry, and freedom from conflicts of interest.
Candidates who do not meet all of these requirements may still be
considered, as the Nominating and Corporate Governance Committee will seek
candidates who present the best combination of these characteristics.
IDENTIFYING AND EVALUATING NOMINEES FOR DIRECTORS
When identifying and evaluating incumbent directors whose terms are set to
expire, the Nominating and Corporate Governance Committee reviews such
directors' overall service to the Company during their term including the number
of meetings attended, level of participation, quality of performance, and any
transactions of such directors with the Company during their term. The
Nominating and Corporate Governance Committee then evaluates that information in
the context of the current composition of the Board of Directors, the operating
requirements of the Company and the long-term interests of the stockholders.
When identifying new director candidates, the Nominating and Corporate
Governance Committee uses its network of contacts or a professional search firm
to compile a list of candidates. To date, the Nominating and Corporate
Governance Committee has not used a professional search firm to compile a list
of candidates. The Nominating and Corporate Governance Committee next submits
and requires the candidate to complete a questionnaire and determines whether
the nominee is independent as such term is defined under the Nasdaq listing
standards, which determination is based upon applicable securities laws, the
rules and regulations of the Securities and Exchange Commission and the advice
of counsel, if necessary. The Nominating and Corporate Governance Committee may
also organize interviews and meetings to evaluate the candidate and
collegiality. Finally, the Nominating and Corporate Governance Committee meets
to discuss and consider such candidates' qualifications, chooses a candidate by
majority vote and then proposes the candidate to the entire Board of Directors.
The Nominating and Corporate Governance Committee will consider director
candidates recommended by stockholders. If a stockholder has a suggestion for
candidates for election to the Board of Directors at the 2006 Annual Meeting of
Stockholders, the Company's Amended and Restated Bylaws provide that the
recommendation must be submitted in writing to the Secretary of the Company at
400 N. Sam Houston Parkway East, Suite 205, Houston, Texas 77060, no earlier
than the close of business on January 27, 2006 nor later than the close of
business on February 26, 2006. However, in the event that the 2006 Annual
Meeting of Stockholders is advanced by more than 30 days or delayed by more than
70 days from May 27, 2006, the recommendation must be received no earlier than
the close of business on the 120th day prior to such annual meeting and not
later than the close of business on the latter of (1) the 90th day prior to such
annual meeting, or (2) the 10th day following the day the notice of such annual
meeting was first given. Submissions must include each of the following:
- The name and record address of the stockholder who intends to make
such nomination;
- The class and number of shares which are beneficially owned by the
stockholder;
- The name in which such shares are registered on the stock transfer
books of the Company and if such stockholder is not the holder of
record at the time of the submission, a representation that such
stockholder has a valid proxy granted by the record holder at the
time of such submission which is in full force and effect and which
authorizes the stockholder to make and vote on such submission
together with an attached complete copy of such proxy;
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- A representation whether the stockholder or the beneficial owner, if
any, intends or is part of a "group" (as such term is used in
Section 13(d)(3) of the Exchange Act) which intends to (1) deliver a
proxy statement and form of proxy to holders of at least the
percentage of the Company's outstanding Common Stock required to
elect the nominee and/or (2) otherwise solicit proxies from
stockholders in support of such nomination;
- The name, age, business and residential address of each individual
to be nominated;
- The principal occupation or employment of each individual to be
nominated;
- The class and number of shares which are beneficially owned by each
individual to be nominated;
- All other information relating to each individual to be nominated
that is required to be disclosed in solicitations for proxies in an
election of directors pursuant to Regulation 14A under the Exchange
Act;
- The signed consent of any such nominee to serve as a Director, if so
elected;
- A representation that the stockholder is entitled to vote at the
meeting and intends to appear at the meeting in person or by proxy
to nominate each individual; and
- A description of all arrangements or understandings between the
stockholder and each nominee and any other person or persons (naming
such person or persons) pursuant to which the nominations are to be
made by the stockholder.
The Company may require the stockholder making such nomination or the
proposed nominee to furnish such other information as may reasonably be required
by the Company to determine the eligibility of such proposed nominee to serve as
a Director of the Company.
MEETINGS
During the Company's year ended December 31, 2004, there were twelve
meetings of the Board of Directors, three meetings of the Audit Committee, two
meetings of the Compensation Committee and one meeting of the Nominating and
Corporate Governance Committee. During 2004, except for Jawaharlal Gondi, each
member of the Board of Directors attended at least 75% of the aggregate number
of meetings of the Board of Directors and Board of Directors' committees on
which the Director served. While the Company does not have a formal policy
regarding Director attendance at annual meetings of stockholders, the Company
encourages each Director to attend each annual meeting of stockholders. In
practice, the Company intends to schedule regular Board of Directors meetings on
the same day as its annual meeting of stockholders, which the Company believes
will facilitate Director attendance at the annual stockholders' meeting.
COMMUNICATIONS WITH THE COMPANY
Stockholders may communicate directly with the Board of Directors, any
committee of the Board of Directors, all independent Directors, or any one
Director serving on the Board of Directors by sending written correspondence to
the desired person or entity in care of the Company's Secretary at 400 N. Sam
Houston Parkway East, Suite 205, Houston, Texas 77060. Communications are
distributed to the Board of Directors, or to any individual Director or
Directors as appropriate, depending on the facts and circumstances outlined in
the communication.
8
CODE OF BUSINESS CONDUCT
The Board of Directors has adopted a Code of Business Conduct. The full
text of the Code of Business Conduct is posted on the Company's website at
www.fareastenergy.com under the "Investor Relations" caption and is also
available in print to any stockholder who requests a copy. The Company intends
to disclose future amendments to, or waivers from, certain provisions of the
Code of Business Conduct on the Company's website within four business days
following the date of such amendment or waiver.
PROPOSAL NO. 1 - ELECTION OF DIRECTORS
BOARD OF DIRECTORS
The Company's Amended and Restated Bylaws provide that Board of Directors
may consist of up to nine Directors. At the Meeting, six Directors are to be
elected, each to hold office for one year or until his successor is duly elected
and qualified. Unless otherwise specified on the proxy card, the shares
represented by the enclosed proxy will be voted for the election of the six
nominees named below. The Board of Directors has no reason to believe that any
nominee will be unable to serve if elected. In the event any nominee shall
become unavailable for election, it is intended that such shares will be voted
for the election of a substitute nominee selected by the Board of Directors.
However, in no event will proxies will be voted for a greater number of persons
than six, which is the number of nominees for the Board of Directors. The
Nominating and Corporate Governance Committee and the Board of Directors have
recommended each of the nominees for Directors.
NOMINEES FOR DIRECTOR
JOHN C. MIHM, 62, has served as Chairman of the Board since January 2005.
Mr. Mihm joined the Board of Directors in May 2004. Mr. Mihm serves on and is
the chairman of the Board's Compensation Committee, and he also serves on the
Board's Audit Committee. Mr. Mihm is the owner and President of JCM Consulting,
PLLC, which provides services in the engineering, construction, and project
management field. From 1964 until his retirement in February 2003, Mr. Mihm
worked for Phillips Petroleum Company, now known as ConocoPhillips, Inc., in
various positions, finally serving as Senior Vice President of Technology and
Project Development. Mr. Mihm is a registered professional engineer. Mr. Mihm
earned a B.S. degree in chemical engineering from Texas Tech University.
MICHAEL R. McELWRATH, 53, has served as our President and Chief Executive
Officer since October 2003. He became a Director in October 2003 and served as
Chairman of the Board from October 2003 until January 2005. Mr. McElwrath also
served as Secretary and Treasurer from October 2003 until March 2005. He was
employed as Vice President of Hudson Highland (formerly known as TMP Worldwide)
from 1999 until joining the Company in October 2003. He also served as Acting
Assistant Secretary of Energy in the first Bush Administration, as Director of
the National Institute for Petroleum and Energy Research, as Director of British
Petroleum's outsourced exploration and production lab for the Americas and as
Deputy Assistant Secretary for policy for the U.S. Department of Interior in the
last year of the Reagan Administration. Mr. McElwrath holds a J.D. from the
University of Texas School of Law, as well as a B.A. from the Plan II Honors
Program at the University of Texas. He is also a member of the Society of
Petroleum Engineers, the Independent Petroleum Association of America, and the
Texas Independent Producers and Royalty Owners Association.
9
DONALD A. JUCKETT, 60, has served as a Director since May 2004. Dr.
Juckett also serves on and is chairman of the Board's Nominating and Corporate
Governance Committee. Since October 2003, Dr. Juckett has been self-employed as
an industry information consultant. He served at the U.S. Department of Energy
from 1988 until his retirement in 2003. At his retirement, Dr. Juckett was
Director of the Office of Natural Gas and Petroleum Import and Export Activities
for Fossil Energy. During his tenure with the Department of Energy, he also
served as Director for Natural Gas and Petroleum Technology and Acting Deputy
Assistant Secretary for Natural Gas and Petroleum Technology. Dr. Juckett earned
a B.S. degree in chemistry from the State University of New York-Oswego and a
Ph.D. in chemistry from the State University of New York-Albany.
RANDALL D. KEYS, 45, has served as a Director since June 2004. Mr. Keys
serves on and is the chairman of the Board's Audit Committee and has been
designated as the Audit Committee Financial Expert. He also serves on the
Board's Nominating and Corporate Governance Committee. Mr. Keys is currently
self-employed as a financial consultant and as an independent chief financial
officer. From 2002 through 2004, he served as a financial consultant and Chief
Financial Officer of Transmeridian Exploration, Inc., a public oil and gas
company. From 1998 to 2001, he served as Chief Financial Officer of Core
Laboratories N.V., a NYSE-listed global oilfield service company, and one of its
predecessors. Mr. Keys earned a B.B.A. in accounting from the University of
Texas and is a Certified Public Accountant.
TIM WHYTE, 30, was appointed as a Director of the Company in January 2005.
Mr. Whyte is currently an investment manager with Sofaer Capital, Inc. based in
London where he has served since 2003. From December 2001 through October 2002,
Mr. Whyte was a partner with Viva IP, an intellectual property consulting
company. From October 1999 through November 2001, Mr. Whyte served as a Trading
Manager with Enron Europe. Mr. Whyte has a B.S. degree in economics from the
London School of Economics. Mr. Whyte is a nominee for Director pursuant to the
terms of a stock subscription agreement by and between the Company and certain
investors. For further discussion of the terms of this stock subscription
agreement, see "Certain Transactions -- Agreement with Certain Stockholders"
contained herein.
THOMAS E. WILLIAMS, 52, was appointed as a Director in February 2004. Mr.
Williams also serves on the Board's Audit Committee and Compensation Committee.
Mr. Williams has over 24 years of experience in the energy business. Since
February 2001, Mr. Williams has served as Vice President of Maurer Technology, a
drilling technology subsidiary of Noble Corporation. From January 1999 to
February 2001, he was Vice President of Maurer Engineering, focusing on business
development for this technology services entity until Noble Corporation acquired
Maurer Engineering. Mr. Williams has also held senior executive positions at the
U.S. Department of Energy and Interior under the first Bush Administration. He
has a B.S. degree in business from Campbellsville College.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR THE NOMINEES SET
FORTH ABOVE.
REPORT OF THE AUDIT COMMITTEE
The Audit Committee oversees the Company's accounting and financial
reporting processes and the integrity of the Company's financial statements on
behalf of the Board of Directors. Management has the primary responsibility for
the financial statements and the reporting process, including the systems of
internal controls. In fulfilling its oversight responsibilities, the Audit
Committee reviewed and discussed the audited financial statements in the Annual
Report on Form 10-K with management, including a discussion of the quality, not
just the acceptability, of the accounting principles, the reasonableness of
significant judgments and the clarity of disclosures in the financial
statements.
10
The Audit Committee reviewed with the independent registered public
accounting firm who is responsible for expressing an opinion on the conformity
of those audited financial statements with generally accepted accounting
principles, their judgments as to the quality, not just the acceptability, of
the Company's accounting principles and such other matters as are required to be
discussed with the Audit Committee under SAS 61 and other generally accepted
auditing standards. In addition, the Audit Committee has discussed with the
independent registered public accounting firm, the auditor's independence from
management and the Company, and has received from the independent registered
public accounting firm the written disclosures and the letter from the
independent registered public accounting firm required by the Independence
Standards Board.
The Audit Committee discussed with the Company's independent registered
public accounting firm the overall scope and plans for the audit. The Audit
Committee meets with the independent registered public accounting firm, with and
without management present, to discuss the results of their examination, their
evaluation of the Company's internal controls and the overall quality of the
Company's financial reporting. In reliance on the reviews and discussions
referred to above, the Audit Committee recommended to the Board of Directors
(and the Board has approved) that the audited financial statements be included
in the Company's Annual Report on Form 10-K for the fiscal year ended December
31, 2004 for filing with the Securities and Exchange Commission.
Audit Committee
---------------
Randall D. Keys, Chairman
John C. Mihm
Thomas E. Williams
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FEE INFORMATION
AUDIT FEES
The aggregate fees billed by Payne, Falkner, Smith & Jones, P.C. for
professional services rendered for the audit of the Company's annual financial
statements for the years ended December 31, 2004 and 2003 and for the review of
the financial statements included in the Company's Quarterly Reports on Form
10-Q and Form 10-QSB for those years were $139,332 and $94,432, respectively.
AUDIT-RELATED FEES
Payne, Falkner, Smith & Jones, P.C. did not render any audit-related
professional services for the years ended December 31, 2004 and 2003.
TAX FEES
The aggregate fees billed by Payne, Falkner, Smith & Jones, P.C. for
professional services rendered for tax compliance, tax advice, or tax planning
for the years ended December 31, 2004 and 2003 were $7,600 and $7,000,
respectively. The fees were for the preparation of the 2004 and 2003 corporate
tax returns.
ALL OTHER FEES
Payne, Falkner, Smith & Jones, P.C. did not bill any other fees for
professional products or services rendered to the Company, other than those
described above under "Audit Fees," "Audit-Related Fees" and "Tax Fees" for the
years ended December 31, 2004 and 2003.
11
The Audit Committee pre-approved all of the audit and non-audit fees
described above for the year ended December 31, 2004.
PRE-APPROVAL POLICIES AND PROCEDURES
In accordance with the Audit Committee Charter, the Audit Committee has
established policies and procedures by which it approves in advance any audit
and permissible non-audit services to be provided by the Company's independent
registered public accounting firm. Under these procedures, prior to the
engagement of the independent registered public accounting firm for pre-approved
services, requests or applications for the independent registered public
accounting firm to provide services must be submitted to the Company's chief
financial officer or his designee and the Audit Committee and must include a
detailed description of the services to be rendered. The chief financial officer
or his designee and the independent registered public accounting firm must
ensure that the independent registered public accounting firm is not engaged to
perform the proposed services unless those services are within the list of
services that have received the Audit Committee's pre-approval and must cause
the Audit Committee to be informed in a timely manner of all services rendered
by the independent registered public accounting firm and the related fees.
Requests or applications for the independent registered public accounting
firm to provide services that require case-by-case approval will be submitted to
the Audit Committee (or any Audit Committee members who have been delegated
pre-approval authority) by the chief financial officer or his designee. Each
request or application must include:
- a recommendation by the chief financial officer (or designee) as to
whether the Audit Committee should approve the request or
application; and
- a joint statement of the chief financial officer (or designee) and
the independent registered public accounting firm as to whether, in
their view, the request or application is consistent with the
Securities and Exchange Commission's and the Public Company
Accounting Oversight Board's requirements for independence.
The Audit Committee will not permit the independent registered public
accounting firm to provide services in connection with a transaction initially
recommended by them, the purpose of which may be tax avoidance and the tax
treatment of which may not be supported in the Internal Revenue Code and related
regulations. The Audit Committee also will not permit the independent registered
public accounting firm to provide any services to the extent that the Securities
and Exchange Commission has prohibited the provision of those services by the
independent registered public accounting firm, which generally include:
- bookkeeping or other services related to accounting records or
financial statements;
- financial information systems design and implementation;
- appraisal or valuation services, fairness opinions or
contribution-in-kind reports;
- actuarial services;
- internal audit outsourcing services;
- management functions;
- human resources;
12
- broker-dealer, investment adviser or investment banking services;
- legal services; and
- expert services unrelated to the audit.
The Audit Committee delegated authority to the chairman of the Audit
Committee, to:
- pre-approve any services proposed to be provided by the independent
registered public accounting firm and not already pre-approved or
prohibited by the Audit Committee's Pre-Approval Policy;
- increase any authorized fee limit for pre-approved services (but not
by more than 20% of the initial amount that was pre-approved) before
the Company or its subsidiaries engage the independent registered
public accounting firm to perform services for any amount in excess
of the fee limit; and
- investigate further the scope, necessity or advisability of any
services as to which pre-approval is sought.
The Chairman is required to report any pre-approval or fee increase
decisions to the Audit Committee at the next Audit Committee meeting. The Audit
Committee does not delegate to management any of the Audit Committee's authority
or responsibilities concerning the independent registered public accounting
firm's services.
13
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth a summary of compensation paid to the
Company's Chief Executive Officer and the other persons serving as executive
officers (the "Named Executive Officers") for the years ended December 31, 2004,
2003 and 2002, respectively.
Long Term
Compensation
Annual Compensation Awards
----------------------------------------- ------------
Securities
Underlying
Fiscal Other Annual Options/SARs All Other
Name and Principal Position Year Salary Bonus Compensation (#)(1) Compensation(2)
- ------------------------------------------ ------ -------- ------- ------------ ------------ ---------------
Michael R. McElwrath.................. 2004 $225,000 $40,000 $ -- 200,000 $ 11,078
President and Chief Executive 2003 40,312 56,250 -- 1,200,000 1,500
Officer 2002 -- -- -- 100,000(3) --
Bruce N. Huff......................... 2004 106,667 57,000 -- 900,000 4,844
Chief Financial Officer, 2003 -- -- -- -- --
Secretary and Treasurer 2002 -- -- -- -- --
Tun Aye Sai........................... 2004 120,000 12,000 15,840 200,000 --
Senior Vice President of China 2003 96,355 -- 11,563 -- --
Operations(4) 2002 72,000 -- 8,640 300,000 --
Garry R. Ward......................... 2004 128,333 17,500 -- 600,000 11,079
Senior Vice President, 2003 -- -- -- -- --
Engineering 2002 -- -- -- -- --
Alex Yang............................. 2004 126,000 12,600 -- -- 8,948
Senior Vice President, 2003 101,750 -- -- 800,000 --
Exploration 2002 26,250 -- -- -- --
- ---------
(1) Amounts represent options to acquire shares of Common Stock.
(2) This column includes the following items of compensation in the fiscal
years indicated:
a. Company's payment of medical insurance premiums: Michael R.
McElwrath, $9,472 (2004), $1,500 (2003); Bruce N. Huff, $3,844
(2004); Garry R. Ward, $11,079 (2004); and Alex Yang, $8,160 (2004).
b. Company's contributions to the named individuals under its Simple
IRA plan in the following amounts: Michael R. McElwrath, $1,606;
Bruce N. Huff, $1,000 (2004); Garry R. Ward $0 (2004); and Alex Yang
$788 (2004).
(3) Consists of options granted to Michael R. McElwrath in his capacity as a
director of the Company.
(4) Effective April 15, 2005, Mr. Sai resigned as a director and as Senior
Vice President of China Operations of the Company.
14
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information concerning individual
grants of stock options made during the last completed fiscal year to each of
the Named Executive Officers. The Company did not grant any stock appreciation
rights during the last fiscal year.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Potential Realizable Value
at Assumed Annual Rates
of Stock Price Appreciation
Individual Grants for Option Term
---------------------------------------------------------------- ----------------------------
Number of
Securities Percent of Total
Underlying Options/SARs
Option/SARs Granted to Exercise of
Granted Employees in Base Price Expiration 5% 10%
Name (#) Fiscal Year ($/sh) Date ($) ($)
- -------------------- ----------- ----------------- ----------- ---------- -------- ----------
Michael R. McElwrath 200,000(1) 10% $2.00 12/23/14 $ -- $ 212,000
Bruce N. Huff 500,000(1) 25% 2.00 05/01/09 320,951 666,878
Bruce N. Huff 400,000(1) 20% 2.00 12/23/14 -- 424,000
Tun Aye Sai(1),(2) 200,000 10% 2.00 07/15/05 -- --
Garry R. Ward 400,000(3) 20% 2.00 02/01/14 744,192 1,658,868
Garry R. Ward 200,000(1) 10% 2.00 12/23/14 -- 212,000
Alex Yang -- -- -- -- -- --
- --------
(1) Vest 20% on the award date of the options and 20% on each succeeding
anniversary of the award date.
(2) Effective April 15, 2005, Mr. Sai resigned as a director and as Senior
Vice President of China Operations of the Company. Pursuant to the terms
of the option agreement, Mr. Sai must exercise any options granted
pursuant to the option agreement that were vested at the time of
termination by July 15, 2005.
(3) Vest 25% on the award date of the options and 25% on each succeeding
anniversary of the award date.
FISCAL YEAR-END OPTION VALUES
The following table sets forth the number of unexercised options
segregated by those that were exercisable and those that were unexercisable at
December 31, 2004 and the value of in-the-money options segregated by those that
were exercisable and those that were unexercisable at December 31, 2004 for the
Named Executive Officers. The Named Executive Officers did not exercise any
options during the last fiscal year.
AGGREGATED OPTION/SAR EXERCISES IN LAST
FISCAL YEAR AND FISCAL YEAR-END OPTION/SAR VALUES
Number of Securities
Underlying Unexercised Value of Unexercised
Options/SARs at In-the-Money Options/SARs
Shares Fiscal Year End at Fiscal Year End
Acquired on (#)(1) ($)(1)
Exercise Value Realized ------------------------------- ------------------------------
Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable
- -------------------- ----------- -------------- ----------- ------------- ----------- -------------
Michael R. McElwrath -- $-- 580,000 920,000 $ 307,800 $ 433,200
Bruce N. Huff -- -- 180,000 720,000 -- --
Tun Aye Sai(2) -- -- 220,000 280,000 102,600 68,400
Garry R. Ward -- -- 140,000 460,000 -- --
Alex Yang -- -- 320,000 480,000 182,400 273,600
- -------------
(1) Information relates to options to acquire shares of Common Stock.
(2) Effective April 15, 2005, Mr. Sai resigned as a director and as Senior
Vice President of China Operations of the Company.
15
EMPLOYMENT AGREEMENTS
For a discussion of the employment agreements with Messrs. McElwrath,
Huff, Ward and Yang, see "Certain Transactions -- Agreements with Named
Executive Officers of the Company."
EQUITY COMPENSATION PLAN INFORMATION
NUMBER OF WEIGHTED NUMBER OF SECURITIES
SECURITIES TO BE AVERAGE REMAINING AVAILABLE FOR
ISSUED UPON EXERCISE PRICE FUTURE ISSUANCE UNDER
EXERCISE OF OF OUTSTANDING EQUITY COMPENSATION
OUTSTANDING OPTIONS, PLANS (EXCLUDING
OPTIONS, WARRANTS WARRANTS AND SECURITIES REFLECTED IN
AND RIGHTS RIGHTS COLUMN (a))
PLAN CATEGORY (a) (b) (c)
- ----------------------------------------------------------- ----------------- -------------- -----------------------
Equity compensation plans approved by security holders -- -- --
Equity compensation plans not approved by security holders* 10,218,000 $ 1.27 --
----------------- -------------- -----------------------
TOTAL 10,218,000 $ 1.27 --
- ---------
* We have granted stock options to purchase an aggregate of 11,180,000
shares of Common Stock, which are evidenced by stock option agreements.
This total excludes 962,000 options, which were forfeited by certain prior
officers and directors when they resigned from their positions.
The options reflected above were granted to officers, directors and
consultants and have a term of between five and ten years and an exercise price
of between $0.65 and $4.40 per share.
DIRECTORS' COMPENSATION AND STOCK OPTION GRANTS
The Company does not pay cash compensation to non-employee Directors for
their service on the Board of Directors. Employee Directors do not receive any
compensation for their service on the Board of Directors. From time to time,
non-employee Directors have received grants of options to purchase the Company's
Common Stock in consideration of their service on the Board of Directors. In
2004, John C. Mihm, Thomas Cavanagh, Donald A. Juckett, Randall D. Keys and
Thomas E. Williams each received an option grant to purchase 400,000 shares of
the Company's Common Stock, which were granted upon their election as Directors.
The options vest over three years, have a five-year term and have an exercise
price of $2.00 per share.
Additionally, the Company reimburses its Directors for reasonable expenses
incurred to attend the meetings of the Board of Directors or the Board
committees.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's independent directors are, and the Company expects they will
continue to be, the only members of the Compensation Committee. None of the
Company's directors or executive officers has a relationship with us or any
other company that the Securities and Exchange Commission defines as a
compensation committee interlock or insider participation that should be
disclosed to stockholders.
REPORT OF THE COMPENSATION COMMITTEE
COMPENSATION PHILOSOPHY AND OBJECTIVES
The philosophy of the Company's compensation program is to attract,
employ, retain and reward executives capable of leading the Company to achieve
its business objectives. These business objectives
16
include financial performance, achievement and implementation of the Company's
business strategy and improvement in the Company's asset base. The
accomplishment of these objectives is measured against conditions characterizing
the industry in which the Company operates. The Compensation Committee reviews
the compensation program of the Chief Executive officer ("CEO") and other
members of senior management, including the Company's executive officers. The
Compensation Committee also oversees the administration of the Company's
employee benefits and benefit plans. In 2004, the Compensation Committee
retained an independent consultant to assist the Compensation Committee in
fulfilling its responsibilities. This consultant was engaged by, and reported
directly to, the Compensation Committee.
EXECUTIVE OFFICER COMPENSATION
The Company's executive officer compensation program is comprised of base
salary, annual cash incentive compensation and long-term incentive compensation
in the form of stock options. Performance bonuses may be awarded to executive
officers based on performance criteria established by the Compensation
Committee.
On December 23, 2004, the Compensation Committee authorized an increase in
the base salary of certain executive officers of the Company effective January
1, 2005. Base salary levels for the Company's executive officers are set
relative to the median of the Company's peer groups and reflect a subjective
assessment by the Compensation Committee of the executive's contribution in
relation to the Company's financial performance and the achievement of business
objectives. The Compensation Committee also takes into account the executive's
scope of responsibilities and experience. The primary peer group, considered to
be oil and gas exploration companies, is further considered so that the Company
can compete for the best industry talent. The Compensation Committee believes
that the market adjustments were appropriate to bring the chief executive
officer's and chief financial officer's base salary into the median range of
comparable peer group positions.
An additional objective of the Compensation Committee has been to reward
executive officers with equity compensation, in keeping with the Company's
overall compensation philosophy of granting equity compensation to key personnel
in an effort to further instill stockholder perspective and values in actions of
employees and executive officers. Stock options historically have been used to
reward and provide incentives to executive officers and to retain them through
potential share value appreciation and equity accumulation. Such awards are made
by the Compensation Committee based upon a subjective determination. The awards
vest over a number of years and therefore provide a long-term incentive. Shares
of Common Stock subject to option awards made to executive officers of the
Company in 2004 vest 20% on the award date of the options and 20% on each
succeeding anniversary of the award date. The options have a term ranging
between five and ten years and are exercisable at $2.00 per share.
The Compensation Committee will continue to review, on a periodic basis,
the equity participation awards outstanding to the executive officers of the
Company and will consider additional awards from time to time, based upon a
subjective determination consistent with the philosophy stated above, the
financial performance of the Company, and the Compensation Committee's
assessment of each executive's ability to influence the Company's long-term
growth and profitability. Because the value of equity awards should, over time,
bear a direct relationship to the Company's stock price, the Compensation
Committee believes equity awards represent an effective incentive to create
value for stockholders.
The Company has submitted the 2005 Stock Incentive Plan (the "Plan") to
the stockholders for approval at the Meeting. The Compensation Committee will
administer the Plan. If the stockholders approve the Plan, the Compensation
Committee intends to grant future equity awards to executive officers under the
Plan.
17
CHIEF EXECUTIVE OFFICER COMPENSATION
The CEO's base salary and performance bonuses are established under his
employment agreement with the Company. The CEO's base salary is reviewed
periodically, pursuant to the terms of his employment agreement, consistent with
the Company's salary administration policy for all executive officers as
discussed above. The Compensation Committee considers adjustments based upon the
Company's financial performance, progress in achieving specified business
objectives, and by reference to the median salary paid to chief executive
officers of the Company's peer groups. On December 23, 2004, the CEO's base
salary was increased to $236,250 per year effective January 1, 2005. Under the
CEO's employment agreement the CEO is entitled to performance bonuses of not
less than $20,000 payable on or before the 13th of April and October of each
year. The performance criteria for bonuses are established by the Compensation
Committee. The CEO was awarded performance bonuses in the aggregate amount of
$40,000 relative to 2004 performance.
In 2004, the CEO was awarded options to purchase 200,000 shares of the
Company's Common Stock. The shares of Common Stock subject to the options
granted to the CEO vest 20% on the award date of the options and 20% on each
succeeding anniversary of the award date, are valid for a ten-year term, and are
exercisable at $2.00 per share. This award was granted consistent with the
Company's equity award policy for all other executive officers as discussed
above.
Compensation Committee
----------------------
John C. Mihm, Chairman
Thomas Cavanagh
Thomas E. Williams
18
COMPANY PERFORMANCE
The following graph compares the performance of the Company with that of
the S&P 500 Index and the Dow Jones U.S. Exploration & Production Index. The
graph sets forth the cumulative total stockholder return, which assumes
reinvestment of dividends, of a $100 investment in the Company's Common Stock,
the S&P 500 Index and the Dow Jones U.S. Exploration & Production Index.
COMPARISON OF CUMULATIVE TOTAL RETURN
AMONG THE COMPANY, THE S&P 500 INDEX, AND
THE DOW JONES U.S. EXPLORATION & PRODUCTION INDEX
[PERFORMANCE GRAPH]
Cumulative Total Return*
---------------------------------------------------
1/31/02 12/31/02 12/31/03 12/31/04
------- -------- -------- --------
Far East Energy Corporation $100.00 168.00 131.20 48.80
S&P 500 Index $100.00 108.00 141.66 200.97
Dow Jones U.S. Exploration & Production Index $100.00 79.05 101.73 112.80
- ----------
* The Company's Common Stock was first listed under the symbol "EZFS" on the
OTC Bulletin Board on February 15, 2001. On January 16, 2002, the
Company's symbol was changed to "FEEC" to reflect the Company's name
change to Far East Energy Corporation. Because no meaningful trading
market for the Company's Common Stock occurred until January 31, 2002,
this analysis assumes $100.00 invested on January 31, 2002 in the
Company's Common Stock and each of the indices, including reinvestment of
dividends.
The Compensation Committee Report, the Audit Committee Report, the Audit
Committee Charter, references to the independence of directors, and the Stock
Performance Graph are not deemed to be "soliciting material" or "filed " with
the Securities and Exchange Commission, are not subject to the liabilities of
Section 18 of the Exchange Act, and shall not be deemed incorporated by
reference into any of the filings previously made or made in the future by our
company under the Exchange Act or the Securities Act of 1933, as amended (except
to the extent the Company specifically incorporates any such information into a
document that is filed).
19
CERTAIN TRANSACTIONS
AGREEMENTS WITH NAMED EXECUTIVE OFFICERS OF THE COMPANY
AGREEMENTS WITH MICHAEL R. McELWRATH AND BRUCE N. HUFF
On December 23, 2004, the Company entered into Amended and Restated
Employment Agreements (the "Employment Agreements") with Michael R. McElwrath
and Bruce N. Huff (each, an "Executive").
The Employment Agreements provide that the Executive will receive (i) an
annual base salary of not less than $236,250 in the case of Mr. McElwrath and
$168,000 in the case of Mr. Huff and (ii) performance bonuses of (A) not less
than $20,000 payable on or before the 13th of April and October of each year in
the case of Mr. McElwrath and (B) between 15% to 25% of his base salary in the
case of Mr. Huff. The performance criteria for bonuses will be established by
the Compensation Committee (or the Board of Directors if the Company does not
have a Compensation Committee).
Unless extended, the Employment Agreements for Messrs. McElwrath and Huff
terminate on October 13, 2008 and May 1, 2009, respectively. The Employment
Agreements provide that if an Executive is terminated by the Company for Cause
(as defined in the Employment Agreements), the Company shall pay his base salary
and all amounts actually earned, accrued or owing as of the date of termination
and the Executive shall be entitled to exercise all options granted to him under
his Employment Agreement or otherwise to the extent vested and exercisable on
the date of termination.
If an Executive's employment is terminated by the Company (other than as a
result of death, Disability or Cause (as defined in his Employment Agreement)),
or if the Executive terminates his employment for Good Reason (as defined in his
Employment Agreement), the Executive shall be entitled to the following:
- a lump sum payment of two times the sum of Executive's base salary
and bonus paid during the immediately preceding twelve-month period;
- continued participation in all employee benefit plans, programs or
arrangements available to the Company's executive officers in which
Executive was participating on the date of termination for a
specified period of time following termination; and
- the exercise of all options and restricted stock awards granted to
him to the extent vested and exercisable at the date of termination
of Executive's employment, provided, that if the date of termination
of Executive's employment is on or before April 13, 2006 in the case
of Mr. McElwrath and May 1, 2006 in the case of Mr. Huff, then all
options and restricted stock granted to him and exercisable within
the first anniversary of the date of termination in the case of Mr.
McElwrath and within 30 months of the date of termination in the
case of Mr. Huff, shall be immediately and fully vested as of the
date of termination.
Notwithstanding the foregoing, if an Executive's termination of employment
by the Company (other than for death, Cause or Disability (as defined in the
Employment Agreements) or by the Executive for Good Reason (as defined in the
Employment Agreements) occurs within 24 months following a Change of Control (as
defined in the Employment Agreements), then the Executive shall be entitled to a
lump sum payment of three times the sum of Executive's base salary and bonus
during the immediately preceding twelve-month period and all options and
restricted stock granted to Executive will immediately vest and become
exercisable as of the date of termination. The Employment Agreements also
entitle each Executive to certain gross up payments for excise taxes in the
event of a Change of Control.
20
In connection with the Employment Agreements, the Company amended and
restated its three stock option agreements with Messrs. McElwrath and Huff, in
order to make the option agreements consistent with the terms of the Employment
Agreements. The stock option agreements affected include:
- A stock option award granted to Mr. McElwrath with respect to
1,200,000 options to purchase the Company's Common Stock at an
exercise price of $0.65 per share;
- A stock option award granted to Mr. McElwrath with respect to
100,000 shares of the Company's Common Stock at an exercise of $0.65
per share; and
- A stock option award granted to Mr. Huff with respect to 500,000
shares of the Company's Common Stock at an exercise price of $2.00
per share.
The amendments to those stock option agreements did not change the vesting
and exercise price provisions of the original option agreements. The stock
option agreements provide that the shares of Common Stock subject to such
options vest 20% on the Award Date (as defined therein) and vest 20% on each
succeeding anniversary of the Award Date.
AGREEMENT WITH GARRY R. WARD
On February 1, 2004, the Company entered into an Employment Agreement with
Garry R. Ward whereby Mr. Ward will serve as the Senior Vice President of
Engineering of the Company for a term of five years unless sooner terminated.
Mr. Ward will receive an annual base salary of $140,000. Subject to management's
discretion, Mr. Ward will also be eligible to receive annual bonuses in an
amount equal to 20 to 25% of his annual base salary at the time of payment.
Pursuant to the terms of the employment agreement, Mr. Ward was also granted an
option to purchase 400,000 shares of the Company's Common Stock at an exercise
price of $2.00 per share. Additionally, if after February 1, 2005, Mr. Ward is
terminated by the Company for any reason other than Cause or is terminated after
a Change in Control (as such terms are defined in the employment agreement), the
Company will pay him a single lump-sum severance payment of $50,000, and Mr.
Ward will retain all of his rights in, and ownership of, all stock options
vested as of the date of termination or that would vest within 30 days following
the date of termination.
AGREEMENT WITH ZHENDONG "ALEX" YANG
On November 1, 2003, the Company entered into an Employment Agreement with
Zhendong "Alex" Yang. The term of the Employment Agreement is five years unless
sooner terminated. Mr. Yang will receive an annual base salary of $126,000.
Pursuant to the terms of the employment agreement, Mr. Yang was also granted an
option to purchase 800,000 shares of the Company's Common Stock at an exercise
price of $0.65 per share.
AGREEMENT WITH FORMER DIRECTOR
On December 31, 2004, the Company, Jawaharlal Gondi and The Arthi Trust
entered into a Settlement Agreement (the "Settlement Agreement") pursuant to
which Mr. Gondi resigned as a director of the Company. Pursuant to the terms of
the Settlement Agreement, the Company paid Mr. Gondi a total gross amount of
$165,000, minus all applicable withholding, and reimbursed Mr. Gondi certain
out-of-pocket expenses. The Settlement Agreement also provides that Mr. Gondi
and The Arthi Trust, for a period of two years after the date of the Settlement
Agreement, without the prior written consent of the Company, will refrain from
certain activities related to seeking control of the Company. Pursuant to the
Settlement Agreement, Mr. Gondi and The Arthi Trust also agreed to execute and
deliver to the Company one or more proxies naming certain members of the Board
of Directors of the Company who are not officers of the Company, as agents and
21
proxies, with full power of substitution and re-substitution, to vote all shares
of Common Stock or other voting securities of the Company held by Mr. Gondi. The
proxy expires on December 31, 2006.
AGREEMENT WITH CERTAIN STOCKHOLDERS
On December 21, 2004, the Company entered into a Stock Subscription
Agreement (the "Subscription Agreement") with certain investors located outside
the United States (the "Purchasers") and Tim Whyte as representative (the
"Representative"). Under the Subscription Agreement, the Purchasers subscribed
for 6,406,250 units of the Company (the "Units"). The gross proceeds the Company
received from the sale of the Units at the closing were $10,250,000. Each Unit
is comprised of two shares of the Company's Common Stock and one warrant to
purchase one share of Common Stock ("Warrant"). In connection with the
Subscription Agreement, the Company also granted the Purchasers registration
rights in connection with the shares of Common Stock underlying the Units and
the Warrants. The Company was not obligated to file a registration statement
covering the shares of Common Stock underlying the Units and the Warrants prior
to April 30, 2005.
Pursuant to the Subscription Agreement, the Company, the Purchasers and
the Representative agreed to the following:
- Subject to the approval of the Company's Nomination and Corporate
Governance Committee, on or before January 20, 2005, the Company
agreed to appoint Tim Whyte to the Company's Board of Directors to
serve until the next meeting of the Company's stockholders called
for the purpose of electing directors of the Company. The Company
has also agreed to nominate the Representative or such other person
designated by the Representative (the "Purchaser Designee") to the
Company's Board of Directors for election by the stockholders of the
Company at each meeting of the Company's stockholders called for the
purpose of electing directors of the Company, provided that at the
time of such appointment and nomination (a) the Purchasers, in the
aggregate, beneficially own at least 10% of the outstanding shares
of Common Stock, and (b) the Purchaser Designee is satisfactory to
the Company's Nominating and Corporate Governance Committee. Mr.
Whyte was appointed as a Director in January 2005 and has been
nominated for election as Director pursuant to the terms of the
Subscription Agreement. Mr. Whyte also serves as an investment
manager of Sofaer Capital, Inc., one of the Purchasers.
- For a period of 18 months from the date of the Subscription
Agreement, if the Company determines to pursue an offering of debt
or equity securities ("Offered Securities") in a capital raising
transaction (a "Proposed Offering"), the Company is required to
notify the Representative of the Proposed Offering and the
Representative shall have the exclusive right, for a period of 45
days from receipt of notice of the Proposed Offering, to consummate
the purchase of all or a part of the Offered Securities by one or
more of the Purchasers or syndicate of investors arranged by the
Representative. The Company's Board of Directors shall review and
consider in good faith the proposal by the Representative and make a
determination as to whether to approve such proposal, which
determination shall consider whether the terms of, and all fees that
may be incurred by the Company in connection with, the issuance and
sale of the securities are customary for a transaction of this
nature. If the Representative fails to submit, fails to close or the
Company's Board of Directors fails to approve the proposal by the
Representative on or before the expiration of the 45 day period,
then the Company may offer and sell the securities to one or more
third parties upon similar terms specified in the Company's notice
of the Proposed Offering without any obligation to submit another
notice to the Representative. The Company's obligations are subject
to certain
22
exceptions and limitations relating to specified private placements
and other matters described in the Subscription Agreement.
- The Company agreed to use its commercially reasonable efforts to
list or include the Common Stock on a recognized stock exchange,
such as Nasdaq, the Hong Kong Stock Exchange or AIM, on or before
June 30, 2005, and agreed to consult with the Representative
regarding an appropriate choice of an exchange.
- For a period of 18 months from the date of the Subscription
Agreement, the Company granted each Purchaser the right to purchase
a pro rata share of securities sold by the Company in a capital
raising transaction. This right will not arise in connection with
(a) securities issued pursuant to the acquisition of another
business entity or business segment of any such entity by the
Company by merger, consolidation, conversion, purchase of
substantially all the assets or other reorganization, (b) securities
issued upon conversion of convertible notes or securities, upon
exercise of warrants, options or other rights to acquire securities
or as dividends, stock splits or distributions and (c) securities
issued pursuant to specified private placements.
- The Company agreed to consult with the Representative and consider
in good faith, any proposal from any person with whom the
Representative has a relationship and who is qualified and
experienced in the construction of oil and gas drilling rigs in The
People's Republic of China, relating to any joint venture,
partnership, or other arrangement or undertaking providing for the
manufacture, production or construction of drilling rigs for the
drilling of coalbed methane gas with respect to the Company's
holdings and rights in The People's Republic of China. These
obligations are subject to (a) the receipt by the Company and each
other person party to such agreement, arrangement or undertaking
receiving all permits, concessions and licenses required or
necessary to participate in the construction of such rigs, (b) the
approval of such agreement, arrangement or undertaking and the
contractor by all partners and venturers of the Company in the
exploration and production of coalbed methane gas with respect to
China, including, without limitation, ConocoPhillips and China
United Coalbed Methane Company and (c) the approval of such
agreement, arrangement or undertaking by the Company's Board of
Directors. The Company and its subsidiaries also agreed not to enter
into any venture relating to the manufacture, production or
construction of any drilling rigs for the use of third parties for
the drilling of coalbed methane gas in China. The Purchasers and its
subsidiaries agreed not to enter into a commercial joint venture
relating to the construction of any drilling rigs for the use of
third parties for the drilling of coalbed methane gas in China. The
Company is not, however, prohibited or restricted from negotiating,
discussing or entering into a lease, rental or service arrangement
or similar undertaking with any third party relating to provision
and operation of any rig for the drilling of coalbed methane gas
with respect to China. All rights and obligations described in this
paragraph will commence upon the six month anniversary of the date
of the Subscription Agreement and shall expire upon the second
anniversary of the date of the Subscription Agreement.
23
SECURITY OWNERSHIP
The following table sets forth, as of April 29, 2005, certain information
with respect to the beneficial ownership of the Company's Common Stock by (a)
each stockholder beneficially owning more than 5% of the Company's outstanding
Common Stock; (b) each Director and Director nominee of the Company who is a
stockholder of the Company; (c) each of the Named Executive Officers who is a
stockholder of the Company; and (d) all executive officers and Directors of the
Company as a group.
Amount and Nature
of Beneficial Percent Of
Ownership of Common Outstanding
Name of Beneficial Owner Stock Common Stock
- ------------------------------------------------------------------------------- ------------------- ------------
RAB Europe Fund Limited, RAB Special Situations LP, RAB Partners Limited, RAB 5,450,000(2) 6.9%
Capital plc, William Philip Richards, Michael Alen-Buckley, James
Palmer(1)
Sofaer Capital Asian Hedge Fund, Sofaer Capital Global Hedge Fund, Sofaer 19,218,750(4) 22.9%
Capital, Inc., Restructuring Investors Limited, Passlake Limited,
Persistency(3)
Jawaharlal Gondi(5) 8,202,500(6) 10.6%
CURRENT DIRECTORS AND NOMINEES FOR DIRECTOR:
John C. Mihm 200,000(7) *
Thomas Cavanagh 7,430,000(8),(6) 9.6%
Donald A. Juckett 7,430,000(9),(6) 9.6%
Randall D. Keys 200,000(10) *
Tim Whyte --(11) --
Thomas E. Williams 205,000(12) *
CURRENT DIRECTOR, NOMINEE FOR DIRECTOR AND NAMED EXECUTIVE OFFICER:
Michael R. McElwrath 600,000(13) *
OTHER NAMED EXECUTIVE OFFICERS:
Bruce N. Huff 280,000(14) *
Garry R. Ward 240,000(15) *
Alex Yang 480,000(16) *
ALL DIRECTORS AND EXECUTIVE OFFICERS AS A GROUP (10 PERSONS) 9,835,000(17) 12.3%
- ----------
* Less than 1%.
(1) The address for RAB Europe Fund Limited and RAB Partners Limited is P.O.
Box 908 GT, Walker House, Mary Street, George Town, Grand Cayman. The
address for RAB Special Situations LP, RAB Capital plc, William Philip
Richards, Michael Alen-Buckley and James Palmer is No. 1 Adam Street,
London W2CN 6LE, United Kingdom.
(2) Based on a Schedule 13G/A filed by the named beneficial owners on February
11, 2005. Includes 1,950,000 shares of Common Stock which the named
beneficial owners may purchase pursuant to warrants that are currently
exercisable. Each named beneficial owner has shared voting power and
shared investment power with respect to the 5,450,000 shares of Common
Stock.
(3) The address for Sofaer Capital Asian Hedge Fund and Sofaer Capital Global
Hedge Fund is c/o Caledonian Bank & Trust Limited, as Trustee, Caledonian
House, 69 Dr. Roy's Drive, P.O. Box 1043, George Town, Grand Cayman. The
address of Sofaer Capital, Inc. is Craigmuir Chambers, Road Town, Tortola,
British Virgin Islands. The address of Restructuring Investors Limited is
P.O. Box 173, Kingston Chambers, Road Town, Tortola, British Virgin
Islands. The address of Passlake Limited is P.O. Box 309, South Church
Street, George Town, Grand Cayman, Cayman Islands. The address of
Persistency is Ugland House, P.O. Box 309, George Town, Grand Cayman,
British West Indies.
(4) Based on a Schedule 13D/A filed by the named beneficial owners on January
4, 2005. Includes 6,406,250 shares of Common Stock issuable upon the
exercise of warrants. Sofaer Capital Asian Hedge Fund, Sofaer Capital
Global Hedge Fund, Restructuring Investors Limited, Passlake Limited and
Persistency have shared voting power with respect to 19,218,750 shares of
Common Stock. In addition, Sofaer Capital Asian Hedge Fund and Sofaer
Capital Global Hedge Fund may acquire an additional 300,000 shares of
Common Stock issuable upon the exercise of warrants that are currently
exercisable held by an affiliate, Sofaer Capital, Inc. Additionally,
Sofaer Capital Asian Hedge Fund, Sofaer Capital, Inc. and Sofaer Global
Hedge Fund have shared investment power with respect to 7,800,000 shares
of Common Stock. Restructuring Investors Limited may also acquire an
additional 150,000 shares of Common Stock issuable upon the exercise of
warrants that are currently exercisable. Restructuring Investors Limited
has sole investment power with respect to 3,900,000 shares of Common
Stock. Passlake Limited has sole investment power with respect to 468,750
shares of Common Stock. Persistency has sole investment power with respect
to 7,500,000 shares of Common Stock.
24
(5) The address for Jawaharlal Gondi is 37, Longfurlong Road, Rugby,
Warwickshire, United Kingdom CV22 5QT.
(6) Based on a Schedule 13G/A filed by Jawaharlal Gondi on January 26, 2005.
Mr. Gondi is the beneficial owner of 4,000,000 shares held by The Arthi
Trust. Pursuant to a settlement agreement with the Company, Mr. Gondi
executed a proxy giving Thomas Cavanagh and Donald A. Juckett shared
voting power with respect to 7,230,000 shares of Common Stock. Jawaharlal
Gondi still holds sole investment power with respect to the 7,230,000
shares. For further discussion of the terms of the settlement agreement
and proxy, see "Certain Transactions -- Agreement with Former Director"
contained herein.
(7) Includes 200,000 shares which John C. Mihm may purchase pursuant to
options which are exercisable within 60 days of April 29, 2005.
(8) Includes 200,000 shares which Thomas Cavanagh may purchase pursuant to
options which are exercisable within 60 days of April 29, 2005. Mr.
Cavanagh has informed the Company that he does not wish to stand as a
nominee for election as a Director at the Meeting in order to permit him
additional time to pursue his business endeavors.
(9) Includes 200,000 shares which Donald A. Juckett may purchase pursuant to
options which are exercisable within 60 days of April 29, 2005.
(10) Includes 200,000 shares which Randall D. Keys may purchase pursuant to
options which are exercisable within 60 days of April 29, 2005.
(11) Tim Whyte is the representative of the investor group comprised of Sofaer
Capital Asian Hedge Fund, Sofaer Capital Global Hedge Fund, Sofaer
Capital, Inc., Restructuring Investors Limited, Passlake Limited and
Persistency. However, Mr. Whyte disclaims any beneficial ownership of the
shares owned by this investor group. For further discussion, see "Certain
Transactions -- Agreement with Certain Stockholders" contained herein.
(12) Includes 200,000 shares which Thomas E. Williams may purchase pursuant to
options which are exercisable within 60 days of April 29, 2005.
(13) Includes 600,000 shares which Michael R. McElwrath may purchase pursuant
to options which are exercisable within 60 days of April 29, 2005.
(14) Includes 280,000 shares which Bruce N. Huff may purchase pursuant to
options which are exercisable within 60 days of April 29, 2005.
(15) Includes 240,000 shares which Garry R. Ward may purchase pursuant to
options which are exercisable within 60 days of April 29, 2005.
(16) Includes 480,000 shares which Alex Yang may purchase pursuant to options
which are exercisable within 60 days of April 29, 2005.
(17) Includes 2,600,000 shares which may be purchased pursuant to options which
are exercisable within 60 days of April 29, 2005 by the directors and
named executive officers.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's officers and
Directors, and persons who own more than ten percent of the Company's Common
Stock, to file reports of ownership and changes in ownership with the Securities
and Exchange Commission. Officers, Directors and greater than ten-percent
stockholders are required by the Securities and Exchange Commission's
regulations to furnish the Company with copies of all Section 16(a) forms they
file. Based on its review of the copies of such forms received by it, the
Company believes that all filing requirements applicable to its officers,
Directors and greater than ten-percent stockholders for the year ended December
31, 2004 were complied with except that Sofaer Capital Global Hedge Fund, Sofaer
Capital Asian Hedge Fund, Sofaer Capital, Inc., John C. Mihm, Thomas E.
Williams, Garry R. Ward and Zhendong "Alex" Yang each filed a report on Form 3
late during the year.
25
PROPOSAL NO. 2 - APPROVAL OF RESTRUCTURING PLAN
On March 15, 2005, the Board of Directors, upon the recommendation of
management, approved the adoption of the Restructuring Plan, authorizing the
Company (upon satisfaction of certain conditions) to transfer to Far East Energy
(Bermuda), Ltd., a newly formed wholly-owned subsidiary organized under the laws
of Bermuda ("FEEB"), all or substantially all of the Company's assets relating
to its operations in The People's Republic of China (the "PRC"). After the
consummation of the Restructuring Plan, the Company is not expected to own a
significant amount of assets other than the outstanding capital stock of its
subsidiaries, including FEEB, and cash and cash equivalents. In addition to
being subject to stockholder approval, the implementation of the Restructuring
Plan is subject to a number of conditions, including the receipt of all material
consents and approvals from governmental authorities and other third parties.
The Board of Directors may, in its discretion, terminate the Restructuring Plan.
The Restructuring Plan is attached to this Proxy Statement as Exhibit B. The
material features of the Restructuring Plan are described below, but such
description should be read in conjunction with the Restructuring Plan attached
to this Proxy Statement.
REASONS FOR THE RESTRUCTURING
The Company believes that implementation of the Restructuring Plan may
allow the Company to realize a variety of potential business, financial and
strategic benefits. In particular, the Board of Directors is recommending the
restructuring because it believes that the restructuring may, without any
material change or effect in the overall operations of the Company or the
location of the Company's facilities, allow the Company to realize the following
benefits:
- The Board of Directors believes the restructuring may help enhance
business growth and implement its business strategy more
effectively. Growth through the exploration and development of our
properties in the PRC is a principal component of the Company's
strategy. The establishment of FEEB will also facilitate
centralization of management for all PRC operations and any foreign
operations. Establishment of a single international holding company
for our PRC operations and Yunnan Huayi Eco-tech Consulting Co.,
Ltd. ("Eco-tech") should position the Company for the more efficient
implementation of its business strategy and future growth in the
PRC;
- The Board of Directors believes the restructuring may result in a
more favorable corporate structure for expansion of the Company's
current business by allowing FEEB the flexibility to obtain capital
required for expansion from foreign, as well as U.S. sources;
- The Board of Directors believes the restructuring could facilitate
formation (and limitation of risks to the Company as a whole by
helping insulate it from liabilities of its international
operations) of joint ventures or other strategic alliances and
business combinations which might not be available under the
Company's existing organizational structure. For example, the
restructuring could permit FEEB to merge with a foreign corporation
having solely Chinese or other foreign operations in a nontaxable
merger without subjecting the shareholders of the foreign
corporation to potential U.S. federal income taxation. Further,
although the Company has no present plan to sell or issue any
securities in FEEB to any person, the isolation of the China assets
in FEEB would provide the flexibility for FEEB to issue its debt or
equity securities to investors who may value FEEB differently than
the Company as a whole; and
- The Board of Directors believes the restructuring could provide
potential tax savings in future periods by structuring FEEB to take
advantage of any tax incentives offered by the PRC or any other
foreign location of future operations. Establishment of FEEB may
facilitate deferral of US tax on international operations unless and
until profits, if any, from those operations are repatriated to the
U.S. However, the Company cannot give any assurance as to the amount
of taxes it will pay as a result of or after the reorganization.
Because substantially all of the Company's assets will be owned by FEEB
and significant operations will be conducted by FEEB, the consummation of the
Restructuring Plan would also limit the Company's exposure to liabilities to the
assets of its subsidiaries engaged in the operations which give rise to those
26
liabilities, to the extent provided by law and to the extent those liabilities
are not otherwise assumed or guaranteed by the Company. Therefore, based on
these potential benefits, the Board of Directors believes that the adoption of
the Restructuring Plan will promote the interests of the Company and its
stockholders. The implementation of the Restructuring Plan will have no effect
on the presentation of the consolidated financial statements of the Company. The
Company will continue to report its financial operations and condition on a
consolidated basis.
RESTRUCTURING PLAN AND PROPOSED STRUCTURE
Under the Restructuring Plan, the Company would transfer to FEEB, all or
substantially all of the Company's assets relating to its operations in the PRC.
The assets subject to the transfer would include (the "China Assets"):
- all of the Company's agreements and contracts relating to the
exploration of coalbed methane gas in the PRC, including its
production sharing contract with China United Coalbed Methane Co.
Ltd. ("CUCBM") for the Yunnan Province, PRC, its production sharing
contracts with CUCBM and Phillips China Inc., a subsidiary of
ConocoPhillips, Inc., for the Shanxi Province, PRC and its farmout
agreements and escrow agreement relating to Shanxi Province;
- all transferable permits and authorizations used in or relating to
the exploration of coalbed methane gas;
- all tangible assets relating to the Company's operations in the PRC;
and
- its equity interest in its wholly-owned subsidiary, Eco-tech.
FEEB will assume all liabilities relating to the China Assets, but the
Company expects that it will continue to be liable for most of the liabilities
relating to its production sharing contracts and farmout agreements pursuant to
guaranty agreements or similar arrangements. In addition to being subject to
stockholder approval, the implementation of the Restructuring Plan is subject to
a number of conditions discussed below in "Conditions to the Restructuring
Plan," including receipt of all material consents and approvals with
governmental authorities and other third parties. The Board of Directors may, in
its discretion, terminate the Restructuring Plan.
After consummation of the Restructuring Plan, FEEB would perform all of
the Company's operating activities in the PRC. As a result, the Company will not
have any significant operations or assets other than its ownership of the
capital stock of subsidiaries and cash and cash equivalents. The Company would
continue to perform management, finance and administrative functions. In
addition, FEEB and the Company from time to time might engage in other
transactions with each other, including making or receiving intercompany loans.
27
The following diagrams show the present corporate structure of the Company
and its subsidiaries and the structure that would result from the implementation
of the proposed Restructuring Plan.
Organization Prior to Restructuring
[FLOW CHART]
Proposed Organization Post-Restructuring
[FLOW CHART]
Pursuant to the Restructuring Plan, the Board of Directors retains the
discretion to amend the Restructuring Plan, including determining which assets
should be transferred; provided that no amendment to the Restructuring Plan will
be made without the approval of the Company's stockholders if required under the
laws of the State of Nevada and the articles of incorporation and the Amended
and Restated Bylaws of the Company. The Company currently anticipates that,
assuming stockholder approval of the Restructuring Plan and satisfaction of the
conditions discussed below in "Conditions to the Restructuring Plan," the
restructuring can be accomplished on or before December 31, 2005. Nevertheless,
there can be no assurances that the conditions to the Restructuring Plan will be
satisfied and the Board of Directors will determine to transfer the China Assets
pursuant to the Restructuring Plan.
CONDITIONS TO THE RESTRUCTURING PLAN
The implementation of the Restructuring Plan is subject to a number of
conditions, including:
28
- the approval and adoption of the Restructuring Plan by the
stockholders;
- the making of all filings with and the receipt of all material
consents, approvals, authorizations and clearances required by any
court or governmental or regulatory authority or other person to
consummate the Restructuring Plan and necessary for FEEB to conduct
its operations in the PRC, including the Ministry of Commerce, CUCBM
and Phillips China Inc.;
- the receipt of all national, provincial and local approvals,
authorizations and clearances by Chinese tax authorities favorable
to the Company as determined by the Board of Directors;
- the absence of any order or injunction or legal restraint or
prohibition that would prevent the consummation of the Restructuring
Plan or would subject the transfer of the China Assets under the
Restructuring Plan to a condition that the Board of Directors
believes might have a material adverse effect on the Company or the
China Assets; and
- the absence of any event that the Board of Directors believes might
have a material adverse effect on the China Assets, the Company or
the ability to consummate the Restructuring Plan.
No U.S. federal or state regulatory requirements must be complied with,
nor must any U.S. federal or state governmental approval be obtained, in order
to effectuate the Restructuring Plan (other than standard federal income tax
reporting requirements). The transfer of the China Assets is subject to the
approval of CUCBM, Phillips China Inc. and specified regulatory authorities in
the PRC, including the Ministry of Commerce. The Company has begun to prepare
and arrange for meetings with these regulatory authorities. There can be no
assurances that these approvals will be obtained or any or all of the conditions
will be satisfied.
TERMINATION OF THE RESTRUCTURING PLAN
The Board of Directors, in its discretion, may terminate the Restructuring
Plan at any time prior to its consummation. The Board of Directors may determine
to terminate the Restructuring Plan for various reasons, including, among
others, if any of the conditions to the Restructuring Plan are not achieved, the
Company is unable to implement the Restructuring Plan at a time where the fair
market value of the China Assets would not significantly exceed their costs so
that no or minimal PRC income tax is imposed as a result of the restructuring,
or the Board of Directors believes that the implementation of the Restructuring
Plan would result in greater than anticipated costs to the Company.
EFFECTS OF RESTRUCTURING PLAN
Use of China Assets Following Restructuring. The Company's operations
concentrate on coalbed methane exploration and development in the Yunnan
Province in Southern China and in the Shanxi Province in Northern China.
Although pursuant to the Restructuring Plan, the Company would transfer legal
and beneficial ownership of all or substantially all of its China Assets to
FEEB, such assets would continue to be used by FEEB for the same purposes as are
presently used by the Company.
Effect on the Company's Financial Statements. The implementation of the
Restructuring Plan will have no effect on the presentation of the consolidated
financial statements of the Company. The Company will continue to report its
financial operations and condition on a consolidated basis.
No Effect on a Pro Forma Basis. If the Company was to prepare pro forma
consolidated financial statements giving effect to the Restructuring Plan as of
the beginning of the Company's fiscal year ended December 31, 2004 (or any prior
year), there would not be any pro forma adjustments required to account for the
effects of the Restructuring Plan. Rather, the effect of the Restructuring Plan
will be that substantially all of the Company's losses from operations (on a
consolidated basis) will be generated by FEEB, and the
29
Company's principal source of revenue (on an unconsolidated basis) will be any
dividends from FEEB and its other operating subsidiaries, to the extent that
such subsidiaries declare and pay dividends.
Assumption of Liabilities. The China Assets transferred to FEEB will be
transferred subject to all related liabilities and obligations. However, the
Company expects that it will continue to be liable for most of the liabilities
relating to its production sharing contracts and farmout agreements under
guaranty agreements or similar arrangements.
Effect on Stockholders. The outstanding stock of the Company would not be
affected by consummation of the Restructuring Plan. Stockholders of the Company
would continue to have the same voting, dividend and liquidation rights in the
Company before and after implementation of the Restructuring Plan. However,
stockholders of the Company would not be entitled to elect the board of
directors of FEEB. Instead, stockholders of the Company would elect the Board of
Directors of the Company, who would have overall responsibility for the
management of the Company and FEEB. The Board of Directors would elect the
directors of the Company's operating subsidiaries, including FEEB, which would
be the sole stockholder of the subsidiaries. It is possible that FEEB may not be
wholly-owned in the future, although the Company has no present plan to sell or
issue any shares in FEEB to any person other than the Company and/or its direct
and indirect wholly-owned subsidiaries. In the event FEEB were to so issue
shares, the Company's stockholders would be subject to dilution, if such
issuance were to any person or entity other than the Company (whether such
issuance was in a public offering or a private placement).
The following table provides a comparison of some of the rights of the
Company's stockholders before and after the consummation of the Restructuring
Plan. Shareholders are referred to as "members" under Bermuda law, but we use
the term "shareholder" in this summary for ease of comparison.
30
PROVISION BEFORE RESTRUCTURING AFTER RESTRUCTURING
- ------------------------------------------------------------------------------------------------------------------------
VOTING RIGHTS/ELECTION OF THE Pursuant to the Company's Amended and Because the Company will be the sole
BOARD OF DIRECTORS Restated Bylaws, a stockholder of the shareholder of FEEB, the Board of
Company is entitled to one vote for each Directors will hold all voting power
share of the Company's common stock held with respect to FEEB and will have the
by such stockholder. Stockholders are sole power to elect the directors of
entitled to elect the board of directors FEEB. The Company's stockholders will
of the Company, and the board of continue to not be entitled to any
directors of the Company have overall voting rights with respect to the
responsibility for election of the board Company's operating subsidiaries,
of directors of its operating including FEEB. The Company's
subsidiaries. stockholders will not be entitled to
elect the board of directors of FEEB and
would not be entitled to vote on amendments
to FEEB's memorandum of association or
bye-laws.
- ------------------------------------------------------------------------------------------------------------------------
INSPECTION OF BOOKS AND RECORDS Under applicable Nevada law, a Bermuda law provides the general public
stockholder who has been a stockholder with a right of inspection of a Bermuda
for at least six months or who holds, or company's public documents and provides
is authorized in writing by holders of, a Bermuda company's shareholders with a
at least five percent of the outstanding right of inspection of a Bermuda
shares of any class or series of stock company's bye-laws, minutes of general
of the Company has the right, for any meetings of shareholders and audited
proper purpose and upon at least five financial statements.
days' written notice, to inspect the
Company's articles of incorporation, A Bermuda company's share register is
bylaws and stock ledger. This statutory open to inspection by its shareholders
right of the Company's stockholders to and, upon payment of a small fee, by any
inspect the books and records of the other person. A Bermuda company is
Company may not extend to all or any of required to keep at its registered
the books and records of its operating office a register of its directors and
subsidiaries. officers that is open for inspection by
members of the public without charge.
Because FEEB is a separate legal entity of
which the sole shareholder is the Company,
the statutory right of the Company's
stockholders to inspect the books and
records of the Company may not extend to
FEEB. However, because the Company is
subject to the reporting requirements of the
Exchange Act, certain information regarding
the Company and its subsidiaries is
available to
31
PROVISION BEFORE RESTRUCTURING AFTER RESTRUCTURING
- ------------------------------------------------------------------------------------------------------------------------
stockholders without resort to the
statutory right to inspect the Company's
books and records.
- ------------------------------------------------------------------------------------------------------------------------
MERGER/SALE OF ASSETS Under applicable Nevada law, the sale, The Companies Act permits an
lease or exchange of all of the amalgamation or merger between two or
Company's assets, must be approved by more Bermuda companies, or between one
its board of directors and authorized by or more Bermuda "exempted companies" and
the affirmative vote of the holders of a one or more foreign companies. As
majority of the shares of common stock permitted by Bermuda law, subject to
present or represented at the Meeting. certain limitations with respect to
business combinations with an interested
shareholder, shareholders holding a majority
of the shares voting at a meeting, and each
class of shares present and voting at a
meeting, is required to approve a merger.
Under Bermuda law, FEEB will be considered
an "exempted company" since it will be owned
predominantly by non-Bermudians.
Although the Company has no present
intentions to cause FEEB to make further
transfers of assets following implementation
of the Restructuring Plan (other than to
other subsidiaries and/or the Company), the
Company will be the sole shareholder of FEEB
and does not intend to seek approval from
the stockholders of the Company of any
subsequent dispositions of assets by FEEB or
of the stock of any subsidiary (whether by
amalgamation or merger or other business
combination), unless such assets or stock to
be transferred constitute all or
substantially all of the assets of the
Company and its subsidiaries, taken as a
whole.
Effect of Becoming a Holding Company. Upon full implementation of the
Restructuring Plan, the Company will become principally a holding company, with
its operations in China being conducted by FEEB, its newly-formed subsidiary.
The Company will have no direct operations and no significant assets other than
ownership of the capital stock of its subsidiaries and cash and cash
equivalents. As the Company does not currently have a source of revenue, it will
continue to rely on additional financing in order to continue the
32
exploration and development in China and sustain its operating losses. However,
because the Company will conduct its operations through its subsidiaries, if and
when the commercial production of coalbed methane gas commences, the Company
will depend on those entities for dividends and other payments to generate the
funds necessary to meet its financial obligations and to pay dividends, if any,
with respect to the Company's Common Stock. All of the Company's subsidiaries
will be separate and independent legal entities and will have no obligation
whatsoever to pay any dividends, distributions or other payments to the Company.
Effects on Management. The proposed restructuring will not result in any
changes in the current membership of the Board of Directors of the Company.
Persons who are currently serving as officers of the Company may become officers
and/or directors of FEEB. Although there are no plans to make any changes in
compensation or benefits in connection with implementation of the Restructuring
Plan, the Board of Directors retains discretion to adjust compensation and
benefits as it deems appropriate.
No Dissenters Rights. The holders of the Common Stock are not entitled to
dissenters' rights in connection with the Restructuring Plan under the Nevada
Revised Statutes, the Company's Articles of Incorporation or the Company's
Amended and Restated Bylaws.
TAX CONSEQUENCES OF CONSUMMATION OF THE RESTRUCTURING PLAN
U.S. Federal Income Tax Consequences of the Restructuring. The below
discussion summarizes only the material U.S. federal income tax consequences of
the transactions to be consummated pursuant to the Restructuring Plan (the
"Transactions") and does not address any state, local or foreign tax
consequences of the Transactions. The Company has neither requested nor received
a ruling from the United States Internal Revenue Service or any state, local or
foreign taxing authority as to the tax consequences of the Transactions.
The Company's transfer of its equity interest in Eco-tech to FEEB and
subsequent change in Eco-tech's entity classification to that of a disregarded
entity for U.S. federal income tax purposes should qualify as a "reorganization"
within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as
amended (the "Tax Code"). In addition, the Company's transfer of the China
Assets, excluding the equity interest in Eco-tech (the "Other China Assets"), to
FEEB should qualify as an exchange under Section 351(a) of the Tax Code.
Transfers of assets and shares pursuant to either Section 368(a) or Section
351(a) of the Tax Code generally do not result in the recognition of gain or
loss for U.S. federal income tax purposes. Special rules contained in Sections
904(f) and 367 of the Tax Code, however, will likely cause the Company to
recognize gain on the transfer of the Other China Assets to FEEB to the extent
of certain prior foreign losses of the Company (the "Foreign Loss Recapture
Amount"). Company management believes that the Company's existing and available
net operating losses will fully or substantially offset the Foreign Loss
Recapture Amount, and therefore, no or minimal U.S. tax liability will result
from the Transactions. The Company's net operating loss carryovers to future
years will be reduced, however, by the Foreign Loss Recapture Amount.
Chinese Tax Consequences of the Restructuring. It is expected that the
Company's transfer of its equity interest in Eco-tech and the Other China Assets
to FEEB will constitute taxable transactions under the laws and regulations of
the PRC. Specifically, PRC Enterprise Income Tax at the rate of 33% (the
"Enterprise Income Tax") will generally be imposed on the net gain, if any,
attributable to the Company's transfer of the production sharing contracts and
farmout agreements to FEEB. Although not subject to the Enterprise Income Tax,
the Company's gain, if any, on the transfer of its equity interests in Eco-tech
to FEEB generally will be subject to a 10% withholding tax.
The Company will seek approval from the PRC tax authorities to transfer
the China Assets to FEEB at their cost (or, alternatively, at a fair market
value that minimally exceeds cost) so that there would be no, or minimal, PRC
income tax imposed as a result of the Transactions. Written advance tax rulings
are rarely available in the PRC. Therefore, Company representatives have met
with relevant PRC national tax authorities
33
who have indicated that they would consent to the transfer the China Assets at
cost. Company representatives also plan to meet with local PRC tax authorities
to obtain verbal consents and approvals to transfer the China Assets at cost
(or, alternatively, at a fair market value that minimally exceeds cost) before
consummating the Restructuring Plan. No assurances can be given that all
necessary consents and approvals will be obtained.
The Company's transfer of its equity interest in Eco-tech will be subject
to a 0.05% PRC stamp duty. Due to the ambiguity of the tax regulations, the
Company plans to seek clarification from the PRC tax authorities regarding
whether the transfer of the production sharing contracts and farmout agreements
will be subject to the 0.05% PRC stamp duty.
PRINCIPLE EXECUTIVE OFFICES
The Company's principal executive offices are located at 400 North Sam
Houston Parkway, Suite 205, Houston, Texas 77060 and its telephone number is
(832) 598-0470.
REQUIRED VOTE FOR THE RESTRUCTURING PLAN
Section 78.565 of the Nevada Revised Statutes requires that the sale,
lease or exchange of all of the Company's assets be approved by its Board of
Directors and authorized by the affirmative vote of the holders of a majority of
the shares of Common Stock present or represented at the Meeting. Although it is
unclear that the transfer of all or substantially all of the Company's assets to
a wholly-owned subsidiary, which includes an assumption of liabilities by the
subsidiary, falls within Section 78.565, there is no clear authority under
Nevada law which would exempt such a transaction from Section 78.565's
requirements. Accordingly, in order to ensure compliance with applicable law,
the Board of Directors has determined to submit the Restructuring Plan to a
binding stockholder vote.
If the stockholders do not approve the Restructuring Plan, it will not be
consummated. However, the submission of the Restructuring Plan to stockholders
is not intended to affect the Company's right, under applicable Nevada law, to
dispose of less than all or substantially all of its assets without stockholder
approval. Thus, even if the Restructuring Plan is not approved by the
stockholders, the Company may from time to time in the future transfer portions
of its assets to subsidiaries or to third parties on terms and for consideration
approved by the Board of Directors, subject to applicable Nevada law, without
seeking stockholder approval.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR THE APPROVAL OF
THE RESTRUCTURING PLAN.
PROPOSAL NO. 3 - APPROVAL OF 2005 STOCK INCENTIVE PLAN
On March 15, 2005, the Board of Directors, following recommendation by the
Compensation Committee, adopted, subject to stockholder approval at the Meeting,
the 2005 Stock Incentive Plan (the "Plan"). The purpose of the Plan is to (1)
aid the Company and its Subsidiaries and Affiliates (as defined in the Plan) in
attracting, securing and retaining employees of outstanding ability, (2) attract
members to the Board of Directors, (3) attract consultants to provide services
to the Company and its Subsidiaries (as defined in the Plan) and Affiliates, as
needed, and (4) motivate such persons to exert their best efforts on behalf of
the Company and its Affiliates by providing incentives through the granting of
stock options and other stock-based awards.
A copy of the Plan, as adopted by the Board of Directors, is attached to
this Proxy Statement as Exhibit C. The principal features of the Plan are
described below, but such description is qualified in its entirety by reference
to the complete text of the Plan.
34
The Plan will not become effective unless stockholder approval is obtained
at the Meeting. The Plan will be approved if the number of votes cast in favor
of the proposal exceeds the number of votes cast in opposition of the proposal.
If the stockholders approve the proposal, the Plan will be effective as of the
date of its adoption by the stockholders.
SUMMARY OF THE PLAN
General. The Plan permits the granting of any or all of the following
types of awards:
- stock options, including incentive stock options ("ISOs") and
non-qualified stock options;
- stock appreciation rights ("SARs");
- restricted stock;
- restricted stock units; and
- other stock-based awards.
The Plan provides that the maximum number of shares of Common Stock with respect
to which awards may be granted is 3,500,000 shares (subject to adjustment in
accordance with the provisions under the caption "Adjustments Upon Certain
Events" below), whether pursuant to ISOs or otherwise. The Plan also provides
that the total number of shares of Common Stock that will be available for
grants of ISOs is 2,600,000 shares and that the total number of shares of Common
Stock that will be available for grants of unrestricted shares of Common Stock,
restricted stock, restricted stock units or any other stock-based awards is
900,000 shares.
The maximum number of shares with respect to which awards of any and all
types may be granted during a calendar year to any participant is limited, in
the aggregate, to 1,500,000 shares. Shares which are subject to awards which
terminate, expire, are cancelled, exchanged, forfeited, lapse or are settled for
cash may be utilized again with respect to awards granted under the Plan.
Eligibility. Employees of the Company, its Subsidiaries and Affiliates and
members of the Board of Directors, who from time to time are responsible for the
management, growth and protection of the business of the Company and its
Affiliates, and consultants to the Company and its Subsidiaries, are eligible to
participate in the Plan. Currently, the Company, its Subsidiaries and
Affiliates, have six Directors who are not employees, approximately eighteen
employees and approximately four consultants.
Administration. The Plan is administered by the Compensation Committee of
the Board of Directors. The Compensation Committee has the authority to select
employees, Board members or consultants to whom awards are to be granted, to
determine the number of options or other types of awards to be granted to such
employees, Board members or consultants and to establish the terms and
conditions of such awards. The Compensation Committee has the authority to
interpret the Plan, to establish, amend and rescind any rules and regulations
relating to the Plan, and to otherwise make any determination that it deems
necessary or desirable for the administration of the Plan. Members of the
Compensation Committee are "non-employee directors" within the meaning of Rule
16b-3 of the Exchange Act and, if required, "outside directors" within the
meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended (the
"Tax Code"). The Plan provides that if the Chief Executive Officer of the
Company is a member of the Board of Directors, the Board of Directors may
authorize him or her to grant awards of up to an aggregate of 200,000 shares of
Common Stock in each calendar year to participants who are not subject to the
rules promulgated under Section 16 of the Exchange Act or Covered Employees (as
defined in the Plan), provided that the Chief Executive Officer must notify the
Compensation Committee of any such grants.
35
Adjustments Upon Certain Events. In the event of any change in the
outstanding shares of Common Stock by reason of any stock dividend or split,
reorganization, recapitalization, merger, consolidation, split-up, spin-off,
combination or exchange of stock or other corporate exchange, or any
distribution to stockholders of shares of Common Stock other than regular cash
dividends, the Compensation Committee shall make such substitution or
adjustment, if any, as it deems equitable to prevent substantial dilution or
enlargement of the rights granted to participants. In the event of a Change of
Control (as defined in the Plan), if the Compensation Committee makes no
provision for the assumption of outstanding awards by the successor corporation,
then the award agreement shall provide whether (1) none, all or a portion of
each award shall vest, (2) any option shall terminate as of a date fixed by the
Compensation Committee which is at least 30 days after the notice thereof to the
participant and shall give each participant the right to exercise his or her
option as to all or any part of the shares, including shares as to which the
option would not otherwise be exercisable, or (3) cause any award outstanding as
of the effective date of any such event to be cancelled in consideration of a
cash payment or grant of an alternative option or award (whether by the Company
or any entity that is a party to the transaction), or a combination thereof, to
the holder of the cancelled award, provided that such payment and/or grant are
substantially equivalent in value to the fair market value of the cancelled
award as determined by the Compensation Committee. Notwithstanding the
foregoing, for any award under the Plan that consists of deferred compensation
subject to Section 409A of the Tax Code, the definition of Change of Control
will be the definition set forth in Section 409A of the Tax Code and any
subsequent guidance thereunder.
Stock Options. The Plan provides that the option price pursuant to which
Common Stock may be purchased will be determined by the Compensation Committee,
but will not be less than the fair market value of the Common Stock on the date
the option is granted. As of April 29, 2005, the closing price of the Common
Stock was $0.99. The Compensation Committee will determine the term of
each option, but no option shall be exercisable more than 10 years after the
date of grant. Payment of the purchase price shall be (1) in cash, (2) in shares
of Common Stock held for at least six months, (3) partly in cash and partly in
such shares, (4) through the delivery of irrevocable instructions to a broker to
deliver promptly to the Company an amount equal to the aggregate option price
for the shares being purchased, or (5) through such other means as shall be
prescribed in the award agreement. If a participant's service terminates by
reason of death or Disability (as defined in the Plan), to the extent the
participant was entitled to exercise the option on the date of death or
Disability, the option may be exercised within 180 days after the date of death
or Disability (or such other period of time not exceeding one year as is
determined by the Compensation Committee at the time of grant). If a
participant's service with the Company terminates for any reason (other than
death or Disability), each option then held by the participant may be exercised
within 90 days after the date of such termination, but only to the extent such
option was exercisable at the time of termination of service. Notwithstanding
the foregoing, the Compensation Committee may accelerate the vesting of unvested
options held by a participant if the participant is terminated without "cause"
(as determined by the Compensation Committee) by the Company.
Stock Appreciation Rights. The Compensation Committee has the authority
under the Plan to grant SARs independent of stock options. Each SAR granted
independently of an option entitles a participant to exercise the SAR in whole
or in part and, upon such exercise, to receive from the Company an amount equal
to (1) the excess of (i) the fair market value on the exercise date of one share
of Common Stock over (ii) the exercise price per share, times (2) the number of
shares covered by the portion of the SAR so exercised.
Other Stock-Based Awards. The Compensation Committee also has the
authority under the Plan to grant awards of unrestricted shares of Common Stock,
restricted stock, restricted stock units and other awards that are valued in
whole or in part by reference to, or are otherwise based upon, the fair market
value of the Common Stock. The terms and conditions of these other stock-based
awards shall be determined by the Compensation Committee. Such other stock-based
awards may be granted in a manner that will enable the Company to deduct any
amount paid by the Company under Section 162(m) of the Tax Code
("Performance-Based Awards"). Performance-Based Awards are rights to receive
amounts denominated in cash or shares of Common Stock, based on the Company's or
a participant's performance between the date of grant and a pre-established
future date. Performance criteria, the length of the performance period and time
of payment of the
36
Performance-Based Award are established in writing by the Compensation
Committee: (1) at a time when the outcome for that performance period is
substantially uncertain and (2) not later than 90 days after the commencement of
the performance period to which the performance goal relates, but in no event
after 25% of the relevant performance period has elapsed. The performance
measures to be used for purposes of awards to employees whose compensation is
subject to Section 162(m) of the Tax Code must be chosen by the Compensation
Committee from among the following:
- earnings before or after taxes (including earnings before interest,
taxes, depreciation and amortization);
- net income;
- operating income;
- earnings per share;
- book value per share;
- return on stockholders' equity;
- expense management;
- return on investment before or after the cost of capital;
- improvements in capital structure;
- profitability of an identifiable business unit or product;
- maintenance or improvement of profit margins;
- stock price;
- market share;
- revenues or sales;
- costs;
- cash flow;
- working capital;
- changes in net assets (whether or not multiplied by a constant
percentage intended to represent the cost of capital); and
- return on assets.
The foregoing criteria may relate to the Company, one or more of its
Affiliates, Subsidiaries or one or more of its divisions, units, minority
investments, partnerships, joint ventures, product lines or products or any
combination of the foregoing, and may be applied on an absolute basis and/or be
relative to one or more peer group companies or indices, or any combination
thereof, all as the Compensation Committee determines. To the degree consistent
with Section 162(m) of the Tax Code, the performance goals may be calculated
without regard to extraordinary items or accounting changes. The Plan provides
that the maximum amount of a
37
performance-based award to any Covered Employee (as defined in the Plan) for any
fiscal year of the Company will be $1,000,000.
Restricted Stock and Restricted Stock Units. The Plan provides for certain
terms and conditions pursuant to which restricted stock and restricted stock
units may be granted under the Plan. Each grant of restricted stock and
restricted stock units must be evidenced by an award agreement in a form
approved by the Compensation Committee. The vesting of a restricted stock award
or restricted stock unit granted under the Plan may be conditioned upon the
completion of a specified period of employment with the Company or a Subsidiary,
upon attainment of specified performance goals, and/or upon such other criteria
as the Compensation Committee may determine in its sole discretion. If a
participant's service is terminated for any reason, the participant shall only
be entitled to the restricted stock or restricted stock units vested at the time
of such termination of service. The participant's unvested restricted stock and
restricted stock units will be forfeited. Notwithstanding the foregoing, the
Compensation Committee may accelerate the vesting of unvested restricted stock
or restricted stock units held by a participant if the participant is terminated
without "cause" (as determined by the Compensation Committee) by the Company.
Except as provided in the applicable award agreement, no shares of restricted
stock may be assigned, transferred or otherwise encumbered or disposed of by the
participant until such shares have vested in accordance with the terms of such
award agreement. If and to the extent that the applicable award agreement so
provides, a participant will have the right to vote and receive dividends on the
shares of restricted stock granted to him or her under the Plan. Unless
otherwise provided in the applicable award agreement, any shares received as a
dividend on such restricted stock or in connection with a stock split of the
shares of restricted stock will be subject to the same restrictions as the
restricted stock. Restricted stock units may not be assigned, transferred or
otherwise encumbered or disposed of by the participant until such restricted
stock units have vested in accordance with the terms of the applicable award
agreement. Upon the vesting of the restricted stock unit, certificates for
shares will be delivered to the participant or his or her legal representative
on the last business day of the calendar quarter in which such vesting event
occurs or as soon thereafter as practicable (but not later than March 15 of the
calendar year following the year in which vesting occurs), in a number equal to
the shares covered by the restricted stock unit.
Amendments to the Plan. The Plan may be amended by the Board of Directors
or the Compensation Committee, except that no amendment may be made which,
without the approval of the stockholders of the Company, would (except as in
accordance with the provisions under the caption "Adjustments Upon Certain
Events" above) increase the total number of shares reserved or change the
maximum number of shares for which awards may be granted to any participant, or
that otherwise would require stockholder approval under rules of any stock
exchange or market or quotation system on which the shares are traded, or other
applicable law. Subject to the foregoing, with respect to participants who
reside or work outside of the United States, the Compensation Committee may
amend the terms of the Plan or awards granted thereunder in order to conform
such terms with the requirements of local law. In addition, the Compensation
Committee may amend the Plan in such a manner, as it deems necessary or
appropriate, to comply with the requirements of Section 409A of the Tax Code and
any guidance issued thereunder.
Transferability. Awards under the Plan are not transferable otherwise than
by will or by the laws of descent or distribution, except that the Compensation
Committee may authorize stock options (other than ISOs) to be granted on terms
which permit irrevocable transfer for no consideration by the participant to (i)
any child, stepchild, grandchild, parent, stepparent, grandparent, spouse,
former spouse, sibling, niece, nephew, parent-in-law, child-in-law or
sibling-in-law, including adoptive relationships, of the participant, (ii) any
trust in which these persons have more than 50% of the beneficial interest,
(iii) any foundation in which these persons or the participant control the
management of assets and (iv) any other entity in which these persons or the
participant own more than 50% of the voting interests. In addition, the
Compensation Committee may waive the non-transferability provisions of the Plan
(except with respect to ISOs) to the extent that such provisions are not
required under any law, rule or regulation applicable to the Company.
38
Federal Income Tax Consequences. The following is a discussion of certain
U.S. federal income tax consequences relevant to participants in the Plan who
are subject to federal income tax and the Company. It is not intended to be a
complete description of all possible tax consequences with respect to awards
granted under the Plan and does not address state, local or foreign tax
consequences.
A participant who is granted a non-qualified stock option will not
recognize income at the time the option is granted. Upon the exercise of the
option, however, the excess, if any, of the market value of the stock on the
date of exercise over the option price will be treated as ordinary income to the
participant, and the Company will generally be entitled to an income tax
deduction in the same year in an amount measured by the amount of ordinary
income taxable to the participant. The participant will be entitled to a cost
basis for the stock for income tax purposes equal to the amount paid for the
stock plus the amount of ordinary income taxable at the time of exercise. Upon a
subsequent sale of such stock, the participant will recognize short-term or
long-term capital gain or loss, depending upon his or her holding period for
such stock.
A participant who is granted an ISO satisfying the requirements of the Tax
Code will not recognize income at the time the option is granted or exercised.
The excess of the fair market value over the option exercise price is, however,
included in determining the participant's alternative minimum tax as of the date
of exercise. If the participant does not dispose of shares received upon
exercise of the option for one year after exercise and two years after grant of
the option (the "Holding Period"), upon the disposition of such shares the
participant will recognize long-term capital gain or loss based on the
difference between the option exercise price and the fair market value of shares
on the date of disposition. In such event, the Company is not entitled to a
deduction for income tax purposes in connection with the exercise of the option.
If the participant disposes of the shares received upon exercise of the ISO
without satisfying the Holding Period requirement, the participant must
generally recognize ordinary income equal to the lesser of (i) the fair market
value of the shares at the date of exercise of the option over the exercise
price or (ii) the amount realized upon the disposition of such shares over the
exercise price. Any further appreciation is taxed as short-term or long-term
capital gain, depending on the participant's holding period. In such event, the
Company would be entitled to an income tax deduction in the same year in an
amount measured by the amount of ordinary income taxable to the participant.
Upon exercise of a SAR, a participant will recognize taxable income in the
amount of the aggregate cash received. A participant who is granted unrestricted
shares will recognize ordinary income in the year of grant equal to the fair
market value of the shares received. In either such case, the Company will be
entitled to an income tax deduction in the amount of such income recognized by
the participant. A participant will not recognize any income at the time an
award of restricted stock or restricted stock units is granted, nor will the
Company be entitled to a deduction at that time. In the year in which
restrictions on shares of restricted stock lapse, the participant will recognize
ordinary income in an amount equal to the excess of the fair market value of the
shares on the date of vesting over the amount, if any, the participant paid for
the shares. A participant may, however, elect within 30 days after receiving an
award of restricted stock to recognize ordinary income in the year of receipt,
instead of the year of vesting, equal to the excess of the fair market value of
the shares on the date of receipt over the amount, if any, the participant paid
for the shares. Similarly, upon the vesting of restricted stock units, the
participant will recognize ordinary income in an amount equal to the fair market
value of the shares received. With respect to grants of awards of both
restricted stock and restricted stock units, the Company will be entitled to a
tax deduction at the same time and in the same amount as the participant
recognizes income.
The Compensation Committee will require payment of any amount it may
determine to be necessary to withhold for federal, state, local or other taxes
as a result of the grant, vesting or the exercise of an Award. In compliance
with the American Jobs Creation Act of 2004, after January 1, 2005, the maximum
federal withholding rate will be used for supplemental wage payments in excess
of $1,000,000 during any taxable year.
39
Section 162(m) of the Tax Code. Section 162(m) of the Tax Code generally
disallows a federal income tax deduction to any publicly held corporation for
compensation paid in excess of $1,000,000 in any taxable year to the chief
executive officer or any executive officer who is named by the corporation on
the last day of the taxable year, but exempts from this limitation
"performance-based" compensation the material terms of which are disclosed and
approved by stockholders. The Company has structured and intends to implement
the Plan so that generally compensation to these executive officers resulting
therefrom would be qualified performance-based compensation under Section 162(m)
of the Tax Code and would not, therefore be subject to any deduction limitation
under Section 162(m) of the Tax Code. However, the Company may, from time to
time, award compensation to executive officers that is not deductible under
Section 162(m) of the Tax Code.
Section 280G of the Tax Code. Under certain circumstances, the accelerated
vesting or exercise of awards in connection with a Change of Control (as defined
in the Plan) of the Company might be deemed an "excess parachute payment" for
purposes of the golden parachute tax provisions of Section 280G of the Tax Code.
To the extent it is so considered, the grantee may be subject to a 20% exercise
tax, and the Company may be denied a tax deduction.
Section 409A of the Tax Code. The Company generally intends that, to the
extent applicable, awards granted under this Plan shall comply with the
provisions of Section 409A of the Tax Code. Options are granted so as not to be
subject to Section 409A of the Tax Code. Other awards have been designed to
automatically comply with Section 409A of the Tax Code. However, grantees of
Performance-Based Awards may be permitted to elect to defer the payment of
certain Performance-Based Awards. This deferral election is also intended to
comply with Section 409A of the Tax Code. However, under certain circumstances
the accelerated exercise or payment of awards subject to Section 409A of the Tax
Code may subject the grantee to an increased tax rate and interest.
Tax Summary. The foregoing discussion is intended only as a summary of
certain federal income tax consequences and does not purport to be a complete
discussion of all the tax consequences of participation in the Plan.
Accordingly, holders of awards granted under the Plan should consult their own
tax advisers for specific advice with respect to all federal, state or local tax
effects before exercising any options or SARs, and before disposing of any
shares of stock acquired pursuant to an award. Moreover, the Company does not
represent that the foregoing tax consequences apply to any particular award
holder's specific circumstances or will continue to apply in the future and
makes no undertaking to maintain the tax status (e.g., as an ISO) of any award.
The Plan is not subject to any provision of ERISA, nor is it a qualified
employee benefit plan under Section 401(a) of the Tax Code.
Other. The amounts that will be received by participants in the future
under the Plan are not yet determinable, as awards are at the discretion of the
Compensation Committee.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR THE APPROVAL OF
THE 2005 STOCK INCENTIVE PLAN.
FORM 10-K AND FINANCIAL STATEMENTS AVAILABLE
A COPY OF THE COMPANY'S 2004 FORM 10-K IS ENCLOSED. STOCKHOLDERS MAY
REQUEST ANOTHER COPY OF THE FORM 10-K WITHOUT CHARGE UPON WRITTEN REQUEST FROM
THE SECRETARY OF THE COMPANY, 400 N. SAM HOUSTON PARKWAY EAST, SUITE 205,
HOUSTON, TEXAS 77060. FINANCIAL STATEMENTS ARE ALSO ON FILE WITH THE SECURITIES
AND EXCHANGE COMMISSION, WASHINGTON, D.C. 20549. ALTERNATIVELY, CURRENT AND
PROSPECTIVE INVESTORS CAN ACCESS THE FORM 10-K FREE OF CHARGE BY LINKING
DIRECTLY FROM THE COMPANY'S WEBSITE UNDER THE "INVESTOR RELATIONS--SEC FILINGS"
CAPTION TO THE EDGAR DATABASE OF THE SECURITIES AND EXCHANGE COMMISSION. THE
COMPANY'S WEBSITE CAN BE FOUND AT WWW.FAREASTENERGY.COM. THE
40
COMPANY WILL ALSO FURNISH ANY EXHIBIT TO THE 2004 FORM 10-K IF SPECIFICALLY
REQUESTED.
ATTENDANCE AT THE MEETING BY PAYNE, FALKNER, SMITH & JONES, P.C.
Payne, Falkner, Smith & Jones, P.C. served as the Company's independent
registered public accounting firm for the year ended December 31, 2004.
Representatives of Payne, Falkner, Smith & Jones, P.C. are expected to be
present at the Meeting and to be available to respond to appropriate questions.
They will be given the opportunity to make a statement if they wish to do so.
The Audit Committee intends to appoint the Company's independent registered
public accounting firm for the year ending December 31, 2005 at a meeting later
this year.
OTHER BUSINESS
The Board of Directors does not expect there will be presented at the
Meeting, any business other than the election of the Directors, the approval of
the Restructuring Plan and the approval of the Company's 2005 Stock Incentive
Plan, as described above. If other matters properly come before the Meeting, the
persons named on the accompanying proxy card will vote the returned proxies as
the Board of Directors recommends.
Please date, sign and return the proxy at your earliest convenience. A
prompt return of your proxy will be appreciated as it will save the expense of
further mailings.
By order of the Board of Directors,
/s/ Bruce N. Huff
BRUCE N. HUFF
Houston, Texas Chief Financial Officer,
May 12, 2005 Secretary and Treasurer
41
EXHIBIT A
[LOGO] FAR EAST ENERGY CORPORATION
-- PARTNERS IN CLEAN ENERGY
CHARTER
OF THE
AUDIT COMMITTEE
OF
THE BOARD OF DIRECTORS
ADOPTED AS OF SEPTEMBER 10, 2004
PURPOSE
The primary purposes of the committee are to oversee on behalf of the board of
directors:
- the company's accounting and financial reporting processes and the
integrity of its financial statements;
- the audits of the company's financial statements and the
appointment, compensation, qualifications, independence and
performance of the company's independent auditors; and
- the company's compliance with legal and regulatory requirements.
The committee also has the purpose of preparing the audit committee report that
SEC rules require the company to include in its annual proxy statement.
The committee's function is one of oversight only and does not relieve
management of its responsibilities for preparing financial statements that
accurately and fairly present the company's financial results and condition, nor
the independent auditors of their responsibilities relating to the audit or
review of financial statements.
ORGANIZATION
Number of members. The committee must consist of at least three directors. The
board may designate a committee member as the chairperson of the committee, or
if the board does not do so, the committee members will appoint a committee
member as chairperson by a majority vote of the authorized number of committee
members.
Independence. All committee members must have been determined by the board to be
independent, as defined and to the extent required in the applicable SEC rules
for purposes of audit committee membership.
Financial literacy. Each committee member must be financially literate upon
appointment to the committee, as determined by the board in accordance with the
listing standards. At all times there must be at least one committee member who,
as determined by the board, meets the finance, accounting or comparable
experience or background requirement of the listing standards. In addition, the
committee must annually evaluate, and report to the company on timely basis to
enable the company to disclose under applicable SEC rules, whether or not at
least one committee member is an audit committee financial expert as defined in
the SEC rules.
A-1
Appointment. Subject to any requirements of the listing standards, the board may
appoint and remove committee members in accordance with the company's bylaws.
Committee members will serve for such terms as the board may fix, and in any
case at the board's will, whether or not a specific term is fixed.
INDEPENDENT AUDITORS AND THEIR SERVICES
Overall authority. The committee has the sole authority and direct
responsibility for the appointment, compensation, retention, termination,
evaluation and oversight of the work of the independent auditors engaged by the
company for the purpose of preparing or issuing an audit report or related work
or performing other audit, review or attest services for the company. The
independent auditors report directly to the committee. The committee's authority
includes resolution of disagreements between management and the auditors
regarding financial reporting and the receipt of communications from the
auditors as may be required under professional standards applicable to the
auditors.
Terms of audit and non-audit engagements. The committee must pre-approve all
audit, review, attest and permissible non-audit services (including any
permissible internal control-related services) to be provided to the company or
its subsidiaries by the independent auditors. The committee may establish
pre-approval policies and procedures in compliance with applicable SEC rules.
ANNUAL FINANCIAL REPORTING
As often and to the extent the committee deems necessary or appropriate, but at
least annually in connection with the audit of each fiscal year's financial
statements, the committee will:
1. Discuss financial statements and internal control reports with management.
Review and discuss with appropriate members of management and, if
appropriate, representatives of the independent auditors:
- the audited financial statements;
- related accounting and auditing principles and practices; and
- management's assessment of internal control over financial reporting
and the related report and attestation on internal control over
financial reporting to be included in the company's annual report on
Form 10-K (as and when these reports are required under SEC rules).
2. Critical accounting policy report. Timely request and receive from the
independent auditors (before the filing of any audit report) the report or
update required pursuant to applicable SEC rules, concerning:
- all critical accounting policies and practices to be used;
- all alternative treatments within generally accepted accounting
principles for policies and practices relating to material items
that have been discussed with company management, including
ramifications of the use of such alternative disclosures and
treatments and the treatment preferred by the independent auditors;
and
- other material written communications between the independent
auditors and company management, such as any management letter or
schedule of unadjusted differences.
3. SAS 61 review. Discuss with the independent auditors the matters required
to be discussed by Statement on Auditing Standards No. 61, including such
matters as:
A-2
- the quality and acceptability of the accounting principles applied
in the financial statements;
- new or changed accounting policies, the effect of regulatory and
accounting initiatives, and significant estimates, judgments,
uncertainties or unusual transactions;
- the selection, application and effects of critical accounting
policies and estimates applied by the company;
- issues raised by any "management" or "internal control" letter from
the auditors, problems or difficulties encountered in the audit
(including any restrictions on the scope of the work or on access to
requested information) and management's response to such problems or
difficulties, significant disagreements with management, or other
significant aspects of the audit; and
- any off-balance sheet transactions, and relationships with any
unconsolidated entities or any other persons, which may have a
material current or future effect on the financial condition or
results of the company and are required to be reported under SEC
rules.
4. MD&A. Review with appropriate members of management and the independent
auditors the intended disclosures under "Management's Discussion and
Analysis of Financial Condition and Results of Operations" to be included
in the company's annual report on Form 10-K.
5. ISB 1 disclosure. Receive from the independent auditors a formal written
statement of all relationships between the auditors and the company
consistent with Independence Standards Board Standard No. 1.
6. Auditor independence. Actively discuss with the independent auditors any
disclosed relationships or services that may impact their objectivity and
independence, and take any other appropriate action to oversee their
independence.
7. Recommend filing of audited financial statements. Recommend to the board
of directors whether the company's annual report on Form 10-K to be filed
with the SEC should include the audited financial statements.
QUARTERLY FINANCIAL REPORTING
The committee's quarterly review will normally include:
1. Quarterly review. Review and discuss the quarterly financial statements of
the company and the results of the independent auditors' review of these
financial statements with appropriate members of management and the
independent auditors.
2. Discussion of significant matters with management. Review and discuss with
company management and, if appropriate, the independent auditors,
significant matters relating to:
- the quality and acceptability of the accounting principles applied
in the financial statements;
- new or changed accounting policies, and significant estimates,
judgments, uncertainties or unusual transactions;
- the selection, application and effects of critical accounting
policies and estimates applied by the company; and
A-3
- any off-balance sheet transactions and relationships with any
unconsolidated entities or any other persons that may have a
material current or future effect on the financial condition or
results of the company and are required to be reported under SEC
rules.
3. MD&A. Review and discuss the company's disclosures under "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
to be included in the company's quarterly report on Form 10-Q with
appropriate members of management and the independent auditors.
A-4
EXHIBIT B
AGREEMENT AND PLAN OF RESTRUCTURING
This Agreement and Plan of Restructuring (this "Agreement") is entered
into this 11th day of May 2005 by and between Far East Energy Corporation, a
Nevada corporation (the "Company"), and Far East Energy (Bermuda), Ltd., a
Bermuda company ("FEEB").
WHEREAS, the Board of Directors of the Company (a) has unanimously
approved a restructuring plan, subject to the terms and conditions of this
Agreement, authorizing the Company to transfer to FEEB all or substantially all
of the Company's assets relating to its operations in The People's Republic of
China (the "PRC") and (b) has unanimously recommended approval of such
restructuring plan by, and directed that such restructuring plan be submitted to
a vote of, the stockholders of the Company;
WHEREAS, the Company and FEEB desire to enter into this Agreement to
establish such restructuring plan on the terms and subject to the conditions set
forth herein; and
WHEREAS, the Company and FEEB intend for the transactions consummated
pursuant to the restructuring plan to qualify, for U.S. federal income tax
purposes, as a nontaxable exchange and as a nontaxable reorganization under
Sections 351 and 368(a) of the Internal Revenue Code of 1986, as amended,
respectively.
NOW THEREFORE, in consideration of the premises and the mutual promises
herein made, the parties agree as follows:
1. DEFINITIONS.
For purposes of this Agreement, the following terms have the meanings
specified or referred to in this Section 1:
"Assigned Contracts" shall mean all contracts, commitments, agreements,
leases, subleases, and rights thereunder, including all working interests or
participation interests thereunder, and all guaranties and other similar
arrangements to which the Company is a party or the Company or its assets is
bound, in each case, which are used solely in connection with or benefiting
solely the Company's operations relating to the exploration, development and
production of coalbed methane gas in the PRC, including, but not limited to, the
Company's production sharing contract with CUCBM for its projects in Yunnan
Province, PRC, its production sharing contracts with CUCBM and Phillips China
Inc., a subsidiary of ConocoPhillips, Inc., for its projects in Shanxi Province,
PRC and the Company's farmout agreements and escrow agreement relating to its
projects in Shanxi Province, PRC.
"China Assets" shall mean all right, title and interest in and to the
following assets of the Company: (a) all of the Assigned Contracts; (b) all
transferable permits, licenses and authorizations used in or relating to the
exploration, development and production of coalbed methane gas in the PRC; (c)
all tangible assets relating to the Company's operations in the PRC; and (d) all
equity interests in Yunnan Huayi Eco-tech Consulting Co., Ltd.
"CUCBM" shall mean China United Coalbed Methane Co. Ltd.
"Closing" shall have the meaning defined in Section 3.2.
"Closing Date" shall mean the date and time as of which the Closing
actually takes place.
B-1
2. TRANSFER OF CHINA ASSETS.
2.1 CHINA ASSETS. Subject to the terms and conditions of this Agreement,
at the Closing, the Company agrees to transfer the China Assets to FEEB in
exchange solely for common shares of FEEB. FEEB hereby agrees to be bound by,
and assumes the payment, discharge, satisfaction and performance of, the
Assigned Contracts after the Closing Date (collectively, the "Assumed
Liabilities"). Notwithstanding the foregoing, the effectiveness of any such
contribution, transfer and assumption of the Assigned Contracts shall be subject
to the terms and conditions of Article 3. The Company will execute, acknowledge
(if appropriate), and deliver to FEEB, such instruments of transfer, conveyance,
and assignment and other documents necessary to transfer the China Assets to
FEEB in accordance with, and subject to the terms of this Agreement.
2.2 CONSENTS. To the extent that the transfer by the Company as
contemplated hereunder of any of the Assigned Contracts requires a consent of
any party or authority, and such consent has not been obtained prior to the
Closing Date, each such Assigned Contract shall be deemed to be transferred
pursuant to the provisions of this Agreement, without any further action
required on the part of the Company or FEEB, effective as of the date FEEB
receives notice from the Company of such consent. Effective as of such date,
FEEB shall assume all of the obligations and liabilities related to such
Assigned Contract. With respect to each such Assigned Contract, after the
Closing Date and until such consent is obtained, the Company shall continue as
either the prime or the nominal contracting party, but FEEB shall be the
beneficial owner, or be entitled to the benefits, of such Assigned Contract
after the Closing Date to the extent that the Company may transfer to FEEB such
beneficial ownership or benefits without violating the terms of such Assigned
Contract or applicable law, and FEEB agrees to perform at its sole expense all
of the obligations of the Company to be performed under such Assigned Contract
of which FEEB is the beneficial owner or is receiving the benefits.
2.3 NO ASSUMPTION OF LIABILITIES. Except for the Assumed Liabilities, FEEB
shall not assume or be responsible for any debts, liabilities, or obligations of
the Company, whether known or unknown, or absolute, contingent or otherwise
(including, but not limited to, any liabilities arising from any litigation
involving or related to the Company). All debts, liabilities, and obligations of
the Company shall continue after the Closing Date to be the debts, liabilities,
and obligations of the Company.
3. CONDITIONS PRECEDENT TO CLOSING; CLOSING.
3.1 CONDITIONS PRECEDENT TO CLOSING. The Company's obligation to transfer
the China Assets and FEEB's obligation to assume the Assumed Liabilities and to
take the other actions required by this Agreement are subject to the
satisfaction or waiver of the following conditions:
(a) Stockholder Approval. This Agreement and the transfer of the
China Assets contemplated by this Agreement shall have been approved and
adopted by the affirmative vote of the stockholders of the Company in
accordance with laws of the State of Nevada and the articles of
incorporation and amended and restated bylaws of the Company ("Stockholder
Approval").
(b) Governmental, Regulatory and Other Material Third-Party
Consents. All filings required to be made prior to the Closing with, and
all material consents, approvals, authorizations and clearances required
to be obtained prior to the Closing and necessary for the Company to
transfer the China Asset to FEEB and for FEEB to conduct its operations in
the PRC from, any court or governmental or regulatory authority or agency,
domestic or foreign, or other person in connection with the execution and
delivery of this Agreement and the consummation of the transactions
contemplated hereby, including from the Ministry of Commerce, CUCBM and
Phillips China Inc. will have been made or obtained (as the case may be).
(c) Tax Approvals and Clearances. The receipt of all applicable
national, provincial and local approvals, authorizations and clearances by
Chinese tax authorities favorable to the Company as
B-2
determined by the Board of Directors of the Company.
(d) No Injunctions or Restraints. No temporary restraining order,
preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition preventing
the consummation of the transactions contemplated by this Agreement or
subjecting the transfer of the China Assets under this Agreement to a
condition that the Board of Directors of the Company believes might have a
material adverse effect on the Company or the China Assets shall be in
effect.
(e) No Material Adverse Effect. No event that the Board of Directors
of the Company believes might have a material adverse effect on the China
Assets, the Company or the ability to consummate the transactions
contemplated by this Agreement shall have occurred.
3.2 CLOSING. The transfer of the China Assets (the "Closing") provided for
in this Agreement will not take place until all of the conditions contained in
Section 3.1 have been satisfied or waived. In the event that any of such
conditions are not satisfied or waived, the Board of Directors of the Company
may, in its sole discretion, pursuant to Section 4.1, terminate this Agreement.
4. TERMINATION, AMENDMENT AND WAIVER.
4.1 TERMINATION. This Agreement may be terminated at any time prior to the
Closing, whether before or after the Stockholder Approval, by action of the
Board of Directors of the Company.
4.2 EFFECT OF TERMINATION. In the event of termination of this Agreement
as provided in Section 4.1, this Agreement shall forthwith become void and have
no effect, without any liability or obligation on the part of the Company or
FEEB.
4.3 AMENDMENT. This Agreement may be amended by the parties at any time
before or after the Stockholder Approval; provided, however, that after any such
approval, there shall not be made any amendment without additional approval of
the Company's stockholders to the extent required under the laws of the State of
Nevada and the articles of incorporation and amended and restated bylaws of the
Company. This Agreement may not be amended except by an instrument in writing
signed on behalf of each of the Company and FEEB.
4.4 WAIVER. At any time prior to the Closing, the parties may waive
compliance by the other party with any of the agreements or conditions contained
in this Agreement. Any agreement on the part of a party to any such waiver shall
be valid only if set forth in an instrument in writing signed on behalf of such
party. The failure of any party to this Agreement to assert any of its rights
under this Agreement or otherwise shall not constitute a waiver of such rights.
4.5 PROCEDURE FOR TERMINATION, AMENDMENT, EXTENSION OR WAIVER. A
termination of this Agreement pursuant to Section 4.1, shall, in order to be
effective, require action by the Board of Directors of the Company. An amendment
of this Agreement pursuant to Section 4.3 shall, in order to be effective,
require action by the Boards of Directors of the Company and FEEB and, if
applicable, the approval of the stockholders of the Company. A waiver pursuant
to Section 4.4 shall, in order to be effective, require action by the Boards of
Directors of the Company and FEEB.
5. GENERAL PROVISIONS.
5.1 FURTHER ASSURANCES. The parties agree (a) to furnish upon request to
each other such further information, (b) to execute and deliver to each other
such other documents, and (c) to do such other acts and things, all as the other
party may reasonably request for the purpose of carrying out the intent of this
Agreement.
B-3
5.2 NO THIRD-PARTY RIGHTS. This Agreement will apply to, be binding in all
respects upon, and inure to the benefit of the successors and permitted assigns
of the parties. Nothing expressed or referred to in this Agreement will be
construed to give any person other than the parties to this Agreement any legal
or equitable right, remedy, or claim under or with respect to this Agreement or
any provision of this Agreement. This Agreement and all of its provisions and
conditions are for the sole and exclusive benefit of the parties to this
Agreement and their successors and assigns.
5.3 SECTION HEADINGS, CONSTRUCTION. The headings of Sections in this
Agreement are provided for convenience only and will not affect its construction
or interpretation. All references to "Section" or "Sections" refer to the
corresponding Section or Sections of this Agreement. All words used in this
Agreement will be construed to be of such gender or number as the circumstances
require. Unless otherwise expressly provided, the word "including" does not
limit the preceding words or terms.
5.4 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which will be deemed to be an original copy of this
Agreement and all of which, when taken together, will be deemed to constitute
one and the same agreement.
IN WITNESS WHEREOF, the parties have executed and delivered this Agreement
as of the date first written above.
FAR EAST ENERGY CORPORATION
By: /s/ Michael R. McElwrath
-----------------------------------------
Name: Michael R. McElwrath
---------------------------------------
Title: President and Chief Executive Officer
--------------------------------------
FAR EAST ENERGY (BERMUDA), LTD.
By: /s/ Bruce N. Huff
-----------------------------------------
Name: Bruce N. Huff
---------------------------------------
Title: Director
--------------------------------------
B-4
EXHIBIT C
FAR EAST ENERGY CORPORATION
2005 STOCK INCENTIVE PLAN
1. PURPOSE OF THE PLAN
The purpose of the Plan is to (i) aid the Company and its Subsidiaries and
Affiliates in attracting, securing and retaining employees of outstanding
ability, (ii) attract members to the Board, (iii) attract consultants to provide
services to the Company and its Subsidiaries and Affiliates, as needed, and (iv)
motivate such persons to exert their best efforts on behalf of the Company and
its Affiliates by providing incentives through the granting of Awards. The
Company expects that it will benefit from the added interest, which such persons
will have in the welfare of the Company as a result of their proprietary
interest in the Company's success.
2. DEFINITIONS
The following capitalized terms used in the Plan have the respective
meanings set forth in this Section:
(a) Act: The Securities Exchange Act of 1934, as amended, or any
successor thereto.
(b) Affiliate: Any entity (i) 20% or more of the voting equity of
which is owned or controlled directly or indirectly by the Company, or (ii) that
had been a business, division or subsidiary of the Company, the equity of which
has been distributed to the Company's stockholders, even if the Company
thereafter owns less than 20% of the voting equity.
(c) Award: An Option, Stock Appreciation Right or Other Stock-Based
Award granted pursuant to the Plan.
(d) Award Agreement: Any written agreement, contract, or other
instrument or document evidencing an Award.
(e) Beneficial Owner or Beneficially Owned: As such term is defined
in Rule 13d-3 under the Act (or any successor rule thereto).
(f) Board: The Board of Directors of the Company.
(g) Change of Control: The occurrence of any of the following
events:
(i) any Person becomes the Beneficial Owner, directly or
indirectly, of more than forty percent (40%) of the combined voting power
of the then-outstanding voting securities of the Company entitled to vote
generally in the election of directors (the "Outstanding Company Voting
Securities"); provided, however, that the following acquisitions shall not
constitute a Change of Control: (A) any acquisition by any employee
benefit plan (or related trust) sponsored or maintained by the Company or
any corporation controlled by the Company, or (B) any acquisition by an
entity pursuant to a reorganization, merger or consolidation, unless such
reorganization, merger or consolidation constitutes a Change of Control
under clause (ii) of this Section (2)(f);
(ii) the consummation of a reorganization, merger or
consolidation, unless following such reorganization, merger or
consolidation sixty percent (60%) or more of the combined voting power of
the then-outstanding voting securities of the entity resulting from such
reorganization, merger or consolidation entitled to vote generally in the
election of directors is then Beneficially Owned, directly or indirectly,
by all or substantially all of the individuals and entities who were the
C-1
Beneficial Owners, respectively, of the Outstanding Company Voting
Securities immediately prior to such reorganization, merger or
consolidation;
(iii) the (i) approval by the stockholders of the Company of a
complete liquidation or dissolution of the Company or (ii) sale or other
disposition (in one transaction or a series of related transactions) of
all or substantially all of the assets of the Company and its
Subsidiaries, unless the successor entity existing immediately after such
sale or disposition is then Beneficially Owned, directly or indirectly, by
all or substantially all of the individuals and entities who were the
Beneficial Owners, respectively, of the Outstanding Company Voting
Securities immediately prior to such sale or disposition;
(iv) during any period of twenty-four months (not including
any period prior to the Effective Date), individuals who at the beginning
of such period constitute the Board, and any new director (other than (A)
a director nominated by a Person who has entered into an agreement with
the Company to effect a transaction described in Sections 2(f)(i), (ii) or
(iii) of the Plan, (B) a director whose initial assumption of office
occurs as a result of either an actual or threatened election contest
subject to Rule 14a-11 of Regulation 14A promulgated under the Act or
other actual or threatened solicitation of proxies or consents by or on
behalf of a Person other than the Board or (C) a director designated by
any Person who is the Beneficial Owner, directly or indirectly, of
securities of the Company representing 10% or more of the Outstanding
Company Voting Securities) whose election by the Board or nomination for
election by the Company's stockholders was approved in advance by a vote
of at least two-thirds (2/3) of the directors then still in office who
either were directors at the beginning of the period or whose election or
nomination for election was previously so approved, cease for any reason
to constitute at least a majority thereof; or
(v) the Board adopts a resolution to the effect that, for
purposes hereof, a Change of Control has occurred.
Notwithstanding the foregoing, the definition of Change of Control for any Award
under the Plan that consists of deferred compensation subject to Section 409A of
the Code shall be deemed modified to the extent necessary to comply with Section
409A of the Code.
(h) Code: The Internal Revenue Code of 1986, as amended, or any
successor thereto.
(i) Committee: The Compensation Committee of the Board, or any
successor thereto or other committee designated by the Board to assume the
obligations of the Committee hereunder, or if no such committee shall be
designated or in office, the Board.
(j) Company: Far East Energy Corporation, a Nevada corporation.
(k) Covered Employee: An employee of the Company or its Subsidiaries
who may be deemed to be a covered employee within the meaning of Section 162(m)
of the Code.
(l) Disability: Inability to engage in any substantial gainful
activity by reason of a medically determinable physical or mental impairment
which can be expected to result in death, or can be expected to last for a
continuous period of not less than 12 months. The determination whether a
Participant has suffered a Disability shall be made by the Committee based upon
such evidence as it deems necessary and appropriate. A Participant shall not be
considered disabled unless he or she furnishes such medical or other evidence of
the existence of the Disability as the Committee, in its sole discretion, may
require.
(m) Effective Date: The date on which the Plan takes effect, as
defined pursuant to Section 25 of the Plan.
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(n) Fair Market Value: On a given date, the arithmetic mean of the
high and low prices of the Shares as reported on such date on the Composite Tape
of the principal national securities exchange on which such Shares are listed or
admitted to trading, or, if no Composite Tape exists for such national
securities exchange on such date, then on the principal national securities
exchange on which such Shares are listed or admitted to trading, or, if the
Shares are not listed or admitted on a national securities exchange, the
arithmetic mean of the per Share closing bid price and per Share closing asked
price on such date as quoted on the National Association of Securities Dealers
Automated Quotation System (or such market in which such prices are regularly
quoted), or, if there is no market on which the Shares are regularly quoted, the
Fair Market Value shall be the value established by the Committee in good faith.
If no sale of Shares shall have been reported on such Composite Tape or such
national securities exchange on such date or quoted on the National Association
of Securities Dealers Automated Quotation System on such date, then the
immediately preceding date on which sales of the Shares have been so reported or
quoted shall be used.
(o) ISO: An Option that is also an incentive stock option granted
pursuant to Section 7(d) of the Plan.
(p) LSAR: A limited stock appreciation right granted pursuant to
Section 8(d) of the Plan.
(q) Other Stock-Based Awards: Awards granted pursuant to Section 9
of the Plan.
(r) Option: A stock option granted pursuant to Section 7 of the
Plan.
(s) Option Price: The purchase price per Share of an Option, as
determined pursuant to Section 7(a) of the Plan.
(t) Participant: An individual who is selected by the Committee to
participate in the Plan pursuant to Section 5 of the Plan.
(u) Performance-Based Awards: Other Stock-Based Awards granted
pursuant to Section 9(b) of the Plan.
(v) Person: As such term is used for purposes of Section 13(d)(3) or
14(d)(2) of the Act (or any successor section thereto).
(w) Plan: The Far East Energy Corporation 2005 Stock Incentive Plan.
(x) Restricted Stock: Restricted stock granted pursuant to Section 9
of the Plan.
(y) Restricted Stock Unit: A restricted stock unit representing a
right to acquire a fixed number of Shares at a future date, granted pursuant to
Section 9 of the Plan.
(z) Securities Act: The Securities Act of 1933, as amended, or any
successor thereto.
(aa) Shares: Shares of common stock, par value $0.001 per Share, of
the Company, as adjusted pursuant to Section 10 of the Plan.
(bb) Stock Appreciation Right: A stock appreciation right granted
pursuant to Section 8 of the Plan.
(cc) Subsidiary: A subsidiary corporation, as defined in Section
424(f) of the Code (or any successor section thereto).
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(dd) Termination of Service: A Participant's termination of service
with the Company, its Subsidiaries and Affiliates. A Termination of Service of
an employee of the Company or any Subsidiary shall not be deemed to have
occurred in the case of sick leave, military leave or any other leave of
absence, in each case approved by the Committee or in the case of transfers
between locations of the Company or its Subsidiaries. In the case of "specified
employees" (as described in Section 409A of the Code), distributions may not be
made before the date which is six months after the date of termination of
service (or, if earlier, the date of death of the participant). A specified
employee is a "key employee" as defined in Section 416(i) of the Code without
regard to Paragraph (5), but only if the Company has any stock which is publicly
traded on an established securities market or otherwise.
3. SHARES SUBJECT TO THE PLAN
The maximum number of Shares with respect to which Awards may be granted
under the Plan shall be 3,500,000 (subject to adjustment in accordance with the
provisions of Section 10 hereof), whether pursuant to ISOs or otherwise. Of that
number, not more than 2,600,000 Shares (subject to adjustment in accordance with
the provisions of Section 10 hereof) will be available for grants under the Plan
of ISOs pursuant to Section 7(d) hereof, and not more than 900,000 Shares
(subject to adjustment in accordance with the provisions of Section 10 hereof)
will be available for grants under the Plan of unrestricted Shares, Restricted
Stock, Restricted Stock Units or any Other Stock-Based Awards pursuant to
Section 9 hereof. The maximum number of Shares with respect to which Awards of
any and all types may be granted during a calendar year to any Participant shall
be limited, in the aggregate, to 1,500,000 (subject to adjustment in accordance
with the provisions of Section 10 hereof). The Shares may consist, in whole or
in part, of authorized and unissued Shares or treasury Shares, including Shares
acquired by purchase in the open market or in private transactions. If any
Awards are forfeited, cancelled, terminated, exchanged or surrendered or such
Award is settled in cash or otherwise terminates without a distribution of
Shares to the Participant, any Shares counted against the number of Shares
reserved and available under the Plan with respect to such Award shall, to the
extent of any such forfeiture, settlement, termination, cancellation, exchange
or surrender, again be available for Awards under the Plan.
4. ADMINISTRATION
(a) The Plan shall be administered by the Committee, which may delegate
its duties and powers in whole or in part to any subcommittee thereof. If
necessary to satisfy the requirements of Section 162(m) of the Code and/or Rule
16b-3 promulgated under the Securities Exchange Act of 1934, the Committee shall
consist solely of at least two individuals who are each "non-employee directors"
within the meaning of Rule 16b-3 under the Act (or any successor rule thereto),
"outside directors" within the meaning of Section 162(m) of the Code (or any
successor section thereto) and satisfy all applicable independence requirements
set forth in any applicable stock exchange or market or quotation system in
which the Shares are then traded, listed or quoted. Any action permitted to be
taken by the Committee may be taken by the Board, in its discretion; provided
however that, to the extent required by any stock exchange or market or
quotation system on which the Shares are traded, listed or quoted, any Award
approved by the Board shall also have been approved by a majority of the
Company's independent directors (within the meaning of such exchange or market
or quotation system). The Committee may also delegate to a committee consisting
of employees of the Company the authority to authorize transfers, establish
terms and conditions upon which transfers may be made and establish classes of
options eligible to transfer options, as well as to make other determinations
with respect to option transfers.
(b) The Committee is authorized to interpret the Plan, to establish, amend
and rescind any rules and regulations relating to the Plan, to make any other
determinations that it deems necessary or desirable for the administration of
the Plan, and to take the following actions, in each case subject to and
consistent with the provisions of the Plan:
(i) to select Participants to whom Awards may be granted;
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(ii) to determine the type or types of Awards to be granted to each
Participant;
(iii) to determine the type and number of Awards to be granted, the
number of Shares to which an Award may relate, the terms and conditions of
any Award granted under the Plan (including, but not limited to, any
exercise price, grant price, or purchase price, and any bases for
adjusting such exercise, grant or purchase price, any restriction or
condition, any schedule for lapse of restrictions or conditions relating
to transferability or forfeiture, exercisability, or settlement of an
Award, and waiver or accelerations thereof, and waivers of performance
conditions relating to an Award, based in each case on such considerations
as the Committee shall determine), and all other matters to be determined
in connection with an Award;
(iv) to determine whether, to what extent, and under what
circumstances an Award may be settled, or the exercise price of an Award
may be paid, in cash, Shares, other Awards, or other property, or an Award
may be cancelled, forfeited, exchanged, or surrendered;
(v) to prescribe the form of each Award Agreement, which need not be
identical for each Participant;
(vi) to correct any defect or supply any omission or reconcile any
inconsistency in the Plan and to construe and interpret the Plan and any
Award, rules and regulations, Award Agreement, or other instrument
hereunder, in each case, in the manner and to the extent the Committee
deems necessary or desirable; and
(vii) to make all other decisions and determinations as may be
required under the terms of the Plan or as the Committee may deem
necessary or advisable for the administration of the Plan.
(c) Any decision of the Committee in the interpretation and administration
of the Plan, as described herein, shall lie within its sole and absolute
discretion and shall be final, conclusive and binding on all parties concerned
(including, but not limited to, Participants and their beneficiaries or
successors). Determinations made by the Committee under the Plan need not be
uniform and may be made selectively among Participants, whether or not such
Participants are similarly situated.
(d) The Committee shall require payment of any amount it may determine to
be necessary to withhold for federal, state, local or other taxes as a result of
the grant, vesting or the exercise of an Award. With the approval of the
Committee, the Participant may elect to pay a portion or all of such withholding
taxes by (i) delivery of Shares or (ii) having Shares withheld by the Company
from any Shares that would have otherwise been received by the Participant. The
number of Shares so delivered or withheld shall have an aggregate Fair Market
Value on the date of the exercise of an Award sufficient to satisfy the
applicable withholding taxes. In addition, with the approval of the Committee, a
Participant may satisfy any additional tax that the Participant elects to have
the Company withhold by delivering to the Company or its designated
representative Shares already owned by the Participant or, in the case of Shares
acquired through an employee benefit plan sponsored by the Company or its
Subsidiaries, Shares held by the Participant for more than six months.
(e) If the chief executive officer of the Company is a member of the
Board, the Board by specific resolution may constitute such chief executive
officer as a committee of one which shall have the authority to grant Awards of
up to an aggregate of 200,000 Shares (subject to adjustment in accordance with
the provisions of Section 10 hereof) in each calendar year to Participants who
are not subject to the rules promulgated under Section 16 of the Act (or any
successor section thereto) or Covered Employees; provided, however, that such
chief executive officer shall notify the Committee of any such grants made
pursuant to this Section 4.
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5. ELIGIBILITY
Employees of the Company, its Subsidiaries and Affiliates and members of
the Board, who are from time to time responsible for, or contributes to, the
management, growth and protection of the business of the Company and its
Affiliates, and consultants to the Company and its Subsidiaries, are eligible to
be granted Awards under the Plan. Participants shall be selected from time to
time by the Committee, in its sole discretion, from among those eligible, and
the Committee shall determine, in its sole discretion, the number of Shares to
be covered by the Awards granted to each Participant. Notwithstanding any
provisions of the Plan to the contrary, an Award may be granted to an employee
or consultant, in connection with his or her hiring or retention prior to the
date the employee or consultant first performs services for the Company or a
Subsidiary; provided, however, that any such Award shall not become vested prior
to the date the employee or consultant first performs such services.
6. LIMITATIONS
No Award may be granted under the Plan after the tenth anniversary of the
Effective Date, but Awards theretofore granted may extend beyond that date.
7. TERMS AND CONDITIONS OF OPTIONS
Options granted under the Plan shall be, as determined by the Committee,
non-qualified, incentive or other stock options for federal income tax purposes,
as evidenced by the related Award Agreements, and shall be subject to the
foregoing and the following terms and conditions and to such other terms and
conditions, not inconsistent therewith, as the Committee shall determine:
(a) Option Price. The Option Price per Share shall be determined by the
Committee, but shall not be less than 100% of the Fair Market Value of the
Shares on the date an Option is granted.
(b) Exercisability. Options granted under the Plan shall be exercisable at
such time and upon such terms and conditions as may be determined by the
Committee, but in no event shall an Option be exercisable more than ten years
after the date it is granted.
(c) Exercise of Options. Except as otherwise provided in the Plan or in an
Award Agreement, an Option may be exercised for all, or from time to time any
part, of the Shares for which it is then exercisable. For purposes of Section 7
of the Plan, the exercise date shall be the date the Company receives a written
notice of exercise in accordance with the terms of the Award Agreement and full
payment for the Shares with respect to which the Option is exercised, together
with (i) any other agreements required by the terms of the Plan and/or Award
Agreement or as required by the Committee, and (ii) payment by the Participant
of all payroll, withholding or income taxes incurred in connection with such
Option exercise (or arrangements for the collection or payment of such tax
satisfactory to the Committee are made). The purchase price for the Shares as to
which an Option is exercised shall be paid to the Company in full at the time of
exercise at the election of the Participant (A) in cash, (B) in Shares having a
Fair Market Value equal to the aggregate Option Price for the Shares being
purchased and satisfying such other requirements as may be imposed by the
Committee; provided, that, such Shares have been held by the Participant for no
less than six months, (C) partly in cash and partly in such Shares, (D) through
the delivery of irrevocable instructions to a broker to deliver promptly to the
Company an amount equal to the aggregate Option Price for the Shares being
purchased, or (E) through such other means as shall be prescribed in the Award
Agreement.
(d) ISOs. The Committee may grant Options under the Plan that are intended
to be ISOs. Such ISOs shall comply with the requirements of Section 422 of the
Code (or any successor section thereto). Unless otherwise permitted under
Section 422 of the Code (or any successor section thereto), no ISO may be
granted to any Participant who at the time of such grant, owns more than 10% of
the total combined voting power of all
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classes of stock of the Company or of any Subsidiary, unless (i) the Option
Price for such ISO is at least 110% of the Fair Market Value of a Share on the
date the ISO is granted and (ii) the date on which such ISO terminates is a date
not later than the day preceding the fifth anniversary of the date on which the
ISO is granted. Any Participant who disposes of Shares acquired upon the
exercise of an ISO either (i) within two years after the date of grant of such
ISO or (ii) within one year after the transfer of such Shares to the
Participant, shall notify the Company of such disposition and of the amount
realized upon such disposition. Notwithstanding Section 5 of the Plan, ISOs may
be granted solely to employees of the Company and its Subsidiaries.
(e) Exercisability Upon Termination of Service by Death or Disability.
Upon a Termination of Service by reason of death or Disability, the Option may
be exercised within 180 days (or such other period of time not exceeding one
year as is determined by the Committee at the time of granting the Option)
following the date of death or Termination of Service due to Disability (subject
to any earlier termination of the Option as provided by its terms), by the
Participant in the case of Disability, or in the case of death, by the
Participant's estate or by a person who acquired the right to exercise the
Option by bequest or inheritance, but in any case only to the extent the
Participant was entitled to exercise the Option on the date of his or her
Termination of Service by death or Disability. To the extent that he or she was
not entitled to exercise such Option at the date of his or her Termination of
Service by death or Disability, or if he or she doe not exercise such Option
(which he or she was entitled to exercise) within the time specified herein, the
Option shall terminate. Notwithstanding anything to the contrary herein, the
Committee may at any time and from time to time prior to the termination of an
Option, with the consent of the Participant, extend the period of time during
which the Participant may exercise his or her Option following the date of
Termination of Service due to death or Disability; provided, however, that the
maximum period of time during which an Option shall be exercisable following the
date of Termination of Service due to death or Disability shall not exceed the
original term of such Option as set forth in the Award Agreement and that
notwithstanding any extension of time during which an Option may be exercised,
such Option, unless otherwise amended by the Committee, shall only be
exercisable to the extent the Participant was entitled to exercise the Option on
the date of Termination of Service due to death or Disability. Any such
extension shall be designed to conform to the requirements of Section 409A of
the Code so as to avoid the imposition of the additional income tax.
(f) Effect of Other Termination of Service. Upon a Termination of Service
for any reason (other than death or Disability), an unexercised Option may
thereafter be exercised during the period ending 90 days after the date of such
Termination of Service, but only to the extent to which such Option was vested
and exercisable at the time of such Termination of Service. Notwithstanding the
foregoing, the Committee may, in its sole discretion, either by prior written
agreement with the Participant or upon the occurrence of a Termination of
Service, accelerate the vesting of unvested Options held by a Participant if
such Participant's Termination of Service is without "cause" (as such term is
defined by the Committee in its sole discretion) by the Company.
(g) Nontransferability of Stock Options. Except as otherwise provided in
this Section 7(g), an Option shall not be transferable by the Participant
otherwise than by will or by the laws of descent and distribution, and during
the lifetime of a Participant an Option shall be exercisable only by the
Participant. An Option exercisable after the death of a Participant or a
transferee pursuant to the following sentence may be exercised by the legatees,
personal representatives or distributees of the Participant or such transferee.
The Committee may, in its discretion, authorize all or a portion of the Options
previously granted or to be granted to a Participant, other than ISOs, to be on
terms which permit irrevocable transfer for no consideration by such Participant
to any child, stepchild, grandchild, parent, stepparent, grandparent, spouse,
former spouse, sibling, niece, nephew, mother-in-law, father-in-law, son-in-law,
daughter-in-law, brother-in-law or sister-in-law, including adoptive
relationships, of the Participant, any trust in which these persons have more
than 50% of the beneficial interest, any foundation in which these persons (or
the Participant) control the management of assets, and any other entity in which
these persons (or the Participant) own more than 50% of the voting interests
("Eligible Transferees"), provided that (i) the Award Agreement pursuant to
which such options are granted
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must be approved by the Committee, and must expressly provide for
transferability in a manner consistent with this Section 7(g) and (ii)
subsequent transfers of transferred Options shall be prohibited except those in
accordance with the first sentence of this Section 7(g). The Committee may, in
its discretion, amend the definition of Eligible Transferees to conform to the
coverage rules of Form S-8 under the Securities Act (or any comparable or
successor registration statement) from time to time in effect. Following
transfer, any such Options shall continue to be subject to the same terms and
conditions as were applicable immediately prior to transfer. The events of
Termination of Service of Sections 7(e) and 7(f) hereof shall continue to be
applied with respect to the original Participant, following which the options
shall be exercisable by the transferee only to the extent, and for the periods
specified, in Sections 7(e) and 7(f).
8. TERMS AND CONDITIONS OF STOCK APPRECIATION RIGHTS
(a) Grants. The Committee also may grant a Stock Appreciation Right,
independent of an Option, with respect to Shares that are traded or listed on an
established stock exchange or market or quotation system.
(b) Terms. The exercise price per Share of a Stock Appreciation Right
shall be an amount determined by the Committee but in no event shall such amount
be less than the greater of (i) the Fair Market Value of a Share on the date the
Stock Appreciation Right is granted and (ii) an amount permitted by applicable
laws, rules, by-laws or policies of regulatory authorities or stock exchanges or
market or quotation systems. Each Stock Appreciation Right granted independent
of an Option shall entitle a Participant to exercise the Stock Appreciation
Right in whole or in part and, upon such exercise, to receive from the Company
an amount equal to (i) the excess of (A) the Fair Market Value on the exercise
date of one Share over (B) the exercise price per Share, times (ii) the number
of Shares covered by the portion of the Stock Appreciation Right so exercised.
The date a notice of exercise is received by the Company shall be the exercise
date. Payment shall be made in Shares. Stock Appreciation Rights may be
exercised from time to time upon actual receipt by the Company of written notice
of exercise stating the number of Shares with respect to which the Stock
Appreciation Right is being exercised.
(c) Limitations. The Committee may impose, in its discretion, such
conditions upon the exercisability or transferability of Stock Appreciation
Rights as it may deem fit.
(d) Limited Stock Appreciation Rights. The Committee may grant LSARs that
are exercisable upon the occurrence of specified contingent events. Such LSARs
may provide for a different method of determining appreciation, may specify that
payment will be made only in cash as soon as practicable after the occurrence of
the specified contingent event (but not later than March 15 of the year
following the year in which such contingent event occurs) and may provide that
any related Awards are not exercisable while such LSARs are exercisable. Unless
the context otherwise requires, whenever the term "Stock Appreciation Right" is
used in the Plan, such term shall include LSARs.
9. OTHER STOCK-BASED AWARDS
(a) Generally. The Committee, in its sole discretion, may grant Awards of
unrestricted Shares, Restricted Stock, Restricted Stock Units and other Awards
that are valued in whole or in part by reference to, or are otherwise based on
the Fair Market Value of, Shares (collectively, "Other Stock-Based Awards").
Such Other Stock-Based Awards shall be in such form, and dependent on such
conditions, as the Committee shall determine, including, without limitation, the
right to receive one or more Shares (or the equivalent cash value of such
Shares) upon the completion of a specified period of service, the occurrence of
an event and/or the attainment of performance objectives. Other Stock-Based
Awards may be granted alone or in addition to any other Awards granted under the
Plan. Subject to the provisions of the Plan, the Committee shall determine (i)
to whom and when Other Stock-Based Awards will be made, (ii) the number of
Shares to be awarded under (or otherwise related to) such Other Stock-Based
Awards, (iii) whether such Other Stock-Based Awards shall be
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settled in cash, Shares or a combination of cash and Shares, and (iv) all other
terms and conditions of such Awards (including, without limitation, the vesting
provisions thereof).
(b) Performance-Based Awards. Notwithstanding anything to the contrary
herein, certain Other Stock-Based Awards granted under this Section 9 may be
granted to Covered Employees in a manner that will enable the Company to deduct
any amount paid by the Company under Section 162(m) of the Code (or any
successor section thereto) ("Performance-Based Awards"). A Covered Employee's
Performance-Based Award shall be determined based on the attainment of one or
more pre-established, objective performance goals established in writing by the
Committee, for a performance period established by the Committee, (i) at a time
when the outcome for that performance period is substantially uncertain and (ii)
not later than 90 days after the commencement of the performance period to which
the performance goal relates, but in no event after 25% of the relevant
performance period has elapsed. The performance goals shall be based upon one or
more of the following criteria: (i) earnings before or after taxes (including
earnings before interest, taxes, depreciation and amortization); (ii) net
income; (iii) operating income; (iv) earnings per Share; (v) book value per
Share; (vi) return on stockholders' equity; (vii) expense management; (viii)
return on investment before or after the cost of capital; (ix) improvements in
capital structure; (x) profitability of an identifiable business unit or
product; (xi) maintenance or improvement of profit margins; (xii) stock price;
(xiii) market share; (xiv) revenues or sales; (xv) costs; (xvi) cash flow;
(xvii) working capital; (xviii) changes in net assets (whether or not multiplied
by a constant percentage intended to represent the cost of capital); and (xix)
return on assets. The foregoing criteria may relate to the Company, one or more
of its Affiliates, Subsidiaries or one or more of its divisions, units, minority
investments, partnerships, joint ventures, product lines or products or any
combination of the foregoing, and may be applied on an absolute basis and/or be
relative to one or more peer group companies or indices, or any combination
thereof, all as the Committee shall determine. In addition, to the degree
consistent with Section 162(m) of the Code (or any successor section thereto),
the performance goals may be calculated without regard to extraordinary items or
accounting changes. The maximum amount of a Performance-Based Award to any
Covered Employee with respect to a fiscal year of the Company shall be
$1,000,000. The Committee shall determine whether, with respect to a performance
period, the applicable performance goals have been met with respect to a given
Covered Employee and, if they have, to so certify and ascertain the amount of
the applicable Performance-Based Award. No Performance-Based Awards will be paid
for such performance period until such certification is made by the Committee.
The amount of the Performance-Based Award actually paid to a given Covered
Employee may be less than the amount determined by the applicable performance
goal formula, at the discretion of the Committee. The amount of the
Performance-Based Award determined by the Committee for a performance period
shall be paid to the Covered Employee at such time as determined by the
Committee in its sole discretion after the end of such performance period;
provided, however, that a Covered Employee may, if and to the extent permitted
by the Committee and consistent with the provisions of Sections 162(m) and 409A
of the Code, elect to defer payment of a Performance-Based Award.
(c) Terms and Conditions of Restricted Stock and Restricted Stock Units.
(i) Grant. Each grant of Restricted Stock and Restricted Stock Units
shall be evidenced by an Award Agreement in form approved by the
Committee. The vesting of a Restricted Stock Award or Restricted Stock
Unit granted under the Plan may be conditioned upon the completion of a
specified period of employment with the Company or a Subsidiary, upon
attainment of specified performance goals, and/or upon such other criteria
as the Committee may determine in its sole discretion.
(ii) Receipt of Restricted Stock. As soon as practicable after an
Award of Restricted Stock has been made to a Participant, there shall be
registered in the name of such Participant or of a nominee the number of
Shares of Restricted Stock so awarded. Except as provided in the
applicable Award Agreement, no Shares of Restricted Stock may be assigned,
transferred or otherwise encumbered or disposed of by the Participant
until such Shares have vested in accordance with the
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terms of such Award Agreement. If and to the extent that the applicable
Award Agreement so provides, a Participant shall have the right to vote
and receive dividends on the Shares of Restricted Stock granted to him or
her under the Plan. Unless otherwise provided in the applicable Award
Agreement, any Shares received as a dividend on such Restricted Stock or
in connection with a stock split of the Shares of Restricted Stock shall
be subject to the same restrictions as the Restricted Stock.
(iii) Payments Pursuant to Restricted Stock Units. Restricted Stock
Units may not be assigned, transferred or otherwise encumbered or disposed
of by the Participant until such Restricted Stock Units have vested in
accordance with the terms of the applicable Award Agreement. Upon the
vesting of the Restricted Stock Unit, certificates for Shares shall be
delivered to the Participant or his legal representative on the last
business day of the calendar quarter in which such vesting event occurs or
as soon thereafter as practicable (but not later than March 15 of the
calendar year following the year in which vesting occurs), in a number
equal to the Shares covered by the Restricted Stock Unit.
(iv) Effect of Termination of Service. Upon a Termination of Service
for any reason, the Participant shall only be entitled to the Restricted
Stock or Restricted Stock Units vested at the time of such Termination of
Service, and the Participant's unvested Restricted Stock and Restricted
Stock Units shall be forfeited. Notwithstanding the foregoing, the
Committee may, in its sole discretion, either by prior written agreement
with the Participant or upon the occurrence of a Termination of Service,
accelerate the vesting of unvested Restricted Stock or Restricted Stock
Units held by the Participant if such Participant's Termination of Service
is without "cause" (as such term is defined by the Committee in its sole
discretion) by the Company.
10. ADJUSTMENTS UPON CERTAIN EVENTS
Notwithstanding any other provisions in the Plan to the contrary, the
following provisions shall apply to all Awards granted under the Plan:
(a) Generally. Subject to any required action by the stockholders of the
Company, the number and type of Shares covered by each outstanding Award, and
the number and type of Shares which have been authorized for issuance under the
Plan but as to which no Awards have yet been granted or which have been returned
to the Plan upon cancellation, expiration or forfeiture of an Award, as well as
the exercise or purchase price per Share, as applicable, covered by outstanding
Awards, shall be proportionately adjusted for any increase or decrease in the
number of issued Shares resulting from a stock split, reverse stock split or
combination or the payment of a stock dividend (but only on the Company's common
stock) or reclassification of the Company's common stock or any other increase
or decrease in the number of issued Shares effected without receipt of
consideration by the Company (other than increases pursuant to the issuance of
Other Stock-Based Awards under Section 9 of the Plan); provided, however, that
the conversion of any convertible securities of the Company shall not be deemed
to have been effected without the receipt of consideration. Any such adjustment
shall be determined in good faith by the Committee to be appropriate in order to
prevent dilution or enlargement of the benefits or potential benefits intended
to be made available under the Plan, and the Committee's determination in that
respect shall be final, binding and conclusive. Except as expressly provided
herein, no issue by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class, shall affect, and no adjustment
by reason thereof shall be made with respect to, the number or price of Shares
subject to the Plan or an Award.
(b) Change of Control. In the event of a Change of Control, if the
Committee makes no provision for the assumption of outstanding Awards by the
successor corporation, then the Award Agreement shall provide whether (i) none,
all or a portion of each Award shall vest, (ii) any Option shall terminate as of
a date fixed by the Committee which is at least 30 days after the notice thereof
to the Participant and shall give each Participant the right to exercise his or
her Option as to all or any part of the Shares, including Shares as to which the
Option would not otherwise be exercisable, or (iii) cause any Award outstanding
as of the effective
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date of any such event to be cancelled in consideration of a cash payment or
grant of an alternative option or award (whether by the Company or any entity
that is a party to the transaction), or a combination thereof, to the holder of
the cancelled Award, provided that such payment and/or grant are substantially
equivalent in value to the fair market value of the cancelled Award as
determined by the Committee.
11. "LOCKUP" AGREEMENT
The Committee may in its discretion specify upon granting an Award that
upon request of the Company or the underwriters managing any underwritten
offering of the Company's securities, the Participant shall agree in writing
that for a period of time (not to exceed 180 days) from the effective date of
any registration of securities of the Company, the Participant will not sell,
make any short sale of, loan, grant any option for the purchase of, or otherwise
dispose of any Shares issued pursuant to the exercise of such Award, without the
prior written consent of the Company or such underwriters, as the case may be.
12. LIMITATION OF LIABILITY
Each member of the Committee shall be entitled to, in good faith, rely or
act upon any report or other information furnished to him or her by any officer
or other employee of the Company or any Subsidiary or Affiliate, the Company's
independent certified public accountants, or other professional retained by the
Company to assist in the administration of the Plan. No member of the Committee,
nor any officer or employee of the Company acting on behalf of the Committee,
shall be personally liable for any action, determination, or interpretation
taken or made in good faith with respect to the Plan, and all members of the
Committee and any officer or employee of the Company acting on their behalf
shall, to the extent permitted by law, be fully indemnified and protected by the
Company with respect to any such action, determination, or interpretation.
13. AMENDMENTS OR TERMINATION
(a) The Board or the Committee may terminate or discontinue the Plan at
any time. The Board or the Committee may amend, modify or alter the Plan at any
time, but no amendment, modification or alteration shall be made which, (a)
without the approval of the stockholders of the Company, would (except as is
provided in Section 10 of the Plan), increase the total number of Shares
reserved for the purposes of the Plan, change the maximum number of Shares for
which Awards may be granted to any Participant or modify the Plan in any other
way to the extent stockholder approval is required by the rules of any stock
exchange or market or quotation system on which the Shares are traded, listed or
quoted, or (b) without the consent of a Participant, would impair any of the
rights or obligations under any Award theretofore granted to such Participant
under the Plan; provided, however, that the Board or the Committee may amend or
modify the Plan in such manner as it deems necessary to permit the granting of
Awards meeting the requirements of the Code (including, but not limited to,
Sections 162(m) to preserve the deductibility of Awards and 409A to comply with
its requirements so as to ensure any amounts paid or payable hereunder are not
subject to the additional 20% income tax thereunder) or other applicable laws.
Notwithstanding anything to the contrary herein, neither the Committee nor the
Board may amend, alter or discontinue the provisions relating to Section 10(b)
of the Plan after the occurrence of a Change of Control.
(b) Except as provided in Section 10 of the Plan or expressly provided
under the Plan, any amendment, modification, termination or discontinuance of
the Plan shall not affect Awards previously granted, and such Awards shall
remain in full force and effect as if the Plan had not been amended, modified,
terminated or discontinued, unless mutually agreed otherwise between the
Participant and the Company, which agreement shall be in writing and signed by
the Participant and the Company.
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14. INTERNATIONAL PARTICIPANTS
The Committee may delegate to another committee, as it may appoint, the
authority to take any action consistent with the terms of the Plan, either
before or after an Award has been granted, which such other committee deems
necessary or advisable to comply with any government laws or regulatory
requirements of a foreign country, including but not limited to, modifying or
amending the terms and conditions governing any Awards, or establishing any
local country plans as sub-plans to the Plan. In addition, under all
circumstances, the Committee may make non-substantive administrative changes to
the Plan as to conform with or take advantage of governmental requirements,
statutes or regulations.
15. NO RIGHT TO CONTINUED EMPLOYMENT OR SERVICE
Neither the Plan nor the granting of an Award under the Plan shall impose
any obligation on the Company, a Subsidiary or any Affiliate to continue the
employment or service of a Participant or lessen or affect the Company's,
Subsidiary's or Affiliate's right to terminate the employment or service of such
Participant.
16. NOT COMPENSATION FOR BENEFIT PLANS
No Award payable under the Plan shall be deemed salary or compensation for
the purpose of computing benefits under any benefit plan or other arrangement of
the Company for the benefit of its employees or directors unless the Company
shall determine otherwise.
17. UNFUNDED STATUS OF AWARDS
The Plan is intended to constitute an "unfunded" plan for incentive
compensation. With respect to any payments not yet made to a Participant
pursuant to an Award, nothing contained in the Plan or any Award shall give any
such Participant any rights that are greater than those of a general creditor of
the Company; provided, however, that the Committee may authorize the creation of
trusts or make other arrangements to meet the Company's obligations under the
Plan to deliver cash, Shares, other Awards, or other property pursuant to any
Award, which trusts or other arrangements shall be consistent with the
"unfunded" status of the Plan unless the Committee otherwise determines with the
consent of each affected Participant.
18. NONEXCLUSIVITY OF THE PLAN
Neither the adoption of the Plan by the Board nor its submission to the
stockholders of the Company for approval shall be construed as creating any
limitations on the power of the Board to adopt such other incentive arrangements
as it may deem desirable, including, without limitation, the granting of options
and other awards otherwise than under the Plan, and such arrangements may be
either applicable generally or only in specific cases.
19. SUCCESSORS AND ASSIGNS
The Plan shall be binding on all successors and assigns of the Company and
a Participant, including, without limitation, the estate of such Participant and
the executor, administrator or trustee of such estate, or any receiver or
trustee in bankruptcy or representative of the Participant's creditors.
20. NONTRANSFERABILITY OF AWARDS
Except as provided in Section 7(g) of the Plan, an Award shall not be
transferable or assignable by the Participant otherwise than by will or by the
laws of descent and distribution. During the lifetime of a Participant, an Award
shall be exercisable only by such Participant. An Award exercisable after the
death of a Participant may be exercised by the legatees, personal
representatives or distributees of the Participant.
C-12
Notwithstanding anything to the contrary herein, the Committee, in its sole
discretion, shall have the authority to waive this Section 20 or any part
thereof (except with respect to ISOs) to the extent that this Section 20 or any
part thereof is not required under the rules promulgated under any law, rule or
regulation applicable to the Company.
21. NO RIGHTS TO AWARDS, NO STOCKHOLDER RIGHTS
No Participant or employee shall have any claim to be granted any Award
under the Plan, and there is no obligation for uniformity of treatment of
Participants and employees. No Award shall confer on any Participant any rights
to dividends or other rights of a stockholder with respect to Shares subject to
an Award unless and until Shares are duly issued or transferred to the
Participant in accordance with the terms of the Award and, if applicable, the
satisfaction of any other conditions imposed by the Committee pursuant to the
Plan.
22. NO FRACTIONAL SHARES
No fractional Shares shall be issued or delivered pursuant to the Plan or
any Award, including on account of any action under Section 10 of the Plan. In
the case of Awards to Participants, the Committee shall determine, in its
discretion, whether cash, other Awards, scrip certificates (which shall be in a
form and have such terms and conditions as the Committee in its discretion shall
prescribe) or other property shall be issued or paid in lieu of such fractional
Shares or whether such fractional Shares or any rights thereto shall be
forfeited or otherwise eliminated.
23. COMPLIANCE WITH LEGAL AND TRADING REQUIREMENTS
The Plan, the granting and exercising of Awards thereunder, and the other
obligations of the Company under the Plan and any Award Agreement, shall be
subject to all applicable federal, state and foreign laws, rules and
regulations, and to such approvals by any regulatory or governmental agency as
may be required. All certificates for Shares delivered under the Plan pursuant
to any Award shall be subject to such stock-transfer orders and other
restrictions as the Committee may deem advisable under the rules, regulations
and other requirements of the Securities and Exchange Commission, any stock
exchange or market or quotation system upon which the Shares are then listed,
traded or quoted, and any applicable federal or state securities law, and the
Committee may cause a legend or legends to be put on any such certificates to
make appropriate reference to such restrictions. No Award granted hereunder
shall be construed as an offer to sell securities of the Company, and no such
offer shall be outstanding, unless and until the Committee in its sole
discretion has determined that any such offer, if made, would comply with all
applicable requirements of the U.S. federal securities laws and any other laws
to which such offer, if made, would be subject. The Company, in its discretion,
may postpone the issuance or delivery of Shares under any Award until completion
of such stock exchange or market or quotation system listing or registration or
qualification of such Shares or other required action under any state, federal
or foreign law, rule or regulation as the Company may consider appropriate,
including the Securities Act and the Act, and may require any Participant to
make such representations and furnish such information as it may consider
appropriate in connection with the issuance or delivery of Shares in compliance
with applicable laws, rules and regulations. No provisions of the Plan shall be
interpreted or construed to obligate the Company to register any Shares under
federal, state or foreign law.
24. SEVERABILITY
If any provision of the Plan is or becomes or is deemed invalid, illegal
or unenforceable in any jurisdiction, or would disqualify the Plan or any Award
under any law deemed applicable by the Committee, such provision shall be
construed or deemed amended to conform to applicable laws or if it cannot be
construed or deemed amended without, in the determination of the Committee,
materially altering the intent of the Plan, it shall be stricken and the
remainder of the Plan shall remain in full force and effect.
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25. CHOICE OF LAW
The Plan and all Award Agreements shall be governed by and construed in
accordance with the laws of the State of Texas applicable to contracts made and
to be performed in the State of Texas without regard to conflict of laws
principles.
26. CONFLICT
To the extent the provisions of the Plan conflicts with the terms and
conditions of any written agreement between the Company and a Participant, the
terms and conditions of such agreement shall control.
27. EFFECTIVENESS OF THE PLAN; TERM
The Plan shall be effective upon its approval by the stockholders at the
2005 Annual Meeting of stockholders of the Company. The Plan shall continue in
effect for a term of ten (10) years from the Effective Date unless sooner
terminated under Section 13 of the Plan.
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PROXY PROXY
FAR EAST ENERGY CORPORATION
ANNUAL MEETING OF STOCKHOLDERS -- MAY 27, 2005
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
The undersigned hereby (1) acknowledges receipt of the notice, dated May
12, 2005, of the Annual Meeting of Stockholders of Far East Energy Corporation
(herein called the "Company") to be held on Friday, May 27, 2005, at 10:00 a.m.,
local time, at the Company's offices, 400 Sam Houston Parkway East, Suite 205,
Houston, Texas 77060, and the Proxy Statement, also dated May 12, 2005, in
connection therewith, and (2) constitutes and appoints Michael R. McElwrath and
Bruce N. Huff, and each of them (if only one be present, then by that one
alone), his attorneys and proxies, with full power of substitution and
revocation to each, for and in the name, place and stead of the undersigned, to
vote, and act with respect to, all of the shares of common stock, par value
$0.001 per share, of the Company standing in the name of the undersigned or with
respect to which the undersigned is entitled to vote and act, at said meeting
and at any adjournment thereof. The Board of Directors of the Company recommends
a vote FOR election of its six nominees for directors and FOR Proposals 2 and 3
set forth on the reverse side.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL
BE VOTED FOR ALL NOMINEES LISTED IN PROPOSAL 1 AND FOR PROPOSALS 2 AND 3.
DISCRETION WILL BE USED WITH RESPECT TO SUCH OTHER MATTERS AS MAY PROPERLY COME
BEFORE THE MEETING OR AT ANY ADJOURNMENT THEREOF.
(CONTINUED AND TO BE SIGNED ON REVERSE SIDE.)
FAR EAST ENERGY CORPORATION
PLEASE MARK VOTE IN BOX IN THE FOLLOWING MANNER USING
DARK INK ONLY. [SOLID SQUARE BOX]
1. Election of Directors: For Withhold For All 3. Proposal to approve the For Against Abstain
Nominees: All All Except 2005 Stock Incentive Plan.
(1) John C. Mihm [ ] [ ] [ ] [ ] [ ] [ ]
(2) Michael R. McElwrath
(3) Donald A. Juckett
(4) Randall D. Keys
(5) Tim Whyte
(6) Thomas E. Williams
Instruction: To withhold authority to vote for any individual
nominee(s), mark "For All Except" and write the nominee(s)
name(s) on the line below.
2. Proposal to approve the For Against Abstain 4. In their discretion, the Proxies are authorized to
Restructuring Plan. [ ] [ ] [ ] vote upon such other business as may properly come
before the meeting.
MARK HERE FOR ADDRESS CHANGE AND NOTE BELOW AT LEFT [ ]
Date: __________________
_____________________________________________________________
_____________________________________________________________
Signature of Stockholder(s)
When shares are held by joint tenants, both should sign. When
signing as an agent, attorney, administrator, executor,
guardian or trustee, please give full title as such. If a
corporation, please sign in full corporate name by President
or other authorized officer who should indicate his title. If
a partnership, please sign in partnership name by authorized
person. Please date, sign and mail this proxy card in the
enclosed envelope. No postage is required if mailed in the
United States.
- FOLD AND DETACH HERE -
EVERY VOTE IS IMPORTANT.
PLEASE PROMPTLY COMPLETE, DATE, SIGN AND RETURN THIS PROXY USING THE
ENCLOSED ENVELOPE.