-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CeUA0f1i0o9yUgPeR1FMLCUUr5bFKmaSLeIvFEREtTo6CwAGqCJXCIWbI8W3CpTG e/dLCrXTvpw0w178zRmaaA== 0000944209-00-000881.txt : 20000516 0000944209-00-000881.hdr.sgml : 20000516 ACCESSION NUMBER: 0000944209-00-000881 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PINNACLE OIL INTERNATIONAL INC CENTRAL INDEX KEY: 0001009922 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 611126904 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-24027 FILM NUMBER: 634480 BUSINESS ADDRESS: STREET 1: 840 SEVENTH AVENUE SW STREET 2: SUITE 750 T2P 3G2 CITY: CALGARY ALBE T2P 3G2 STATE: A2 MAIL ADDRESS: STREET 1: 840 SEVENTH AVE SW STREET 2: SUITE 750 T2P 3G2 CITY: CALGARY ALBERTA STATE: A2 10-Q 1 FOR THE THREE-MONTH PERIOD ENDED MARCH 31, 2000 As filed with the Securities and Exchange Commission on May 15, 2000 ================================================================================ Securities And Exchange Commission Washington, D.C. 20549 ----------------- FORM 10-Q ----------------- (Mark One) [X] Quarterly Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange Act Of 1934 For The Three-Month Period Ended March 31, 2000; Or [_] Act Of 1934 For The Transition Period From ________ To _______ Commission File No. 0-24027 PINNACLE OIL INTERNATIONAL, INC. (Exact name of registrant as specified in its charter) Nevada 61-1126904 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Suite 750 Phoenix Place, 840-7th Avenue, S.W., Calgary, Alberta, Canada T2P 3G2 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (403) 264-7020 Indicate by check mark whether the registrant (1) has filed all Reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registration was required to file such Reports), and (2) has been subject to such filing requirements for the past 90 days: Yes [X] No [_] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 13,070,016 shares of common stock, par value $0.001 per share, as of May 12, 2000 ================================================================================ PINNACLE OIL INTERNATIONAL, INC. QUARTERLY REPORT ON FORM 10--Q TABLE OF CONTENTS
Page ---- PART I. FINANCIAL INFORMATION............................................ 1 ITEM 1. FINANCIAL STATEMENTS............................................. 1 Consolidated Balance sheets...................................... 1 Consolidated Statements Of Loss.................................. 2 Consolidated Statements Of Shareholders' Equity(Deficit)......... 3 Consolidated Statements Of Cash Flows............................ 5 Notes To Financial Statements.................................... 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............................................ 16 General.......................................................... 16 Overview......................................................... 16 Capital Requirements............................................. 18 Results Of Operations............................................ 19 Liquidity And Capital Resources.................................. 21 Other Matters.................................................... 22 Uncertainties And Other Factors That May Affect Our Future Results And Financial Condition.................................. 23 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK....... 34 Oil And Gas Price Fluctuations................................... 34 Currency Fluctuations............................................ 34 Interest Rate Fluctuations....................................... 35 ITEM II OTHER INFORMATION................................................ 35 ITEM 1. LEGAL PROCEEDINGS................................................ 35 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS........................ 35 ITEM 3. DEFAULTS UPON SENIOR SECURITIES.................................. 35 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............. 35 ITEM 5. OTHER INFORMATION................................................ 35 ITEM 6. EXHIBITS......................................................... 35 Exhibits......................................................... 35 Reports on Form 8--K............................................. 35
-ii- PART I. FINANCIAL INFORMATION Item 1. Financial Statements PINNACLE OIL INTERNATIONAL, INC. (A Development Stage Enterprise) Consolidated Balance sheets (Unaudited) (Expressed in U.S. Dollars) - --------------------------------------------------------------------------------
At March 31, ------------------------- Assets 2000 1999 ----------- ----------- Current assets: Cash and cash equivalents......................... $ 9,375,858 $ 4,410,835 Accounts receivable............................... 161,581 126,577 Due from officers and employees................... 176,611 -- Prepaid expenses and other........................ 60,440 116,041 ----------- ----------- Total current assets............................. 9,774,490 4,653,453 Note receivable from officer [note 4].............. 33,709 34,507 Unproved oil and natural gas properties [notes 2(g) and 5]................................ 1,106,687 -- Other property and equipment, net of accumulated depreciation and amortization of $365,959 and $133,357, respectively [notes 2(h) and 6]............................... 692,676 600,280 ----------- ----------- Total assets................................... $11,607,562 $ 5,288,240 =========== =========== Liabilities And Shareholders' Equity Current liabilities: Trade payables.................................... $ 52,617 $ 97,151 Wages and employee benefits payable............... 105,844 23,767 Accrued oil and natural gas property costs........ 188,840 -- Other accrued liabilities......................... 116 18,904 ----------- ----------- Total current liabilities........................ 347,417 139,822 Shareholders' equity: Series "A" convertible preferred stock; par value $0.001 per share, liquidation preference $7.50 per share: 800,000 shares authorized; and 800,000 shares issued as of March 31, 2000 and March 31, 1999 [note 8]........................ 800 800 Common stock, par value $0.001 per share: 50,000,000 shares authorized; 13,070,016 shares issued as of March 31, 2000; 12,431,983 shares issued as of March 31, 1999 [note 7]........................................ 13,070 12,432 Warrants [notes 8 and 9].......................... -- 1,132,000 Additional paid-in capital........................ 19,094,619 10,086,877 Deficit accumulated during the development stage.. (7,810,239) (6,083,691) Accumulated other comprehensive loss.............. (38,105) -- ----------- ----------- Total shareholders' equity....................... 11,260,145 5,148,418 ----------- ----------- Total liabilities and shareholders' equity..... $11,607,562 $ 5,288,240 =========== ===========
The accompanying notes to consolidated financial statements are an integral part of these consolidated balance sheets -1- PINNACLE OIL INTERNATIONAL, INC. (A Development Stage Enterprise) Consolidated Statements Of Loss (Unaudited) (Expressed in U.S. Dollars) - --------------------------------------------------------------------------------
October 20, 1995 (inception) to Three Months Ended March 31, March 31, 2000 2000 1999 (cumulative) ----------- ----------- -------------- Operating expenses: Administrative.............................................. $ 327,684 $ 196,870 $ 3,590,046 Amortization and depreciation [note 2(h)]................... 74,021 45,426 368,015 Research and development [note 2(i)]........................ 64,641 49,114 599,042 Survey support [note 2(j)].................................. 84,049 44,589 686,028 Survey operations and data analysis, net of amounts reimbursable by joint-venture partners of $20,278 and $24,447, respectively [note 2(k)].......................... 53,333 19,865 113,713 Write-down of assets........................................ -- -- 17,662 ----------- ----------- ----------- Total operating expenses.................................. (603,728) (355,864) (5,374,506) Operating loss............................................... (603,728) (355,864) (5,374,506) Other income (expense): Interest cost on promissory notes........................... -- -- (124,299) Interest income............................................. 112,830 50,856 736,260 Other income................................................ -- -- 19,231 Settlement of damages....................................... -- -- 157,500 ----------- ----------- ----------- Total other income (expenses)............................. 112,830 50,856 788,692 Net loss for the period...................................... (490,898) (305,008) (4,585,814) Other comprehensive income (loss): Foreign currency translation adjustments.................... (8,702) 17,720 (38,105) ----------- ----------- ----------- Comprehensive loss for the period............................ $ (499,600) $ (287,288) $(4,623,919) =========== =========== =========== Basic and diluted loss per share [note 2(m)]................. $ (0.04) $ (0.02) =========== =========== Weighted average shares outstanding.......................... 12,863,050 12,430,761 =========== ===========
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements of loss -2- PINNACLE OIL INTERNATIONAL, INC. (A Development Stage Enterprise) Consolidated Statements Of Shareholders' Equity(Deficit) (Unaudited) (Expressed in U.S. Dollars)
Accumulated Series "A" Deficit Other Convertible Common Stock Accumulated Compre- Common Stock Preferred Stock Warrants Additional During the hensive ------------------ --------------- ----------------- Paid-in Development Income Shares Amount Shares Amount Number Amount Capital Stage ---------- ---------- ------- ------- ------ ------- --------- ---------- ------------ 1995: Issued at inception for cash at $0.001 per share on October 20, 1995................. $ -- 5,000,000 $ 5,000 -- $ -- -- $ -- $ -- $ -- Net loss for fiscal 1995.......... -- -- -- -- -- -- -- -- (53,696) Net other comprehensive loss for fiscal 1995............. -- -- -- -- -- -- -- -- -- ---------- ---------- ------- ------- ------ ------- --------- ---------- ------------ Balance -- December 31, 1995... -- 5,000,000 5,000 -- -- -- -- -- (53,696) 1996: Issued on reverse acquisition on January 30, 1996.............. -- 5,968,281 5,968 -- -- -- -- (5,968) -- Issued for cash at $1 per share on May 29, 1996.................. -- 975,000 975 -- -- -- -- 967,775 -- Net loss for fiscal 1996.......... -- -- -- -- -- -- -- -- (475,578) Net other comprehensive loss for fiscal 1996...................... -- -- -- -- -- -- -- -- -- ---------- ---------- ------- ------- ------ ------- --------- ---------- ------------ Balance -- December 31, 1996... -- 11,943,281 11,943 -- -- -- -- 961,807 (529,274) 1997: Issued for services at $2.31 1/2 per share on July 1, 1997........ -- 71,938 72 -- -- -- -- 166,469 -- Net loss for fiscal 1997.......... -- -- -- -- -- -- -- -- (913,321) Net other comprehensive loss for fiscal 1997...................... -- -- -- -- -- -- -- -- -- ---------- ---------- ------- ------- ------ ------- --------- ---------- ------------ Balance -- December 31, 1997... -- 12,015,219 12,015 -- -- -- -- 1,128,276 (1,442,595) 1998: Issued on conversion of promissory notes at $2.72 per share on February 1, 1998 (1), net of issuance costs............ -- 411,764 412 -- -- -- -- 1,119,586 -- Issued for cash at $7.50 per share on April 3, 1998........... -- -- -- 800,000 800 -- -- 7,792,167 (2,104,000) Issued with series "A" preferred stock on April 3, 1998........... -- -- -- -- -- 200,000 1,132,000 -- (1,132,000) Net loss for fiscal 1998.......... -- -- -- -- -- -- -- -- (1,117,808) Net other comprehensive loss for fiscal 1998.................. -- -- -- -- -- -- -- -- -- ---------- ---------- ------- ------- ------ ------- ---------- ----------- ----------- Balance -- December 31, 1998... $ -- 12,426,983 $12,427 800,000 $ 800 200,000 $1,132,000 $10,040,031 $(5,796,403)
[continued on next page] -3- PINNACLE OIL INTERNATIONAL, INC. (A Development Stage Enterprise) Consolidated Statements Of Shareholders' Equity (Deficit) (Unaudited) (Expressed in U.S. Dollars)
Accumulated Series "A" Deficit Other Convertible Common Stock Accumulated Compre- Common Stock Preferred Stock Warrants Additional During the hensive ------------------ --------------- ----------------- Paid-in Development Income Shares Amount Shares Amount Number Amount Capital Stage ---------- ---------- ------- ------- ------ ------- --------- ---------- ----------- 1999: Issued for cash at $15 per share on May 17, 1999, net of issuance costs................. $ -- 400,000 $ 400 -- $ -- -- $ -- 5,998,252 -- Options exercised for cash at prices between $8.12 1/2 and $9.50 per share during 1999..... -- 35,000 35 -- -- -- -- 303,979 -- Cancelled on October 14, 1999.... -- (5,167) (5) -- -- -- -- (11,570) 11,575 Net loss for fiscal 1999......... -- -- -- -- -- -- -- -- (1,534,513) Net other comprehensive loss for fiscal 1999..................... (29,403) -- -- -- -- -- -- -- ---------- ---------- ------- ------- ------ ------- --------- ----------- ----------- Balance -- December 31, 1999..... (29,403) 12,856,816 12,857 800,000 800 200,000 1,132,000 16,330,692 (7,319,341) 2000: Warrants exercised for cash at $7.50 per share on March 31, 2000............................ -- 200,000 200 -- -- (200,000) (1,132,000) 2,631,800 -- Options exercised for cash at prices between $8.25 and $14.06 per share for the three-months ended March 31, 2000............................ -- 13,200 13 -- -- -- -- 132,127 -- Net loss for the three-months ended March 31, 2000............ -- -- -- -- -- -- -- -- (490,898) Net other comprehensive loss for the three-months ended March 31, 2000.................. (8,702) -- -- -- -- -- -- -- -- ---------- ---------- ------- ------- ------ ------- --------- ----------- ----------- Balance -- March 31, 2000..... $ (38,105) 13,070,016 $13,070 800,000 $ 800 -- -- $19,094,619 $(7,810,239) ========== ========== ======= ======= ====== ======= ========= =========== ===========
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements of shareholders' equity (deficit) -4- PINNACLE OIL INTERNATIONAL, INC. (A Development Stage Enterprise) Consolidated Statements Of Cash Flows (Unaudited) (Expressed in U.S. Dollars) - --------------------------------------------------------------------------------
Three Months Ended October 20, March 31, 1995 ------------------------- (inception) to March 31, 2000 2000 1999 (cumulative) ---------- ---------- -------------- Operating activities: Net loss for the period.............................................. $ (490,898) $ (305,008) $(4,585,814) Adjustments to reconcile net loss to net cash provided by operating activities: Amortization of property and equipment.............................. 74,021 45,426 368,015 Write-down of property and equipment................................ -- -- 17,662 Amortization of deferred costs...................................... -- 93,014 154,287 Changes in non-cash working capital: Accounts receivable................................................ (59,850) (6,477) (161,581) Due from officers and employees.................................... (173,392) 1,335 (176,611) Prepaid expenses................................................... 24,903 (88,710) (60,440) Trade payables..................................................... 19,901 (44,275) 52,617 Wages and employee benefits........................................ (26,841) 6,477 105,844 Accrued oil and natural gas property costs......................... (193,546) -- 188,840 Accrued liabilities................................................ (54,418) 270 116 Deferred financing for insurance premium........................... -- -- 7,766 Consulting costs settled by issuance of common stock............... -- -- 166,541 Interest costs settled by issuance of common stock................. -- -- 120,000 ---------- ---------- ----------- Net cash used in operating activities............................ (880,120) (297,948) (3,802,758) Financing activities: Funds borrowed from affiliates....................................... -- -- 1,100,000 Repayment of funds borrowed from affiliates.......................... -- -- (100,000) Funds raised through the sale of common stock, net of issuance costs............................................... -- -- 6,972,402 Funds raised through the sale of preferred stock and warrants, net of issuance costs................................................... -- -- 5,688,967 Funds raised through the exercise of options, net of issuance costs............................................... 132,140 46,851 436,119 Funds raised through the exercise of warrants, net of issuance costs............................................... 1,500,000 -- 1,500,000 Repayment of deferred financing for insurance premium................ -- -- (146,520) ---------- ---------- ----------- Net cash generated by financing activities....................... 1,632,140 46,851 15,450,968 Investing activities: Funds invested in property and equipment............................. (105,496) (70,516) (1,093,851) Funds Invested in oil and natural gas properties..................... (331,528) -- (1,106,687) Funds borrowed by an employee........................................ -- -- (35,760) Repayment of funds borrowed by an employee........................... 841 906 2,051 ---------- ---------- ----------- Net cash used in investing activities............................ (436,183) (69,610) (2,234,247) Effect of net other comprehensive income (loss)....................... (8,702) 17,720 (38,105) Net cash inflow (outflow)............................................. 307,135 (302,987) 9,375,858 Cash position, beginning of period.................................... 9,068,723 4,713,822 -- ---------- ---------- ----------- Cash position, end of period.......................................... $9,375,858 $4,410,835 $ 9,375,858 ========== ========== ===========
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements of cash flows -5- PINNACLE OIL INTERNATIONAL, INC. (A Development Stage Enterprise) Notes To Financial Statements (Unaudited) (Expressed in U.S. Dollars) - -------------------------------------------------------------------------------- 1. Organization And Operations (a) Our Company Pinnacle Oil International, Inc. ("we," "our company" or "Pinnacle"), a development stage enterprise, was incorporated under the laws of the State of Nevada on September 27, 1994, under the name "Auric Mining Corporation," and subsequently changed its name to Pinnacle Oil International, Inc. on February 23, 1996. We have two wholly owned subsidiaries, Pinnacle Oil Inc. ("Pinnacle U.S."), which was incorporated under the laws of the State of Nevada on October 20, 1995, and Pinnacle Oil Canada, Inc. ("Pinnacle Canada"), which was incorporated under the federal laws of Canada on April 1, 1997. (b) Our Business We are a technology-based reconnaissance exploration company which utilizes our proprietary stress field detection or "SFD" remote-sensing airborne survey technology, which we refer to as our "SFD Survey System," to quickly and inexpensively identify and high-grade oil and natural gas prospects. We conduct our reconnaissance exploration activities, as well as land acquisition, drilling, completion and production activities to exploit prospects identified using our SFD technology, through our two subsidiaries, Pinnacle U.S., which focuses on United States-based exploration, and Pinnacle Canada, which focuses on Canadian-based exploration. Pinnacle, in turn, focuses on research and development efforts to improve the efficacy of our SFD Survey System. Since we have not generated operating revenues to date, we should be considered a development stage enterprise. Although we have sufficient working capital as of March 31, 2000 to fund our current level of operations for several years assuming we make minimal investments in petroleum properties, our ability to continue as a going concern in the longer term will nevertheless be dependent upon our ability, either through our joint venture arrangements or for our own account, to successfully identify hydrocarbon bearing prospects, and to finance, develop, extract and market oil and natural gas from these prospects for a profit. We anticipate that we will continue to incur further operating losses until such time as we receive revenues from our joint venture partners with respect to prospects currently in the development stage, or through prospects we identify and exploit for our own account. 2. Significant Accounting Policies (a) Basis of Presentation We have prepared these consolidated financial statements in accordance with accounting principles generally accepted in the United States for interim financial reporting. While these financial statements reflect all normal recurring adjustments which are, in the opinion of management, necessary for fair presentation of the results of the interim period, they do not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements. For further information, refer to the financial statements included in our annual report on Form 10-K for the fiscal year ended December 31, 1999, as filed with the United States Securities and Exchange Commission on April 17, 2000. (b) Consolidation We have consolidated the accounts of our wholly owned subsidiaries with those of Pinnacle in the course of preparing these consolidated financial statements. All significant intercompany balances and transactions amongst Pinnacle and its subsidiaries have been eliminated as a -6- consequence of the consolidation process, and are therefore not reflected in these consolidated financial statements. (c) Reclassifications We have changed the manner of presentation in these consolidated financial statements and, as a consequence, have reclassified certain accounts and amounts reflected in our prior annual consolidated financial statements to conform to this change in presentation. (d) Estimates and assumptions The preparation of these consolidated financial statements in conformity with generally accepted accounting principles in the United States requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of these consolidated financial statements and the reported amount of revenues and expenses during the reporting periods. Actual results may differ from those estimates. (e) Cash and Cash Equivalents For purposes of preparing the consolidated balance sheets and statements of cash flows contained in these consolidated financial statements, we consider all investments with original maturities of ninety days or less to constitute "cash and cash equivalents." (f) Fair Value of Financial Instruments Our financial instruments consist of cash, accounts receivable, notes receivable, accounts payable and accrued liabilities. The fair value of these financial instruments approximates their carrying values on our consolidated financial statements due to their short-term to maturity and similarity to current market rates. It is the opinion of our management that we are not exposed to significant interest, currency or credit risks arising from these financial instruments. (g) Oil and Natural Gas Properties We follow the full cost method of accounting for oil and natural gas properties and equipment whereby we capitalize all costs relating to our acquisition of, exploration for and development of oil and natural gas reserves. These capitalized costs include: . land acquisition costs; . geological and geophysical costs; . costs of drilling both productive and non-productive wells, production equipment and related facilities; and . various costs associated with evaluating petroleum and natural gas properties for potential acquisition. Commencing upon production, these capitalized costs will also include SFD survey support and SFD survey operations and data analysis costs. See notes 2(j) and 2(k). We only capitalize overhead that is directly identified with acquisition, exploration or development activities. All costs related to production, general corporate overhead and similar activities are expensed as incurred. -7- Under the full cost method of accounting, capitalized costs are accumulated into cost centers on a country-by-country basis. These costs, plus a provision for future development costs (including estimated dismantlement, restoration and abandonment costs) of proved undeveloped reserves, are then depleted and depreciated using the unit-of-production method, based on estimated proved oil and gas reserves as determined by independent engineers where significant. For purposes of the depletion and depreciation calculation, proved oil and gas reserves are converted to a common unit of measure on the basis of their approximate relative energy content. In applying the full cost method of accounting, capital costs in each cost center less accumulated depletion and depreciation and related deferred income taxes are restricted from exceeding an amount equal to the sum of the present value of their related estimated future net revenues discounted at 10% less estimated future expenditures, and the lower of cost or estimated fair value of unproved properties included in the costs being amortized, net of related tax effects. Should this comparison indicate an excess carrying value, a write-down would be recorded. The carrying values of unproved properties, which are excluded from the depletion calculation, are assessed on a quarterly basis to ascertain whether any impairment in value has occurred. This assessment typically includes a determination of the anticipated future net cash flows based upon reserve potential and independent appraisal where warranted. Impairment is recorded if this assessment indicates the future potential net cash flows are less than the capitalized costs. All recoveries of costs through the sale or other disposition of oil and gas properties and equipment are accounted for as adjustments to capitalized costs, with no gain or loss recorded, unless the sale or disposition involves a significant change in the relationship between costs and the value of proved reserves or the underlying value of unproved property, in which case the gain or loss is computed and recognized. Our company conducts oil and natural gas exploration, drilling, development and production activities through our joint venture partners. These consolidated financial statements reflect only our proportionate interest in these activities. (h) Other Property and Equipment We carry our other capitalized property and equipment at cost. We depreciate or amortize our other capitalized property and equipment over their estimated service lives using the declining balance method as follows: Airplane.................................................... 15% Computer equipment.......................................... 30% Computer software........................................... 100% Equipment................................................... 20% Furniture and fixtures...................................... 20% Leasehold improvements...................................... 20% Tools....................................................... 20% Vehicles.................................................... 30% When we retire or otherwise dispose of our other capitalized property and equipment, we remove their cost and related accumulated depreciation or amortization from our accounts, and record any resulting gain or loss in the results of operations for the period. Our management periodically reviews the carrying value of our property and equipment to ensure that any permanent impairment in value is recognized and reflected in our results of operations. -8- (i) Research And Development Expenditures We expense all research and development expenditures we incur to develop, improve and test our SFD Survey System and related components, including allocable salaries. (j) Survey Support Expenditures We expense all survey support expenditures we incur, after netting costs which are reimbursable by our joint venture partners. Survey support expenditures consist primarily of the cost, including allocable salaries, to: . conduct field evaluations designed by our joint venture partners to evaluate the SFD Survey System (after netting costs which are reimbursable by our joint venture partners); and . develop, organize, staff and train our survey and interpretation operational functions. Although we currently expense our survey support expenditures, we will, in the future, commencing on the earliest date that any of our initial exploration wells commence production, capitalize and amortize these costs using the units of production method as a component of petroleum properties in accordance with the full cost method of accounting for oil and gas. (k) Survey Operations And Data Analysis Expenditures We expense all survey and data analysis costs we incur, after netting costs which are reimbursable by our joint venture partners. Survey and data analysis expenditures consist primarily of: . aircraft operating costs, travel expenses and allocable salaries of our personnel while on survey assignment (after netting costs which are reimbursable by our joint venture partners); and . allocable salaries of our personnel while interpreting SFD Data. Although we currently expense our survey and data analysis costs, we will, in the future, commencing on the earliest date that any of our initial exploration wells commence production, capitalize and amortize these costs using the units of production method as a component of petroleum properties in accordance with the full cost method of accounting for oil and gas. (l) Foreign Currency Translation We use the United States dollar as our reporting currency. With respect to our subsidiaries whose functional currency is in Canadian dollars, we use the following methodology to convert their Canadian dollar denominated accounts and transactions into U.S. dollars for consolidation purposes: . all asset and liability accounts are translated into U.S. dollars at the rate of exchange in effect as of the end of the applicable fiscal period; . all shareholders' equity accounts are translated into U.S. dollars using historical exchange rates; and . all revenue and expense accounts are translated into U.S. dollars at the average rate of exchange for the applicable fiscal period. -9- We record the cumulative gain or loss arising from the conversion of the noted Canadian dollar denominated accounts and transactions into U.S. dollars as a foreign currency translation adjustment as a component of accumulated other comprehensive income or loss for that period. (m) Basic And Diluted Loss Per Common Share Our basic loss per share is computed in accordance with Statement of Financial Accounting Standards No. 128, "Earnings Per Share," ("SFAS No. 128"), by dividing the net loss for the period attributable to holders of our common stock by the weighted average number of shares of our common stock outstanding for the period. Our diluted loss per share is computed, also in accordance with SFAS No. 128, by including the potential dilution that could occur if holders of our dilutive securities were to exercise or convert these securities into our common stock. In calculating our diluted loss per share, we take into consideration deemed distributions analogous to the declaration of a dividend attributable to the beneficial conversion features affording a discount or benefit to the holders of our securities. See note 8. (n) Stock-based compensation In accounting for our employee and director stock options, we have elected to follow Accounting Principles Board No. 25, "Accounting for Stock Issued to Employees," ("APB 25"), and related interpretations. Pursuant to APB 25, we have not recorded any compensation expense for any period in these consolidated financial statements insofar as the exercise price for all options we have granted to date to our employees and directors have equaled the market price of the underlying common shares on the effective date of grant. See note 10. (o) Recent pronouncements In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as subsequently amended by SFAS No. 137,which established accounting and reporting standards requiring that every derivative instrument, including certain derivative instruments embedded in other contracts, be recorded in the balance sheet as either an asset or liability measured at its fair value for fiscal quarters of fiscal years beginning after June 15, 2000. Our management has not had the opportunity to evaluate the impact of SFAS Nos. 133 and 137 on our consolidated financial position, results of operations or cash flows. 3. Reverse Acquisition We acquired what is now our wholly-owned subsidiary, Pinnacle U.S., on January 20, 1996, in a transaction accounted for as a "reverse acquisition." This acquisition was effected through the issuance of 10,090,675 common shares of our company (then known as Auric Mining Corporation), constituting approximately 92% of its outstanding shares at that date, in exchange for all of the outstanding shares of Pinnacle U.S. As a result of the application of the noted accounting principles governing reverse acquisitions, Pinnacle U.S. (and not Auric Mining Corporation) was treated as the "acquiring" or "continuing" entity for financial accounting purposes. We have accounted for the Pinnacle U.S. acquisition as an issuance of stock by Pinnacle U.S. in exchange for the tangible net assets of Auric Mining Corporation, valued at fair value, which approximate historical costs. As a result, our consolidated statements of loss and shareholders' equity (deficit) included in these consolidated financial statements are deemed to be a continuation of Pinnacle U.S.'s financial statements, and therefore reflect: . Pinnacle U.S.'s operations from the date of its formation (October 20, 1995) through the effective date of the reverse acquisition (January 20, 1996); and -10- . our consolidated operations after the effective date of the reverse acquisition (January 20, 1996). 4. Note Receivable From Officer In September 1998, we loaned the sum of Cdn. $54,756 (U.S. $35,760 as of that date) to one of our officers in connection with his relocation to Calgary, Alberta. Pursuant to the terms of an underlying promissory note, the officer is required to repay the loan on a monthly basis, with a balloon payment due on October 3, 2003. The amount of the monthly payments is calculated on the basis of a 300-month amortization rate, principal plus interest, using a variable interest rate computed at our cost of funds, which we define as our floating interest rate for liquid investments (presently 5 1/2%). 5. Oil And Natural Gas Properties Summarized below are the oil and natural gas property costs we capitalized for our three-month interim periods ended March 31, 2000 and March 31, 1999 and as of March 31, 2000:
Three Months Ended March 31, As of ------------------------ March 31, 2000 1999 2000 --------- --------- ---------- Acquisition costs......... $ 6,263 $ -- $ 410,848 Exploration costs......... 325,265 -- 695,839 Development costs......... -- -- Capitalized interest...... -- -- -------- --------- ---------- $331,528 $ -- $1,106,687 ======== ========= ==========
Since all of our oil and gas properties as of March 31, 2000 were either not yet producing or still in the drilling stage, we have classified all of these properties as unproved properties. Consequently, we did not record any depletion to date for these properties for the three-month interim period ended March 31, 2000. Following the close of our three-month interim period ended March 31, 2000, our management performed a property assessment with respect to each of our unproved properties as of March 31, 2000 to determine if any of these properties had been subject to any impairment in value, and concluded that no impairment had occurred. This assessment included a determination of the future production potential based upon SFD data, seismic data and exploration results. Our company is currently conducting active exploration and development programs with respect to each of these unproved oil and gas properties, and we anticipate that all of these properties will be evaluated and the associated costs transferred into the amortization base or impaired over the next five years. 6. Other Property And Equipment Summarized below are our capitalized costs for other property and equipment as of March 31, 2000 and March 31, 1999: -11-
March 31, ------------------------- 2000 1999 ----------- --------- Airplane........................................ $ 269,724 $ 238,653 Computer equipment.............................. 200,158 91,981 Computer software............................... 85,366 14,695 Equipment....................................... 74,860 40,888 Furniture and fixtures.......................... 165,568 122,381 Leasehold improvements.......................... 103,048 105,376 SFD Survey System (including software).......... 95,721 54,710 Tools........................................... 1,696 2,459 Vehicle......................................... 62,494 62,494 ----------- --------- Property and equipment........................ 1,058,635 733,637 Less accumulated depreciation and amortization.. (365,959) (133,357) ----------- --------- Net property and equipment.................... $ 692,676 $ 600,280 =========== =========
7. Common Stock On January 31, 1997, two of our executive officer-directors at that time each loaned our company the sum of $500,000, for total loan proceeds of $1,000,000. These loans were extended by these officer-directors pursuant to unsecured, convertible promissory notes due January 31, 1998, together with interest accrued at a rate of 12% per annum. Each promissory note contained identical conversion provisions pursuant to which: . each officer-director could elect to convert any or all of the outstanding balance of his loan into common stock based upon a ratio of one share per $4.07 in converted principal and interest at any time; and . our company could convert any or all of the outstanding balance of either loan into common stock based upon a ratio of one share per $2.72 in converted principal and interest should we be unable to repay that amount by the January 31, 1998 due date. We exercised our right to convert the notes into 411,764 shares of common stock on February 1, 1998, in satisfaction of $1,200,000 in aggregate principal and accrued interest which became due on January 31, 1998. On May 17, 1999, we raised $6,000,000 in gross proceeds through a private placement of 400,000 shares of our common stock at $15 per share. Net proceeds to our company from this offering were $5,998,652, after deducting $1,348 in offering expenses. During 1999, we raised $303,979 in gross proceeds through our employees' exercise of incentive stock options entitling them to purchase 35,000 shares of our common stock at exercise prices between $8.12 1/2 and $9.50 per share. On March 31, 2000, the holder of warrants to purchase 200,000 shares of our common stock at an exercise price of $7.50 per share exercised these warrants, resulting in gross proceeds to our company of $1,500,000. See note 8. During the three-month interim period ended March 31, 2000, we raised $138,740 in gross proceeds through our employees' exercise of incentive stock options entitling them to purchase 13,200 shares of our common stock at exercise prices between $8.25 and $14.06 per share. -12- 8. Preferred Stock And Warrants On April 3, 1998, we completed a series of transactions pursuant to which: . Pinnacle U.S. entered into a joint venture agreement, and . we concurrently raised $6,000,000 in gross proceeds from an affiliate of the joint venture partner through the private placement to that party of 800,000 shares of our series "A" convertible preferred stock, and warrants to purchase 200,000 shares of our common stock at an exercise price of $7.50 per share. The net proceeds of this private placement were $5,688,867, after deducting $311,833 in offering expenses, including the cost of becoming a reporting company with the Securities and Exchange Commission. Each share of preferred stock is convertible into one common share at the election of the holder, and carries a $7.50 liquidation preference should our company wind-up and dissolve. We have reserved the right to redeem the preferred stock at a price of $7.50 per share if it has not been converted into common stock by April 3, 2000, and the holder forgoes a final opportunity to exercise his conversion rights to avoid redemption. The preferred shares are not entitled to payment of any dividends, although they are entitled under certain circumstances to participate in dividends on the same basis as if converted into common shares. Each warrant carried a $7.50 per share exercise price, and lapsed to the extent not exercised by April 3, 2000. All of the warrants were exercised on March 31, 2000. See note 7. Insofar as the preferred shares and warrants contained beneficial conversion features affording a discount or benefit to the purchaser of these securities, we recorded a deemed distribution analogous to the declaration of a dividend to that purchaser. This deemed distribution resulted in: . An increase in additional paid-in capital in the amount of $2,104,000 to record the intrinsic value of the beneficial conversion feature of the preferred shares, i.e., the discount in the purchase price of these securities relative to the public trading price as of the date of issuance of the underlying common shares into which these preferred shares could be converted, without adjustment for discounts or restrictions. . A newly created warrant capital account to record the fair value of the warrants in the amount of $1,132,000, including the value of their beneficial conversion feature, as determined by the Black-Scholes method of valuation. This amount was subsequently reclassified to additional paid-in capital upon the exercise of the warrants. . A counterbalancing charge against our accumulated deficit capital account in the amount of $3,236,000. We also made appropriate adjustment for the deemed distribution in calculating our basic loss per common share. See note 2(m). 9. Performance Warrants On August 1, 1996, we granted a performance-based contractual right to be granted warrants to the licensor of our SFD technology, Momentum Resources Corporation, in connection with the amendment of our exclusive SFD technology license with Momentum to use the SFD technology for hydrocarbon exploration. The primary purpose of the amendment was to indefinitely extend the termination date of the license. Pursuant to this contractual right, Momentum is entitled to a separate grant of warrants entitling it to purchase 16,000 shares of our common stock at the then current trading price for each month after December 31, 2000 in which production from SFD-identified prospects during that month exceeds 20,000 barrels of hydrocarbons. Momentum has not earned any warrants under the SFD technology license as of March 31, 2000. -13- 10. Options Through March 31, 2000, we have granted options to selected employees and directors of our company pursuant to the following separate arrangements or plans (the "Plans"): . Separate free-standing directors options which we granted to selected directors as compensation for serving on our Board of Directors; . The 1997 Pinnacle Oil International, Inc. Stock Plan, pursuant to which 1,000,000 shares of our common stock were reserved for issuance to employees, directors and consultants in the form of stock options or outright stock grants; . The 1999 Pinnacle Oil International, Inc. Executive Option Plan, pursuant to which 1,000,000 shares of our common stock were reserved for issuance to executive officers in the form of stock options; and . The 2000 Pinnacle Oil International, Inc. Directors' Option Plan, pursuant to which 400,000 shares of our common stock were reserved for issuance to executive officers in the form of stock options. During the three-month interim period ended March 31, 2000, 95,000 options with an average weighted exercise price of $29.96 were granted under the Plans, 13,200 previously-granted options under the Plans with an average weighted exercise price of $10.01 were exercised, and 16,000 previously- granted options under the Plans with an average weighted exercise price of $14.06 lapsed. We have summarized below all outstanding options under the Plans as of March 31, 2000:
Grant Exercise March 31, 2000 -------------------------------- Type of Option Date Price Outstanding Vested ------------------------------- -------------- --------------- -------------- ------------- Director Non-qualified......... 5-12-97 $ 5.81 75,000 75,000 Director Non-qualified......... 5-20-97 5.25 90,000 90,000 Employee Incentive............. 11-24-97 9.50 37,500 7,500 Director Non-qualified......... 3-10-98 8.31 45,000 45,000 Employee Incentive............. 5-12-98 8.25 30,800 10,800 Employee Incentive............. 8-24-98 8.25 132,500 10,000 Employee Incentive............. 10-1-98 8.12 1/2 20,000 -- Employee Non-qualified......... 5-1-99 14.00 1,016,670 -- Employee Incentive............. 5-1-99 15.00 33,330 -- Employee Incentive............. 5-12-99 17.00 20,000 -- Employee Incentive............. 9-21-99 13.62 1/2 100,000 -- Employee Incentive............. 11-16-99 14.12 1/2 85,000 -- Director Non-qualified......... 2-15-00 28.75 75,000 -- Employee Incentive............. 3-20-00 34.50 20,000 -- -------------- ------------- 1,780,800 238,300 ============== =============
The director options granted before December 31, 1999 that are outstanding as of March 31, 2000 vest one-third on date of grant, and an additional one-third each on the first anniversary and second anniversaries of the grant date, respectively, based upon the continued provision of services as a director. The director options granted after December 31, 1999 that are outstanding as of March 31, 2000 vest one-third each on the first through third anniversaries of the grant date, respectively, based upon the continued provision of services as a director. The employee options outstanding as of March 31, 2000 vest over three to five years from the grant date, depending upon the recipient, based upon the continued provision of services as an employee. Both the director and employee options generally lapse, if unexercised, five years from the date of vesting. -14- 11. Commitments At March 31, 2000, we had entered into joint venture agreements with two separate oil and gas exploration companies. We are required under these joint venture agreements to conduct SFD surveys to identify oil and natural gas prospective prospects on selected exploration areas of up to 2,400 square miles, and our joint venture partners are required to drill each SFD-identified prospect they accept under their respective agreement. We may elect under each of these joint venture agreements to receive one of the two following payment streams for each SFD-identified prospect accepted and drilled by the joint venture partner: . A capital investment and generally risk-free overriding royalty of 5% to 8% of oil or natural gas revenues received by the joint venture partner with respect to the prospect; or . A working interest of up to 45% of the joint venture partner's revenues with respect to the prospect. In any situation where we elect to participate on a working interest basis, we must bear our share of mineral and drilling right acquisition (if necessary), drilling, completion and production costs incurred with respect to the prospect based upon our elected working interest percentage. Although we will bear our share of these costs, our joint venture partner will nevertheless remain responsible for conducting and managing all drilling, production and marketing activities to exploit the prospect. On November 25, 1997, we entered into a five-year non-cancelable operating lease for our principal executive offices. This lease, which consists 13,325 rentable square feet as of March 31, 2000, expires on January 21, 2003. Our combined obligations for base lease payments and building operating cost and other pass-through items as of March 31, 2000 was Cdn. $21,418 per month, which translates into U.S. $14,777 per month based upon the closing conversion rate as of March 31, 2000. 12. Subsequent Events (a) Other Property and Equipment (see note 6) On May 4, 2000, we completed our acquisition of a Piaggio P180 Avanti aircraft for a purchase price of $2,790,000. (b) Options (see note 10) On April 17, 2000, we granted 30,000 non-qualified options under the 2000 Pinnacle Oil International, Inc. Directors' Stock Plan to each of our five outside independent directors as additional compensation for their services as members of our Board of Directors for the next three years. The purchase price for these options were fixed at $26.25 per share, reflecting the closing trading price of our common stock as of the date of grant. These options vest in equal increments on the first through third anniversary dates of the date of grant, respectively, based upon continued provision of services as a director, and lapse, if unexercised, five years after the vesting date, unless the optionee's status as a director is terminated, in which case they lapse two years from date of vesting. -15- Item 2. Management's Discussion And Analysis Of Financial Condition And Results Of Operations General The following discussion of our consolidated financial condition and the results of operations should be read in conjunction with our consolidated financial statements and the notes to our consolidated financial statements included in Part I, Item 1, of this report. The information set forth below in this report is current as of the date of this report, May 12, 2000, unless an earlier or later date is indicated. All references to "dollars" in this report refer to United States, or U.S., dollars unless specific reference is made to Canadian, or Cdn., dollars. For information relative to currency conversion, see note 2(l) to our consolidated financial statements. The rate of exchange of Canadian dollars to United States dollars as of March 31, 2000, was Cdn. $1.4494 to U.S. $1. Overview Pinnacle Oil International, Inc. ("we," "our company" or "Pinnacle") is a technology-based reconnaissance exploration company which utilizes our proprietary, quantum physics-based, stress field detection or "SFD" remote- sensing airborne survey technology, which we refer to as our "SFD Survey System," to quickly and inexpensively identify and high-grade oil and natural gas prospects. We are a publicly traded company whose common stock trades over- the-counter on the NASD Electronic Bulletin Board under the symbol "PSFD." Our principal executive offices are located at Suite 750, Phoenix Place, 840 7th Avenue S.W., Calgary, Alberta, Canada T2P 3G2, and our telephone number is (403) 264-7020. We use our SFD technology to survey or reconnoiter large exploration areas from our survey aircraft at speeds in excess of 150 mph to identify and "high-grade" leads for further evaluation and potential drilling. Our SFD technology is a recently developed technology which we adapted for airborne survey operations, and field tested for independent geologists and our joint venture partners, in 1996 and 1997. We commenced SFD survey activities on a full commercial basis for our joint venture partners in early 1998. Our SFD technology affords us the relatively inexpensive ability to obtain near real-time analysis and interpretation of potential hydrocarbon accumulations in a matter of days or weeks, as compared to months and in some cases years in the case of the seismic methods currently employed by the oil and gas exploration industry for wide area exploration or reconnaissance. These cost and time advantages will ultimately enable us to effectuate potentially significant reductions in oil and gas exploration "finding costs." Finding costs include the cumulative costs of acquiring seismic, purchasing mineral rights, and drilling and completing exploration wells. The ability to reduce finding costs is an extremely important financial factor in the oil and gas industry, insofar as low finding costs represent a measure of an oil and gas company's ability to effectively and efficiently find new reserves, as well as generate cash flow. We conduct our reconnaissance exploration activities, as well as land acquisition, drilling, completion and production activities to exploit prospects identified using our SFD technology, through our two wholly-owned operating subsidiaries. Our first subsidiary, Pinnacle U.S., focuses on United States- based exploration. Our second subsidiary, Pinnacle Oil Canada, Inc., whom we refer to as "Pinnacle Canada," focuses on Canadian-based exploration. Pinnacle, in turn, concentrates on research and development efforts to improve the efficacy of our SFD Survey System. Our United States exploration efforts to date have been focused on the Greater Green River Basin in Wyoming and the Williston Basin in North Dakota. These exploration activities have been conducted under a joint exploration and development agreement with CamWest Exploration LLC, a Colorado-based exploration company. Under this agreement we conduct aerial surveys to identify prospects in exploration areas in the United States selected by CamWest. Our Canadian exploration efforts to date have been focused on southern Alberta, northeastern British Columbia, southwestern Saskatchewan and Newfoundland. The majority of these exploration activities -16- have been conducted under an exploration joint venture agreement with Encal Energy Ltd., a Calgary-based exploration and production company. Under this agreement we conduct aerial surveys to identify prospects in exploration areas in Canada selected by Encal. We have also recently commenced conducting exploration activities in western Canada for our own account. We anticipate developing these prospects through a joint venture with either Encal or another Canadian exploration company. The joint venture agreements we have entered into with our joint venture partners generally entitle us to elect to receive one of the two following payment streams for each SFD-identified prospect accepted and drilled under the applicable agreement: . a capital investment and generally risk-free overriding royalty of 5% to 8% of oil or natural gas revenues received by the joint venture partner with respect to the prospect. In any situation where we elect to receive this royalty, our joint venture partner will be responsible, at its own cost and risk, to acquire the necessary drilling rights for the prospect if it has not already done so, and to conduct all drilling, production and marketing activities necessary to exploit the prospect. . a working interest of up to 45% of the joint venture partner's revenues with respect to the prospect. In any situation where we elect to participate on a working interest basis, we must bear our share of the mineral rights and drilling acquisition (if necessary), drilling and production costs incurred with respect to the prospect based upon our working interest percentage. Although we will bear our share of these costs, our joint venture partner will nevertheless remain responsible for conducting and managing all drilling, production and marketing activities to exploit the prospect. Our U.S. joint venture partner is also required under the terms of its joint venture agreement to reimburse us for 100% of the expenses we incur in conducting aerial surveys for that partner, while our Canadian joint venture partner is required under the terms of its joint venture agreement to reimburse us for 50% of the expenses we incur in conducting aerial surveys for that partner. Our recent practice with our joint venture partners has been to participate in selected prospects on a combination working interest/overriding royalty interest basis, typically a 22 1/2% working interest and a 4% overriding royalty. The status of our current activities as of March 31, 2000 and the date of this report is as follows: . One exploration well spudded in September 1999 by at third-party operator at our Leucite Hills South prospect in Wyoming, was drilled, cased and completed in September 1999 as a natural gas discovery. This well will not be placed into production by the operator, however, until a sufficient number of additional wells are drilled on the exploratory block and can be tied into a gathering system. Pinnacle U.S. elected a combination working interest and overriding royalty interest with respect to this prospect. Pinnacle U.S. anticipates that CamWest, as operator, will spud a step-out exploratory well on this prospect by the end of June 2000. . One exploration well spudded by CamWest in October 1999 at our Poblano prospect in Wyoming, was drilled, cased and completed in January 2000 as a natural gas discovery, and production will commence upon completion of a twelve-mile pipeline that will tie the well into a sales system. CamWest spudded a step-out exploratory well on this prospect in March 2000, which is in the process of being logged in anticipation of completion activities as of the date of this report. Pinnacle U.S. elected a combination working interest and overriding royalty interest with respect to this prospect. Pinnacle U.S. anticipates that CamWest will spud a second step-out exploratory well on this prospect by the end of June 2000, -17- . One exploration well spudded by at third-party operator in October 1999 at our Poblano South prospect in Wyoming, was drilled, cased and completed in January 2000. This well has been shut-in by the operator pending further evaluation of its completion program. Pinnacle U.S. elected a combination working interest and overriding royalty interest with respect to this prospect. . One exploration well spudded in December 1999 in southern Alberta by Encal at our Carbon prospect in southern Alberta, was drilled, cased and completed in January 2000 as a natural gas discovery. This well is currently suspended pending completion activities by the operator. Pinnacle Canada elected an overriding royalty interest with respect to this prospect. . One exploration well spudded in March 2000 by Encal at our Monarch prospect in southern Alberta. This well is cased and is in the process of being completed. Pinnacle Canada elected a combination working interest and overriding royalty interest with respect to this prospect. In addition to the two wells scheduled for spudding note above, we anticipate that at least one additional exploration well will be spudded on other prospects by our joint venture partners or third-party operators by the end of June 30, 2000. Our rights to use our SFD technology arises from an SFD technology license which we acquired from the owner and licensor of that technology, Momentum Resources Corporation, pursuant to which we received the exclusive world-wide right to use the SFD technology for hydrocarbon exploration purposes. We are obligated under the terms of that license to pay Momentum Resources Corporation a fee equal to 1% of any "prospect profits" (as that term is defined in the license) which we may receive on or before December 31, 2000, and 5% of any prospect profits which we may receive after December 31, 2000. Momentum is controlled and indirectly owned by our two largest stockholders, Messrs. George Liszicasz and R. Dirk Stinson. Each of these stockholders currently serve as our directors, and Mr. Liszicasz currently serves as one of our executive officers. Since we have not generated operating revenues to date, we should be considered a development stage enterprise. Capital Requirements We have not generated operating revenues to date, although we have one completed well at our Poblano Prospect which we anticipate will commence production as soon as a twelve-mile pipeline is completed which will connect the prospect to a sales system. We anticipate the pipeline will be laid upon completion of our second step-out exploration well in our Poblano prospects. Assuming no unforeseen delays or changes in production plans, we anticipate that production will commence in our third quarter in fiscal 2000. We are also drilling several additional exploratory wells in fiscal 2000, including the noted step-out exploratory wells, which should add to any revenues we generate. Absent revenues, our sole source of cash to fund our operational and capital investment needs are monies we have raised through the private placement of our securities and exercise of employee options. For further information regarding these transactions, see "--Liquidity And Capital Resources--Sources Of Cash" below. We have budgeted the following level of expenditures over the twelve-month period ended March 31, 2001: . Approximately $2,500,000 for continuing operations including SFD research and development activities; and . Up to $3,000,000 in capital expenditures to invest in working interests with our joint venture partners or acquire drilling interests for our own account, although the overall amount of these capital -18- expenditures may be significantly reduced or increased depending upon the success of drilling efforts over the next six to twelve months. After taking into consideration the $9,427,073 in working capital we had available as of March 31, 2000, we have sufficient working capital on hand to fund our current level of operations, including research and development but excluding capital investments in working interests beyond that amount budgeted for the next twelve months as described above, through early--2002. Our ability in the longer term to continue as a going concern will be dependent upon our ability to either: . raise additional capital through private or public placements of our securities, or . our receipt of meaningful amounts of revenues from our joint venture partners or through our own exploration efforts, which, in either case, will be dependent upon successful exploration and production activities. We cannot give you any assurance that any SFD Prospect that is drilled will ultimately produce commercially viable quantities of oil or gas. We also cannot give you any assurance that our strategic partners will drill any planned exploratory well on any accepted SFD Prospects at all or by projected drilling dates due to the various factors that may affect the drilling process, including the perceived economics of drilling at any time, the ability of the strategic partner to obtain drilling rights (where necessary) on favorable terms or at all, and the ability of the strategic partner to timely schedule a drilling rig and other drilling services. See "Uncertainties And Other Factors That May Affect Our Future Results And Financial Condition--Uncertainties And Risk Factors Generally Relating To Our Company And Our Business," generally, and "-- We Are Reliant Upon Our Joint Venture Partners For Opportunities To Participate In Exploration Projects" and "--Our Revenues And Cash Flow Will Be Principally Dependent Upon The Success Of Drilling And Production From Prospects In Which We Participate Through Agreements With Our Joint Venture Partners," particularly. For additional and more detailed information relating to our company and our business, please see our annual report on Form 10--K for our fiscal year ended December 31, 1999. Results Of Operations Operating Revenues We had no oil and gas working interest or royalty revenues for our three-month interim fiscal periods ended March 31, 2000 and March 31, 1999. Operating Loss We incurred an operating loss of $603,728 for the first three months of fiscal 2000, as compared to $355,864 for the first three months of fiscal 1999, representing a $247,864, or 69.7%, overall increase. The 69.7% increase in our operating loss for the first three months of fiscal 2000 over the first three months of fiscal 1999 was primarily attributable to the following changes in costs and expenses: . a $130,814, or 66.5%, increase in administrative expense from $196,870 to $327,684; . a $39,460, or 88.5%, increase in survey support expense from $44,589 to $84,049; . a $33,468, or 168.5%, increase in survey operations and data analysis expense from $19,865 to $53,333;. . a $28,595, or 63.0%, increase in amortization and depreciation from $45,426 to $74,021; and -19- . a $15,527, or 31.6%, increase in research and development expense from $49,114 to $64,641. Relative Changes In Administrative Expense The $130,814 increase in administrative expense for the first three months of fiscal 2000 over the first three months of fiscal 1999 was primarily attributable to across-the-board net increases in costs to support our increased level of business activities for the first three months of fiscal 2000, the most significant of which were increases of $73,773 in wages and benefits and payments to consultants. Relative Changes In Survey Support Expense Survey support expense generally relates to the cost--including allocable salaries--to: . conduct field evaluations designed by our joint venture partners to evaluate our SFD technology (after netting any costs which our joint venture partners are required to reimburse us for); and . develop, organize, staff and train our survey and interpretation operational functions. The $39,460 increase in survey support expense for the first three months of fiscal 2000 over the first three months of fiscal 1999 was primarily attributable to across-the-board net increases in costs to support our increased level of survey operations and data analysis, the most significant of which were $34,944 in increased salaries associated with additional support staffing, partially offset by a decrease of $18,372 in additional aircraft improvement expenses. Relative Changes In Survey Operations And Data Analysis Expense Survey and data analysis expenditures consist primarily of any costs we incur conducting commercial SFD survey activities. These costs can be generally broken down into the following two components: . aircraft operating costs, travel expenses and allocable salaries of our personnel while on survey assignment (after netting any costs our joint venture partners are required to reimburse us for); and . allocable salaries incurred by our personnel interpreting SFD Data. Our total survey and data analysis expense, before taking any joint venture partner reimbursement into account, was $73,611 for the first three months of fiscal 2000, as compared to $44,312 for the first three months of fiscal 1999. The increase in total survey and data analysis expense was primarily attributable increased salaries associated with additional support staffing. Our net survey and data analysis expense--after taking into consideration joint venture partner reimbursements of $20,278 and $24,447 for the first three months of fiscal 2000 and 1999, respectively--was $53,333 for the first three months of fiscal 2000 as compared to $19,865 for the first three months of fiscal 1999. Relative Changes In Amortization and Depreciation The $28,595 increase in amortization and depreciation for the first three months of fiscal 2000 over the first three months of fiscal 1999 was primarily attributable to addition depreciation and amortization arising in connection with our acquisition of additional computer equipment and software. Relative Changes In Research and Development Expense Research and development expense generally relates to the cost--including allocable salaries--to develop, improve and test our SFD Survey System and related components. The $15,527 increase in research and development expense for the first three months of fiscal 2000 over the first three months of -20- fiscal 1999 was principally attributable to salaries associated with additional research and development staffing as we focused increased efforts to improve the operation and efficacy of our SFD Survey System. Expectations Relative To Future Expense Levels We effectively doubled our company staff for the first three months of fiscal 2000 as compared to the first three months of fiscal 1999 through the hiring of key professionals, including executive, geological, geophysical, scientific, information technology and aviation personnel, and we anticipate that we will continue to hire similar personnel over the pending fiscal year. We anticipate that our total operating expenses will continue to significantly increase on a quarterly basis through the end of fiscal 2000 as a result of the additional wages and employee benefits to be paid to any additional personnel we may hire as well as an increased level of operations which will be facilitated by recent and anticipated hirings. Other Income And Expense . Interest Income We earned $112,830 in interest income for the first three months of fiscal 2000, as compared to $50,856 for the first three months of fiscal 1999. The increase in interest income for fiscal 2000 was attributable to higher cash balances in our accounts as a result of a $6,000,000 private placement of our common stock in May 1999. Liquidity And Capital Resources . Sources of Cash Our cash flow requirements from our inception as Pinnacle U.S. (October 20, 1995) through March 31, 2000 were funded principally from: o a private placement in May 1996 of 975,000 shares of our common stock for total gross proceeds of $975,000, o loans to our company by Messrs. Liszicasz and Stinson in the amount of $1,000,000 in January 1997, and the subsequent conversion of the outstanding balance of principal and accrued interest of these loans in the amount of $1,120,000 into 411,764 shares of our common stock in February 1998; o a private placement in April 1998 of 800,000 shares of our convertible series "A" preferred stock and 200,000 common stock purchase warrants for total gross proceeds of $6,000,000; o a private placement in May 1999 of 400,000 shares of our common stock for total gross proceeds of $6,000,000; o the exercise of employee stock options during fiscal 1999 and the first three months of fiscal 2000, resulting in gross proceeds to our company of $442,754; and o the exercise on March 31, 2000 on warrants to purchase 200,000 shares of our common stock at an exercise price of $7.50 per share, resulting in gross proceeds to our company of $1,500,000. . Cash Position and Sources And Uses Of Cash Our cash position as of March 31, 2000 was $9,375,858, as compared to $9,068,723 as of December 31, 1999. Our cash position as of March 31, 1999 was $4,410,835, as compared to -21- $4,713,822 as of December 31, 1998. The bulk of our cash is maintained in a United States government and government-backed securities money-market account. The $307,135 increase in our cash position as of March 31, 2000 as compared to December 31, 1999 was attributable to $1,632,140 in cash raised through financing activities, partially offset by $880,120 in cash used in operating activities, $436,183 in cash used in investing activities, and a $8,702 comprehensive loss due to the effect of exchange rate changes. The $302,987 decrease in our cash position as of March 31, 1999 as compared to December 31, 1998 was attributable to $297,948 in cash used in operating activities and $69,610 in cash used in investing activities, partially offset by $46,851 in cash raised through financing activities and a $17,720 comprehensive gain due to the effect of exchange rate changes. Our operating activities required cash in the amount of $880,120 for the first three months of fiscal 2000, as compared to cash requirements of $297,948 for the first three months of fiscal 1999. The $880,120 in cash used in operating activities for the first three months of fiscal 2000 reflected our net loss of $490,898 for that period, as decreased for non- cash deductions and a net increase in non-cash working capital balances. The $297,948 in cash used in operating activities for the first three months of fiscal 1999 reflected our net loss of $305,008 for that period, as decreased for non-cash deductions and a net increase in non-cash working capital balances. We raised $1,632,140 in cash from financing activities for the first three months of fiscal 2000, as compared to $46,851 in cash raised from financing activities for the first three months of fiscal 1999. The $1,632,140 in cash raised through financing activities for the first three months of fiscal 2000 was comprised of $1,500,000 in gross proceeds from the exercise of warrants and $132,140 in gross proceeds from the exercise of employee stock options. The $46,851 in cash raised through financing activities for the first three months of fiscal 2000 consisted of the gross proceeds from the exercise of employee stock options We used cash in the amount of $436,183 for investing activities for the first three months of fiscal 2000, as compared to $69,610 in cash used for investing activities for the first three months of fiscal 1999. The principal use of cash for the first three months of fiscal 2000 was to acquire drilling rights in exploratory blocks pursuant to working interest elections ($331,528) and to acquire property, equipment and computer software ($105,496). The principal use of cash for the first three months of fiscal 1999 was to acquire property, equipment and computer software ($70,516). Other Matters Foreign Exchange Fluctuations We recorded a $8,702 foreign currency translation loss for the first three months of fiscal 2000 as a comprehensive loss item on our statements of loss and stockholders' equity (deficit) in consolidating our books for financial reporting purposes as a result of the fluctuation in United States--Canadian currency exchange rates during that period. We anticipate that our exposure to significant foreign currency gains or losses on our books will increase as we invest a greater portion of our United States-dollar denominated cash reserves into our Canadian operations and properties through intercompany advancements. We cannot give you any assurance that our future operating results will not be similarly adversely affected by currency exchange rate fluctuations. See Part I, Item 3, of this report captioned "Quantitative and Qualitative Disclosure About Market Risk," for a description of other aspects of our company that may be potentially affected by foreign exchange fluctuations. Effect Of Inflation We do not believe that our operating results were adversely affected during the first three months of fiscal 2000 or fiscal 1999 by inflation or changing prices. -22- Year 2000 Compliance During fiscal 1999 we reviewed our internal computer systems and software products for Year 2000 problems, and found them to be generally Year 2000 compliant, and have had no Year 2000 complications as of the date of this report. Uncertainties And Other Factors That May Affect Our Future Results And Financial Condition Readers are urged to carefully review and consider the various uncertainties and risks which, in addition to uncertainties and risks presented elsewhere in this report, may affect our future results of operations or financial condition and an investment in our securities. These uncertainties and risks should also be considered in context with the various disclosures concerning our company and our business and uncertainties and risks that may affect our future results of operations or financial condition made in other reports we periodically file with the Securities and Exchange Commission, including the following fillings which we incorporate by reference into this report: . our annual report on Form 10-K for the fiscal year ended December 31, 1999, . any quarterly reports on Form 10-Q we may filed during the remainder of fiscal 2000, and . any current reports on Form 8-K we may file. Uncertainties and Risk Factors Generally Relating To Our Company And Our Business . We Are A Development Stage Enterprise Which Has Accumulated Losses Since Our Inception, And We Anticipate That We Will Continue To Incur Operating Losses For The Near Future We are a developmental stage enterprise since we have not received any oil or gas revenues to date, and have, as a consequence of our lack of revenues, incurred a cumulative net loss (before comprehensive losses) in the amount of $4,585,814 from our inception in October 1995 through March 31, 2000. Our ability to generate revenues and profits will depend primarily upon the successful implementation of our business plan, which is dependent at this point in time upon one or more of our joint venture partners successfully drilling and producing commercially viable quantities of oil or natural gas from SFD Prospects we identify. We do not anticipate that we will receive any oil or gas revenues until the third quarter of fiscal 2000, at the earliest, assuming our current contemplated drilling program is successful and there are no complications in drilling or completing the wells or tying them into a sales or gathering system. We anticipate that we will continue to incur significant losses on a month-to- month basis for at least twelve to eighteen months going forward from the date of this report, notwithstanding our receipt of oil and gas revenues based upon our internal projections, due to our significant monthly operating and research and development costs. . Our Limited Operating History Could Adversely Affect Our Business We are a recently organized development stage enterprise with an unproven technology and a limited operating history. Our activities through the date of this report have encompassed: o developing our business plan; o obtaining license rights to our SFD technologies; o establishing administrative offices and laboratory facilities, and engaging executive, administrative, scientific, geological, geophysical, scientific, information technology and aviation personnel; -23- o developing our SFD technology to a commercial stage; o acquiring joint venture partners; o conducting commercial SFD surveys on behalf of our joint venture partners; and o successfully drilling oil and gas wells identified through our SFD technology. We are subject to all the risks and issues inherent in the establishment and expansion of a new business enterprise including, among others, problems of using new and unproven technologies, hiring and training personnel, acquiring reliable facilities and equipment, and implementing operational controls. In general, startup businesses are subject to risks and or levels of risk that are often greater than those encountered by companies with established operations and relationships. Startups often require significant capital from sources other than operations. The management and employees of startup business shoulder the burdens of the business operations and a workload associated with company growth and capitalization that is disproportionately greater than that for an established business. Our limited operating history makes it difficult, if not impossible, to predict future operating results. We cannot give you any assurance that we will successfully address these risks. Our failure to successfully address these risks could have a material, adverse effect on our business, financial condition and operating results. . Our Future Success Is Dependent Upon Our Ability, Through Utilization Of Our SFD Technology, To Locate Commercially Viable Hydrocarbon Accumulations For Development By Our Joint Venture Partners. Our future success is dependent upon our ability, through utilization of our SFD technology, to locate commercially viable hydrocarbon accumulations for development by our joint venture partners. Based on our business plan, we will be dependent on: o the efficacy of our SFD technology in locating SFD Prospects; and o the cooperation of, and capital investment by, of our joint venture partners in exploiting these prospects. Although the results of our SFD technology as a geologic structural identification tool have been satisfactorily tested by our joint venture partners, we cannot give you any assurances that our SFD technology will be able to consistently locate hydrocarbons or oil and gas prospects, or that these prospects will be commercially exploitable. We also cannot give you any assurances that we will be able to discover commercial quantities of oil and gas, or that our joint venture partners will successfully acquire and drill properties at low finding costs. . We Are Reliant Upon Our Joint Venture Partners For Opportunities To Participate In Exploration Prospects We will be reliant, at least in the near-term, upon our joint venture partners for opportunities to participate in exploration prospects, through overriding royalties or equity participation on a working interest basis from producing SFD Prospects. We exclusively focus on exploration and the review and identification of viable prospects through our SFD technology, and rely upon our joint venture partners to provide and complete all other project operations and responsibilities, including land acquisition, drilling, marketing and project administration. As a result, we have only a limited ability to exercise control over the selection of prospects for development, drilling or production operations, or the associated costs of such operations. The success of each project will be dependent upon a number of factors which are outside our control, or controlled by our joint venture partners as the project operator, in accordance with the applicable agreements between our company and the joint venture partners. These factors include: -24- o the selection and approval of prospects for lease/acquisition and exploratory drilling; o obtaining favorable leases and required permitting for projects; o the availability of capital resources of the joint venture partner for land acquisition and drilling expenditures; o the timing of drilling activity, and the economic conditions at such time, including then prevailing prices for oil and gas; and o the timing and amount of distributions from the production. Our reliance on our joint venture partners, and our limited ability to directly control project operations, costs and distributions could have a material adverse effect on the realization of return from our interest in projects, and on our overall financial condition. . Our Revenues And Cash Flow Will Be Principally Dependent Upon The Success Of Drilling And Production From Prospects In Which We Participate Through Agreements With Our Joint venture partners Pursuant to our business plan, our revenues and cash flow will, at least in the near-term, be principally dependent upon the success of drilling and production from prospects in which we participate through agreements with our joint venture partners in the form of an overriding royalty or a working interest or other participation right. The success of these prospects will be determined by the location, development and production of commercial quantities of hydrocarbons. Exploratory drilling is subject to numerous risks, including the risk that no commercially productive oil and gas reservoirs will be encountered. The cost to our joint venture partners to drill, complete and operate wells is often uncertain, and drilling operations may be curtailed, delayed or canceled as a result of a variety of factors including unexpected formation and drilling conditions, pressure or other irregularities in formations, equipment failures or accidents, as well as weather conditions, compliance with governmental requirements and shortages or delays in the delivery of equipment. Our partners' inability to successfully locate and drill wells that produce commercial quantities of oil and gas would have a material adverse effect on our business, financial position and results of operations. . Our Future Operating Results May In The Future Fluctuate Significantly Our operating results may in the future fluctuate significantly depending upon a number of factors including industry conditions, prices of oil and gas, rate of drilling success, rates of production from completed wells and the timing of capital expenditures. This variability could have a material adverse effect on our business, financial condition and results of operations. In addition, any failure or delay in the realization of expected cash flows from initial operating activities could limit our future ability to continue exploration and to participate in economically attractive projects. . Volatility Of Oil And Natural Gas Prices Could Have A Material Adverse Effect On Our Business It is impossible to predict future oil and natural gas price movements with any certainty, as they have historically been subject to wide fluctuations in response to a variety of market conditions, including: o relatively minor changes in the supply and demand for oil and natural gas, o economic, political and regulatory developments, and -25- o competition from other sources of energy. Any extended or substantial decline in oil and gas prices would have a material adverse effect on: o our ability to negotiate favorable joint ventures with viable industry participants; o the volume of oil and gas that could be economically produced by the joint ventures in which we participate; o our cash flow; and o our access to capital. We do not currently intend to engage in hedging activities, and may be more adversely affected by fluctuations in oil and gas prices than other industry participants that do engage in such activities. Our business, results of operations and financial condition would be materially and adversely affected by adverse changes in prevailing oil and gas prices. See Part I, Item 3, of this report captioned "Quantitative And Qualitative Disclosures About Market Risk," for additional discussion of market risks relating to oil and gas price fluctuations. . The Intense Competition That Is Prevalent In The Oil And Gas Industry Could Have A Material Adverse Effect On Our Business We compete directly with independent, technology-driven exploration and service companies, and indirectly (through our joint venture partnerships) with major and independent oil and gas companies in our exploration for and development of commercial oil and gas properties. We will experience competition from numerous oil and gas exploration competitors offering a wide variety of geological and geophysical services. Many of these competitors have substantially greater financial, technical, sales, marketing and other resources than we do, and may be able to devote greater resources to the development, promotion and sales of their services than our company. We cannot give you any assurance that our competitors will not develop exploration services that are superior to our SFD technology, or that these technologies will not achieve greater market acceptance than our SFD technology. Increased competition could impair our ability to attract viable industry participants, and to negotiate favorable participations and joint ventures with such parties, which could materially and adversely affect our business, operating results and financial condition. The oil and gas industry is highly competitive. Many companies and individuals are engaged in the business of acquiring interests in and developing oil and gas properties in the United States and Canada, and the industry is not dominated by any single competitor or a small number of competitors. Our joint venture partners will compete with numerous industry participants for the acquisition of land and rights to prospects, and for the equipment and labor required to operate and develop such prospects. Many of these competitors have financial, technical and other resources substantially in excess of those available to us or our joint venture partners. These competitive disadvantages could adversely affect our or our joint venture partners' ability to participate in projects with favorable rates of return. . There Is Limited Market Acceptance For Our SFD Technology, And It Must Compete With Established Geological And Geophysical Technologies Which Have Already Achieved Market Acceptance. There is limited market acceptance for our SFD technology, and it must compete with established geological and geophysical technologies which have already achieved market acceptance. As is typical in the case of any new technology, demand and market acceptance for our SFD technology is subject to a high level of uncertainty and risk. Because the market for exploration services using our SFD technology is new and evolving, it is difficult to predict the future growth rate, and the size -26- of the potential market. We cannot give you any assurance that a market for our exploration services will develop, or be sustainable. If the market fails to develop, or if our exploration services do not achieve or sustain market acceptance, our business, results of operations and financial condition would be materially and adversely affected. . Technological Advancements In The Oil And Gas Industry Could Have A Material Adverse Effect On Our Business The oil and gas industry is characterized by rapid technological advancements and the frequent introduction of new products, services and technologies. As new technologies develop, we may be placed at a competitive disadvantage, and competitive pressures may force us to improve or complement our SFD technology, or to implement additional technologies at substantial cost. In addition, other oil and gas exploration companies may implement new technologies before us, and these companies may be able to provide enhanced capabilities and superior quality. We cannot give you any assurance that we will be able to respond to these competitive pressures and implement or enhance our SFD technology on a timely basis, or at an acceptable cost. In such case, our business, financial condition and results of operations could be materially adversely affected. . Our Inability To Retain Our Key Managerial, Geological and Geophysical, and Research and Development Personnel Could Have A Material Adverse Effect On Our Business Our success depends to a significant extent on the continued efforts of our senior management team, which currently is composed of a small number of individuals, including Mr. George Liszicasz, the inventor of our SFD technology who is our Chief Executive Officer and who is responsible for the continuing development of our SFD technology and the interpretation of SFD Data, and Messrs. Daniel C. Topolinsky and James R. Ehrets, our President/Chief Operations Officer and our Executive Vice President of Operations, respectively. The loss of Mr. Liszicasz's services would be extremely difficult to replace since he is the inventor of, and has intimate knowledge of, the theoretical basis of the SFD technology, and has also developed the methodologies used to interpret SFD Data, and the loss of his services would likely have a material adverse effect on our business, results of operations and financial condition. While we are presently training personnel to operate our SFD technology and to interpret SFD Data, we cannot give you any assurance that these personnel could fully replace Mr. Liszicasz with respect to these functions, at least in the short-term. Moreover, we do not know if we would be able to successfully replicate the SFD technology in the event of the loss of Mr. Liszicasz. The loss of Messrs. Topolinsky's and Ehret's services would also be extremely difficult to replace due to their management skills and their core knowledge of our SFD technology and business as a result of their association with our company over the past several years, and their loss would also likely have a material adverse effect on our business, results of operations and financial condition. While we have entered into employment agreements with our senior management team, Mr. Liszicasz is not obligated--and as a result of his relationships with Momentum Resources Corporation may in the future be unable--to devote his entire undivided time and effort to or for our benefit. While we currently carry a key person life insurance on Mr. Liszicasz, we do not carry any key person life insurance policies any of our other executive officers. Our success also depends, to a lesser extent, on the continued efforts of our geological interpretive and research and development teams, which are composed of a small number of individuals. While there are professionals who could replace these individuals, none of these professionals have any theoretical or working knowledge of how to interpret SFD Data or how our SFD technology operates, and it would take a significant period of time to train any replacement personnel. Until such time as we have a fully trained complement of geological interpretive and research and -27- development and teams, the loss of any members of these teams could adversely affect the pace at which we interpret SFD Data or effect improvements to our SFD technology, which could adversely impact our business and results of operations and financial condition. . We May Be Unable To Attract The Qualified Managerial, Geological and Geophysical, and Research and Development Personnel Required To Implement Our Longer-Term Growth Strategies Our ability to implement our longer-term growth strategies depends upon our continuing ability to attract and retain highly qualified geological, technical, scientific, information management and administrative personnel. Competition for these types of personnel is intense and we cannot give you any assurance that we will be able to retain our key managerial, professional and/or technical employees, or that we will be able to attract and retain additional highly qualified managerial, professional and/or technical personnel in the future. Our inability to attract and retain the necessary personnel could impede our growth. . We May Be Unable To Effectively Manage Our Expected Growth Our success will depend upon the rapid expansion of our business. Expansion will place a significant strain on our financial, management and other resources, and will require us, among other things, to: o change, expand and improve our operating, managerial and financial systems and controls; and o improve coordination between our various corporate functions. We cannot give you any assurance that we will be able to manage the expansion of our business effectively. Our inability to effectively manage our growth, including the failure of any new personnel we hire to achieve anticipated performance levels, would have a material adverse effect on our business, results of operations and financial position. . Our Business May Be Adversely Affected By Currency Fluctuation, Regulatory, Political And Other Risks Associated with International Transactions We currently operate within the United States and Canada and anticipate we will also operate outside of these countries in the foreseeable future. These operations will subject us to several potential risks, including risks associated with: o fluctuating exchange rates, o the regulation by the governments of the United States and Canada as well as foreign governments of fund transfers and export and import duties and tariffs; and o political instability. We cannot give you any assurance that any of these risks will not have a material adverse effect upon our business. We do not currently engage in activities to mitigate the effects of foreign currency fluctuations. If earnings from international operations increase, our exposure to fluctuations in foreign currencies may increase, and we may utilize forward exchange rate contracts or engage in other efforts to mitigate foreign currency risks. We can give no you assurance as to the effectiveness of these efforts in limiting any adverse effects of foreign currency fluctuations on our international operations and our overall results of operations. -28- . Impact Of Governmental and Environmental Regulation On Our Business o SFD Survey Flight Operations The operation of our business, namely, conducting aerial SFD surveys and interpreting SFD Data, is not subject to material governmental or environmental regulation with the exception of flight rules promulgated by the Federal Aviation Administration and Transport Canada governing the use of private aircraft, including rules relating to low altitude flights. o Oil And Gas Exploration And Development Projects The oil and natural gas industry in general is subject to extensive controls and regulations imposed by various levels of the federal and state governments in the United States and federal and provincial governments in Canada. In particular, oil and gas exploration and production is subject to laws and regulations governing environmental quality and pollution control, limits on allowable rates of production by well or proration unit, and other similar regulations. Laws and regulations generally are intended to prevent waste of oil and natural gas; protect rights to produce oil and natural gas between owners in a common reservoir, control the amount of oil and natural gas produced by assigning allowable rates of production, and control contamination of the environment. Environmental regulations affect our operations on a daily basis. Public interest in the protection of the environment has increased dramatically in recent years. Drilling in certain areas has been opposed by environmental groups and, in certain areas, has been restricted. We believe that the trend of more expansive and stricter environmental legislation and regulations will continue. We do not expect that any of these government controls or regulations will affect projects in which we participate in a manner materially different than they would affect project of similar size or scope of operations. All current legislation is a matter of public record and we are not able to accurately predict what additional legislation or amendments may be enacted. Governmental regulations may be changed from time to time in response to economic or political conditions. Any laws enacted or other governmental action taken which prohibit or restrict onshore and offshore drilling or impose environmental protection requirements that result in increased costs to the oil and gas industry in general would have a material adverse effect on our business, results of operations and financial position. . Impact Of Operating Hazards On Our Business o SFD Survey Flight Operations The operation of our SFD survey aircraft is subject to the usual hazards incident to general and low level flight operations. These hazards can cause personal injury and loss of life, as well as severe damage to and destruction of property. While we maintain insurance coverage against some, but not all, operating risks associated with the operation of our aircraft, we cannot predict the continued availability of insurance coverage or the availability of insurance at premium levels that justify its purchase, nor can we give any assurance that any claim would not exceed our policy limits. If we were unable to procure insurance for our flight operations at an acceptable cost, the occurrence of significant adverse aircraft accident not fully insured or indemnified against could have a material, adverse effect on our business, financial condition and operating results. Similarly, a judgment or settlement in excess of our policy limits could also have a material, adverse effect on our business, financial condition and operating results. o Oil And Gas Exploration And Development Projects -29- The oil and gas exploration and development projects in which we participate through our joint venture partners will also be subject to the usual hazards incident to the drilling of oil and gas wells, including the risk of fire, explosions, blow-out, pipe failure, casing collapse, abnormally pressured formations and environmental hazards such as oil spills, gas leaks, ruptures and discharges of toxic gases. In addition to the foregoing, offshore operations are subject to the additional hazards of marine operations, such as capsizing, collision and adverse weather and sea conditions. These hazards can cause personal or loss of life, severe damage to or destruction of property, natural resources and equipment, pollution or other environmental damage, clean-up responsibilities, regulatory investigation and penalties and suspension of operations. The project operator will, in accordance with prevailing industry practice, maintain insurance against some, but not all, of these risks. The insurance maintained by the project operator generally would not cover claims relating to failure of title to oil and gas leases, trespass during survey acquisition or surface damage attributable to seismic operations, or business interruption, nor would it protect against loss of revenues due to well failure. There can be no assurance that any insurance obtained by the project operating covering claims related to worker's compensation, comprehensive general liability for bodily injury and property damage, comprehensive automobile liability and pollution, cleanup, underground blowout and evacuation will be adequate to cover any losses or liabilities which may be incurred within projects in which we participate. We also cannot predict the continued availability of insurance coverage or the availability of insurance at premium levels that justify its purchase. Since we do not act as operator on any projects in which we may participate, we are dependent upon our partners to conduct operations in a manner so as to minimize these operating risks. In cases where we have direct liability as a result of our participation on a working interest basis, the failure or inability of the project operator to procure insurance at an acceptable cost or the occurrence of a significant adverse event not fully insured or indemnified against could have an direct material, adverse effect on our business, financial condition and operating condition. In these cases our exposure will be commensurate with our participation percentage. While we would have no direct liability in cases where our participation is limited to an overriding royalty interest, the failure or inability of the project operator to procure insurance at an acceptable cost or the occurrence of a significant adverse event not fully insured or indemnified against could have an indirect material, adverse effect on our business, financial condition and operating results to the extent it adversely affects our joint venture partner's ability to complete current projects or explore for and develop additional projects. Matters Relating To Our Common Stock . There Is Only A Limited Public Market For Our Common Stock There is only a limited public market for our common stock on the NASD OTC Electronic Bulletin, and we cannot give you any assurance that a broader or more active public trading market for our common stock will develop or be sustained. We are under no obligation to take any action to improve the public market for our securities including, without limitation, filing an application to list our common stock on any stock exchange or any over any other counter market. . Our Stock Price Is Extremely Volatile The market price for our common stock is extremely volatile and subject to significant price and volume fluctuations in response to a variety of external and internal factors. This is especially true -30- with respect to emerging companies such as ours. Examples of external factors, which can generally be described as factors that are unrelated to the operating performance or financial condition of any particular company, include changes in interest rates and worldwide economic and market conditions, as well as changes in industry conditions, such as changes in oil and gas prices, oil and gas inventory levels, regulatory and environment rules, and announcements of technology innovations or new products by other companies. Examples of internal factors, which can generally be described as factors that are directly related to our operating performance or financial condition, would include release of reports by securities analysts and announcements we may make from time-to- time relative to our operating performance, drilling results, advances in technology or other business developments. Because we are a development stage enterprise with a limited operating history and no revenues or profits, the market price for our common stock will be more volatile than that of a seasoned issuer. Changes in the market price of our common stock may have no connection with our operating results or prospects. No predictions or projections can be made as to what the prevailing market price for our common stock will be at any time. . You May Become Subject To The Penny Stock Rules If Our Stock Price Declines To Less Than $5 Since our common stock is not listed on a national stock exchange or quoted on the Nasdaq Market, it will become subject, in the event the market price for these shares declines to less than $5 per share, to a number of regulations known as the "penny stock rules." The penny stock rules require a broker-dealer to deliver a standardized risk disclosure document prepared by the Securities and Exchange Commission, to provide the customer with additional information including current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, monthly account statements showing the market value of each penny stock held in the customer's account, and to make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written agreement to the transaction. To the extent these requirements may be applicable they will reduce the level of trading activity in the secondary market for our common stock and may severely and adversely affect the ability of broker-dealers to sell our common stock. . Our Common Stockholders Should Not Expect To Receive A Liquidation Distribution If we were to wind-up or dissolve our company and liquidate and distribute our assets, the holders of our common stock would share ratably in our assets only after we satisfy any amounts we would owe to our creditors and any amounts we would owe to our series "A" preferred stockholders as a liquidation preference ($7.50 per share, or $6,000,000 in the aggregate). If our liquidation or dissolution were attributable to our inability to profitably operate our business, then it is likely that we would have material liabilities at the time of liquidation or dissolution. Accordingly, we cannot give you any assurance that sufficient assets will remain available after the payment of our creditors and preferred stockholders to enable you to receive any liquidation distribution with respect to any shares of our common stock you may hold. . Two Of Our Principal Stockholders Control Our Company Messrs. George Liszicasz and R. Dirk Stinson, our two principal stockholders and two of our directors, beneficially own over two-thirds of our common stock, and will therefore have the power, as a group, to elect a majority of our Board of Directors. Our Board, in turn, has the power to appoint our officers and to determine, in accordance with their fiduciary duties and the business judgment rule, our direction, objectives and policies, such as: o our business expansion or acquisition policies; -31- o whether we should raise additional capital through financing or equity sources, and in what amounts; o whether we should retain cash reserves for future product development, or distribute them as a dividend, and in what amounts; o whether we should sell all or a substantial portion of our assets, our should merge or consolidate with another corporation; and o transactions which may cause or prevent a change in control or the winding up and dissolution of our company. An investment in our common stock will entail entrusting these and similar decisions to our present management subject, of course, to their fiduciary duties and the business judgment rule. . There Is An Inherent Conflict In Interest Arising As a Result Of the Relationship Between Our Two Principal Stockholders And The Licensor Of Our SFD Technology Messrs. George Liszicasz and R. Dirk Stinson indirectly own and control both our company and Momentum Resources Corporation, which has granted us an exclusive license to identifying oil and natural gas prospects using the SFD Data while reserving the exclusive right to use the SFD technology for purposes other than oil and natural gas exploration. Although Mr. Liszicasz has entered into an employment agreement with us he is not obligated, and as a result of his relationships with Momentum may in the future not be able, to devote his entire undivided time and effort to or for our benefit. As a result of the foregoing relationships, certain conflicts of interests between our company and one or more of Momentum and Messrs. Liszicasz and Stinson may directly or indirectly arise, including the following: o Mr. Liszicasz's potential inability to devote his undivided time and attention to our affairs; and o the proper exercise by Messrs. Liszicasz or Stinson of their fiduciary duties on our behalf as directors and controlling stockholders of our company in connection with any matters concerning Momentum such as, by way of example and not limitation: . disputes regarding the validity, scope or duration of the SFD Technology License; . the exploitation of corporate opportunities; . rights to proprietary property and information; . maintenance of confidential information as between entities; and . potential competition between our company and Momentum. While Messrs. Liszicasz and Stinson and our company have each executed certain disclosures and consents relating to these conflicts, these disclosures and consents will not remediate these conflicts, but will merely release Messrs. Liszicasz and Stinson from liability as a result of the conflicts so long as they use reasonable efforts to minimize the conflicts. In the event any of these conflicts prove to be irreconcilable, Messrs. Liszicasz may be forced to resign his positions with our company. Our Statements About Anticipated Events Or Future Trends May Prove To Be Inaccurate In this report we have made a number of statements, which we refer to as "forward-looking statements," generally relating to our expectations or speculations as to future events and our observations as to trends -32- and factors that may impact our future operating results. You can generally identify any forward-looking statements contained in this report through words such as "anticipate," "believe," "estimate," "expect," "budget" and "project" and similar expressions. Forward-looking statements that contained in this report, for example, include statements relating to: . the amount and character of future oil and gas revenues we may receive, the timing of receipt of revenues, and the timing of break-even, including, by way of example and not limitation, those statements contained in that section in Part I, Item 2 of this report captioned "Management's Discussion And Analysis Of Financial Condition And Results Of Operations--Overview;" and Part I, Item 2, of this report captioned "Management's Discussion And Analysis Of Financial Condition And Results Of Operations--Capital Requirements;" . the amount and character of expenses we may incur, and the timing of these expenditures including, by way of example and not limitation, those statements contained in those sections in Part I, Item 2, of this report captioned "Management's Discussion And Analysis Of Financial Condition And Results Of Operations--Capital Requirements" and "Management's Discussion And Analysis Of Financial Condition And Results Of Operations--Results Of Consolidated Operations--Expectations Relative To Future Expense Levels;" and . the amount and composition of our capital expense budget, and the timing of these capital outlays including, by way of example and not limitation, those statements contained in those sections in Part I, Item 2, of this report captioned "Management's Discussion And Analysis Of Financial Condition And Results Of Operations--Capital Requirements" and "Management's Discussion And Analysis Of Financial Condition And Results Of Operations--Results Of Consolidated Operations--Expectations Relative To Future Expense Levels." Whenever you read any forward looking statement contained in this report, you should be aware of and take into consideration that: . the forward-looking statement merely reflects the current expectations and speculation of our management as to anticipated events or observations relating to future trends based, in part, upon currently available information and our current business plan, and . actual results from these future events may differ materially from the results expected or speculated or trends observed as expressed in, or implied by, the forward-looking statement, as a result of changes in circumstances and events and other uncertainties and risks, including: o changes in our business plan and corporate strategies or that of our joint venture partners; o delays in our ability to conduct and complete SFD surveys or interpret SFD Data, o delays on the part of our joint venture partners in planning SFD survey activities, in conducting geologic and geophysical evaluations of recommended anomalies, in acquiring drilling rights, in conducting exploratory drilling activities and completing wells, and in connecting producing wells to pipelines and other production infrastructure; or o the occurrence of the various types of uncertainties and risk factors described above in this section as well as those described in Part I, Item 3, of this report captioned "Quantitative and Qualitative Disclosure About Market Risk;" and . the forward-looking statement must, in any event, be considered in context with the various disclosures concerning our company and our business made in this report as well as other reports we periodically file with the Securities and Exchange, including our annual report on Form 10-K for our fiscal year ended December 31, 1999. -33- As a consequence of the forgoing factors, you are cautioned not to put undue reliance on any forward-looking statement contained in this report. We are not obligated to update or revise any forward looking statement contained in this report to reflect new events or circumstances except to the extent required by law. You are also cautioned that we intend for all forward-looking statements contained in this report to be construed as "forward-looking statements" within the meaning Section 21E of the United States Securities Exchange Act of 1934, which establishes a safe-harbor from private actions for forward-looking statements as defined by Section 21E. Item 3. Quantitative And Qualitative Disclosures About Market Risk Oil And Gas Price Fluctuations Our primary market risks will be related to market changes in oil and gas prices (See Item I, Item 2, captioned "Management's Discussion And Analysis Of Financial Condition And Results Of Operations--Uncertainties And Other Factors That May Affect Our Future Results And Financial Condition--Risks Relating To The Company And Its Business--Volatility Of Oil And Natural Gas Prices"). Since our prospective royalty revenues will be tied to the price at which our joint venture partners sell oil and gas on the world market, any fluctuations in these prices will directly and proportionately impact our royalty income base (i.e., a 1% increase or decrease in oil or gas prices would result in a corresponding 1% increase or decrease in our oil or gas royalties). Should we elect a working interest in lieu of a royalty interest, our working interest revenue base would be similarly affected, except that this affect would not necessarily be proportional since production and marketing costs would most likely remain the same. For example, in the case of a decline in oil and gas prices where production and marketing costs are unaffected, the decline in our working interest revenues would most likely be greater, in percentage terms, than the decline in oil and gas prices. We do not anticipate that any decline in world oil and gas prices would adversely affect our operations (i.e., force our company or our joint venture partners to slow down or cut-back SFD survey or interpretation operations or our staff) insofar as a primary benefit of the SFD technology is to reduce finding costs, which benefit becomes more important as oil and gas prices decline. A decline in oil and gas prices could, however, force our joint venture partners to curtail exploration drilling operations since these operations are ordinarily funded out of available cash flow which, in turn, is dependent upon oil and gas prices. This eventuality would adversely affect our future cash flows since these prospects would not be drilled until the joint venture partner obtained sufficient capital. (Even if exploration activities are curtailed, however, a decline in oil and gas prices raises opportunities to acquire and "bank" SFD- qualified prospects at lower acquisition prices, which can then be drilled when oil and gas prices increase). A decline in oil and gas prices could also lead our joint venture partners to "shut-in" an existing producing well (primarily "marginal producing wells") on the basis that the decline in price no longer make the well economic to operate. In such an event we would no longer receive royalty or working interest revenues from the shut-in well. Currency Fluctuations An additional significant market risk relates to foreign currency fluctuations between American and Canadian dollars. Since our royalty or working interest revenues generated by our Canadian-based joint venture partners will be denominated in Canadian currency, our financial position could be adversely affected by American-Canadian currency fluctuations. We have not previously engaged in activities to mitigate the effects of foreign currency fluctuations due to the absence of Canadian revenues to date, and we anticipate that the exchange rate between the American and Canadian dollar will remain fairly stable. If earnings from our Canadian operations increase, our exposure to fluctuations in the American-Canadian exchange rate will increase, and we may utilize forward exchange rate contracts or engage in other efforts to mitigate these foreign currency risks. If entered into, there can be -34- We cannot give you any assurance that the use of exchange rate contracts or other mitigation efforts would effectively limit any adverse effects of foreign currency fluctuations on our Company's international operations and our overall results of operations. Interest Rate Fluctuations We currently maintain the bulk of our available cash in money-market accounts maintained in U.S. dollars. Our interest income from these short-term investments could be adversely affected by any material changes in interest rates within the United States. ITEM II OTHER INFORMATION Item 1. Legal Proceedings As of the date of this report, there are no material legal proceedings pending or, to the knowledge of our management, contemplated or threatened, to which to our company or properties are or may become a party. As of the date of this report, there are, to the knowledge of our management, no material proceedings to which any director, officer of affiliate of our company is a party adverse to our company or has a material interest adverse to our company. Item 2. Changes In Securities And Use Of Proceeds Not Applicable Item 3. Defaults Upon Senior Securities Not Applicable Item 4. Submission Of Matters To A Vote Of Security Holders Not Applicable Item 5. Other Information Not Applicable Item 6. Exhibits Exhibits 4.1 2000 Pinnacle Oil International, Inc. Directors' Stock Plan 4.2 Form of Stock Option Certificate for grants to directors under the 2001 Pinnacle Oil International, Inc. Stock Plan 4.3 Lease Amending Agreement - Expansion of Premises dated May 11, 2000 between Pinnacle Oil International, Inc. and O & Y Properties, Inc. 4.4 Aircraft Purchase Agreement dated March 20, 2000 between Pinnacle Oil Inc. and Winair Winkler 27 - Financial Data Table Reports on Form 8--K None -35- Signatures Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this Quarterly Report on Form 10--Q to be signed on its behalf by the undersigned, thereunto duly authorized. Dated at Calgary, Alberta, Canada, this 12th day of May, 2000. Pinnacle Oil International, Inc. By: /s/ George Liszicasz --------------------------------------- George Liszicasz Chief Executive Officer (principal executive officer) By: /s/ Daniel C. Topolinsky --------------------------------------- Daniel C. Topolinsky President and Chief Operating Officer (principal executive officer) By: /s/ John M. Woodbury, Jr. --------------------------------------- John M. Woodbury, Jr., Chief Financial Officer (principal accounting officer) -36- EX-4.1 2 2000 DIRECTORS STOCK PLAN EXHIBIT 4.1 ----------- 2000 PINNACLE OIL INTERNATIONAL. INC. DIRECTORS' STOCK PLAN The Board of Directors of Pinnacle Oil International. Inc. (the "Company"), a corporation organized under the laws of the State of Nevada, hereby adopts this 2000 Pinnacle Oil International. Inc. Directors' Stock Plan. WHEREAS, the growth, development and financial success of the Company (and any parents and/or any subsidiaries of the Company) is and will remain dependent, in significant part, upon the judgment, initiative, efforts and/or services their respective directors; WHEREAS, the Company desires, in order to attract, compensate and motivate selected directors for the Company (and any parent and/or any subsidiaries of the Company), and to appropriately compensate them for their efforts, to create a stock plan which will enable the Company, in its sole discretion and from time-to-time, to offer to or provide such persons with incentives and/or inducements in the form of capital stock of the Company, or rights in the form of options to acquire capital stock of the Company, thereby affording such persons with an opportunity to share in potential capital appreciation in the capital stock of the Company and/or potential distributions made in connection therewith; WHEREAS, the Company further desires that the stock plan be structured to permit it, in its sole discretion, to offer and issue capital stock or options to acquire capital stock in reliance upon certain exemptions from registration or qualification afforded under certain federal, state, territorial or provincial securities laws to be selected by the Company as are or may become applicable; and WHEREAS, insofar as the Company's common stock is currently registered under Section12(g) of the Securities and Exchange Act of 1934, the Company desires that the stock plan be structured to comply with the Securities and Exchange Act of 1934 for so long as the Company's common stock or any of its other equity securities are registered under Sections 12(b) or 12(g) of the Securities and Exchange Act of 1934. ARTICLE I DEFINITIONS ----------- Set forth below are definitions of capitalized terms which are generally used throughout the Plan, or references to provisions containing such definitions (Capitalized terms used only in a specific section of the Plan are defined in such section): 1.01 "Applicable Laws" means the requirements relating to the administration of stock plans under: A. applicable corporate laws of the United States and the State of Nevada and, to the extent applicable, any foreign country or jurisdiction where Awards are, or will be, granted under the Plan, including Canada and the Province of Alberta; B. applicable Securities Laws, including those of any foreign country or jurisdiction where Awards are, or will be, granted under the Plan, including Canada and the Province of Alberta; and C. any stock exchange or quotation system on which the Common Stock is listed or quoted. 1.02 "Approved Corporate Transaction" shall mean any time the Board and/or, to the extent required by law, the stockholders of the Company, approve either: A. a merger or consolidation or stock exchange or divisive reorganization (i.e., spin-off, split-off or split-up) and/or other reorganization with respect to the Company and/or its stockholders, or B. the sale, transfer, exchange or other disposition by the Company of fifty percent (50%) or more of its assets in a single or series of related transactions, is approved, provided, however, the term Approved Corporate Transaction shall not include any transaction wherein the stockholders of the Company immediately before such transaction directly or indirectly own, immediately following such transaction, a majority of the Total Combined Voting Power (as such term is defined in section 1.07A below) of the outstanding Voting ------------- Securities (as such term is defined in section 1.07A below) of the ------------- surviving corporation (or other entity) resulting from such transaction pursuant to clause A, or the acquiring corporation (or -------- other entity) pursuant to clause B. -------- 1.03 "Award" "shall collectively and severally refer to any Options or Grant Shares granted or awarded under the Plan. 1.04 "Award Agreement" shall collectively and severally refer to: A. in the case of the grant or award of an Option, a Stock Option Certificate in such form as prescribed by the Plan Administrator from time-to-time; B. in the case of the grant or award of Grant Shares, a Stock Grant Agreement in such form as prescribed by the Plan Administrator from time-to-time; and C. in the case of the grant or award of SARs, a SAR Agreement in such form as prescribed by the Plan Administrator from time-to-time; provided, however, the Company may, in its sole discretion, (1) revise any such form of Award Agreement to reflect or incorporate such changes as the Company or its legal counsel may determine is appropriate and consistent with the terms of the Plan, and/or (2) evidence or confirm the grant of an Award in a written employment or consulting agreement in lieu of the form of any of the foregoing Award Agreements. 1.05 "Blue Sky Laws" shall mean the securities laws of any state or territory of the United States, including any regulations or rules promulgated thereunder, which may apply to a transaction described in this Plan by reason of, among other things, the Recipient's residing in such, state and/or territory at the time of such transaction. 1.06 "Board" shall mean the Board of Directors of the Company, as such body may be reconstituted from time to time. 1.07 "Change In Control" shall mean the occurrence of any "Control Acquisition" or any "Significant Board Change" (as such terms are defined below). A. "Control Acquisition" shall mean any time an "Acquiring Person" attains, by reason of and immediately after a transaction or series of related transactions (other than a "Non-Control Transaction"), "Beneficial Ownership" of fifty percent (50%) or more of the "Total Combined Voting Power" of the Company's then outstanding "Voting Securities" (all as defined below); unless the Board determines that it is not in the best interests of the Company for such transaction -2- to be construed as a Control Acquisition; provided, however that at the time of such approval of the Board there are then in office not less than two Continuing Directors (as such term is defined below) and such action or transaction or series of related actions or transactions are approved by a majority of the Continuing Directors then in office. (1) "Acquiring Person" shall mean any "Person" (as defined below) with the exception of: (i) any employee benefit plan (or a trust forming a part thereof) maintained by the Company, or by any corporation or entity in which the Company holds fifty percent (50%) or more of the Voting Securities (each, a "Controlled Subsidiary"); (ii) the Company or any Controlled Subsidiary; or (iii) any Person which acquires the threshold percentage of Voting Securities through a Non-Control Transaction. (2) "Non-Control Transaction" shall mean any transaction in which the stockholders of the Company immediately before such transaction directly or indirectly own, immediately following such transaction, at least a majority of the Total Combined Voting Power (as defined below) of the outstanding Voting Securities (as defined below) of the surviving corporation (or other entity) resulting from such transaction, in substantially the same proportion as such stockholders' ownership of the Company's Voting Securities immediately before such transaction. (3) "Person," "Beneficial Ownership," "Total Combined Voting Power" and "Voting Securities" shall have the meaning described to such terms in Sections 13(d) and 14(d) of the Exchange Act and Rule 13d-3 promulgated thereunder. (4) "Continuing Director" shall mean: (i) any member of the Board, while such Person is a member of the Board, who is not an Acquiring Person or an "Affiliate" or "Associate" (as defined below) of an Acquiring Person, or a representative of an Acquiring Person or any such Affiliate or Associate, and was a member of the Board prior to the date of this Plan, or (ii) any Person who subsequently becomes a member of the Board, while such Person is a member of the Board, who is not an Acquiring Person or an Affiliate or Associate of an Acquiring Person or a representative of an Acquiring Person or any such Affiliate or Associate, if such Person's nomination for election or election to the Board is recommended or approved by a majority of the Continuing Directors. The terms "Affiliate" and "Associates" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Exchange Act. (5) Notwithstanding the foregoing, a Control Acquisition shall not be deemed to have occurred solely because any Person acquires Beneficial -3- Ownership of more than the threshold percentage of the outstanding Voting Securities as a result of an acquisition of Voting Securities by the Company (each, a "Redemption") which, by reducing the number of Voting Securities outstanding, increased the percentage of outstanding Voting Securities Beneficially Owned by such Person; provided, however, that if (i) a Control Acquisition would occur as a result of a Redemption but for the operation of this sentence, and (ii) after such Redemption, such Person becomes the Beneficial Owner of any additional Voting Securities, which increase the percentage of the then outstanding Voting Securities Beneficially Owned by such Person over the percentage owned as a result of the Redemption, then a Control Acquisition shall occur. B. "Significant Board Change" shall mean any time, during any period of three (3) consecutive years after the date of this Agreement, wherein the individuals who constituted the Board at the beginning of such period (the "Incumbent Board") cease to constitute a majority of the Board, for any reason other than: (1) the voluntary resignation of one or more Board members; (2) the refusal by one or more Board members to stand for election to the Board; and/or (3) the removal of one or more Board members for good cause; provided, however, (i) that if the nomination or election of any new director of the Company was approved by a vote of at least a majority of the Incumbent Board, such new director shall be deemed a member of the Incumbent Board; and (ii) that no individual shall be considered a member of the Incumbent Board if such individual initially assumed office as a result of either an actual or threatened "Election Contest" (as described in Rule 14a-11 promulgated under the Exchange Act), or as a result of a solicitation of proxies or consents by or on behalf of an Acquiror, other than a member of the Board (a "Proxy Contest"), or as a result of any agreement intended to avoid or settle any Election Contest or Proxy Contest. 1.08 "Code" shall mean the United States Internal Revenue Code of 1986, as amended (references herein to sections of the Code are intended to refer to sections of the Code as enacted at the time of the adoption of the Plan by the Board and as subsequently amended, or to any substantially similar successor provisions of the Code resulting from recodification, renumbering or otherwise). 1.09 "Commission" shall mean the United States Securities and Exchange Commission. 1.10 "Common Stock" shall mean the Company's common stock, par value $0.001. 1.11 "Company" shall mean Pinnacle Oil International. Inc., a Nevada corporation, and its successors. -4- 1.12 "Consent of Spouse" shall mean that Consent of Spouse in such form as prescribed by the Plan Administrator from time-to-time. 1.13 "Director" shall mean any Person who is voted or appointed as a member of the Board of Directors of the Company and/or of any Parent and/or of any Subsidiary, whether such Person is so engaged at the time the Plan is adopted or becomes so engaged subsequent to the adoption of the Plan. 1.14 "Disability" (or the related term "Disabled") shall be defined, without limitation, as any of the following with respect to a Recipient who is a Director: A. the receipt of any disability insurance benefits by the Recipient; B. a declaration by a court of competent jurisdiction that the Recipient is legally incompetent; C. the Recipient's material inability due to medically documented mental or physical illness or disabilities to fully perform the Recipient's regular obligations as a Director under such office, with reasonable accommodation if then required by applicable federal, state, territorial or provincial laws or regulations, for a three (3) month continuous period, or for six (6) cumulative months within any one (1) year continuous period, or the reasonable determination by the Board that the Recipient will not be able to fully perform the Recipient's regular obligations as a Director under such office, with reasonable accommodation if then required by applicable federal, state territorial or provincial laws or regulations, for a three (3) month continuous period. If the Board determines that the Recipient is Disabled under clause C -------- above, and the Recipient disagrees with the conclusion of the Board, then the Company shall engage a qualified independent physician reasonably acceptable to the Recipient to examine the Recipient at the Company's sole expense. The determination of such physician shall be provided in writing to the parties and shall be final and binding upon the parties for all purposes of this Agreement. The Recipient hereby consents to examination in the manner set forth above, and waives any physician- patient privilege arising from any such examination as it relates to the determination of the purported disability. 1.15 "Eligible Director" shall mean any Person who, at the applicable time of the grant or award of an Award under the Plan, is a Director. Notwithstanding the foregoing, no Award hereunder may be granted to any Person, even if otherwise an Eligible Director, with respect to: A. any circumstances which would not be considered to be either a bonus or reward for services provided, or compensation for goods or services rendered; or B. services rendered wholly or partially in connection with the offer and sale of securities in a capital-raising transaction. 1.16 "Exchange Act" shall mean the Securities and Exchange Act of 1934, as amended, including any regulations or rules promulgated by the Commission thereunder (references herein to sections of the Exchange Act are intended to refer to sections of the Exchange Act as enacted at the time of the adoption of the Plan by the Board and as subsequently amended, or to any substantially similar successor provisions of the Exchange Act resulting from recodification, renumbering or otherwise). -5- 1.17 "Fair Market Value" of a share of Common Stock as of a given valuation date shall be determined as follows: A. If the Common Stock is traded on a stock exchange, the Fair Market Value will be equal to the closing price of Common Stock on the principal exchange on which the Common Stock is then trading as reported by such exchange (or as reported by any composite index which includes such principal exchange) for the trading day previous to the date of valuation, or if the Common Stock is not traded on such date, on the next preceding trading day during which a trade occurred; B. If the Common Stock is traded over-the-counter on the Nasdaq National Market on the date in question, the Fair Market Value will be equal to the last transaction-price of the Common Stock as reported by Nasdaq for the trading day previous to the date of valuation, or if the Common Stock is not traded on such date, on the next preceding trading day during which a trade occurred; C. If the Common Stock is traded over-the-counter on the Nasdaq SmallCap Market, the Fair Market Value will equal the mean between the last reported closing representative bid and asked price for the Common Stock as reported by Nasdaq for the trading day previous to the date of valuation, or if the Common Stock is not traded on such date, on the next preceding trading day during which a trade occurred; or D. If the Common Stock is not publicly traded on an exchange and is not traded over-the-counter on Nasdaq, the Fair Market Value shall be determined by the Board acting in good faith on such basis as it deems appropriate, including quotations by market makers if the Common Stock is traded over-the-counter on the NASD Electronic Bulletin Board or Pink Sheets on the date in question should the Plan Administrator deem such quotations to be appropriate given the volume and circumstances of trades. The Fair Market Value as determined above shall be subject to such discount as the Plan Administrator may, in its sole discretion and without obligation to do so, determine to be appropriate to reflect any such impairments to the value of the associated Option Shares and/or Grant Shares to which the valuation relates such as, by way of example and not limitation, (1) the fact that such Option Shares and/or Grant Shares constitute unregistered securities (whether or not considered "restricted stock" within the meaning of Rule 144 of the Securities Act), and/or (2) such Option Shares and/or Grant Shares are subject to conditions, risk of forfeiture, or repurchase rights or rights of first refusal which impair their value including, without limitation, those forfeiture conditions more particularly described in Article VII. ----------- 1.18 "Forfeitable Grant Shares" shall mean Grant Shares that are subject to restrictions set forth in Article VII. ----------- 1.19 "Grant Shares" shall mean Plan Shares granted or awarded in accordance with Article VI. ---------- 1.20 "Independent SAR" shall have the meaning ascribed to such term in section ------- 9.01. ---- -6- 1.21 "Option" shall mean an option to purchase Plan Shares granted or awarded pursuant to Article V. --------- 1.22 "Option Price" is defined in section 5.02 of the Plan. ------------ 1.23 "Option Shares" shall mean any Plan Shares which an Option entitles the holder thereof to purchase. 1.24 "Parent" shall mean any "parent" of the Company, as such term is defined by, or interpreted under, Rule 405 of Regulation C promulgated under the Securities Act, including any such parent which is a corporation, partnership, limited partnership or limited liability company to the extent permitted under Rule 405. 1.25 "Person" shall be defined, in its broadest sense, as any individual, entity or fiduciary such as, by way of example and not limitation, individual or natural persons, corporations, partnerships (limited or general), joint-ventures, associations, limited liability companies/partnerships or fiduciary arrangements (such as trusts and custodial arrangements). 1.26 "Plan" shall mean this 2000 Pinnacle Oil International. Inc. Directors' Stock Plan. 1.27 "Plan Administrator" shall refer to the Person or Persons who are administering the Plan as described in Article III, to wit, the Board, ----------- the Plan Committee, or any Director-Officers designated by the Board or the Plan Committee. 1.28 "Plan Committee" shall mean that Committee comprised of members of the Board that may be appointed by the Board to administer and interpret the Plan as more particularly described in Article III of the Plan. ----------- 1.29 "Plan Shares" shall refer to shares of Common Stock issuable in connection with Awards in accordance with section 4.01, including, Option ------------ Shares, Grant Shares and SAR Shares. 1.30 "Provincial Securities Laws" shall mean the securities laws of any province of Canada, including any regulations or rules promulgated thereunder, which may apply to a transaction described in this Plan by reason of, among other things, the Company's principal executive offices being located in such province or a Recipient residing in such province, at the time of such transaction. 1.31 "Recipient" shall mean any Eligible Director who, at a particular time, receives the grant of an Award. 1.32 "Recipient's Representative's Letter" shall mean that letter from an independent investment advisor of a Recipient in such form as prescribed by the Plan Administrator from time-to-time. 1.33 "Replacement Option" shall mean an Option specifically granted as a Replacement Option under the Plan in accordance with the applicable provisions of section 5.08. ------------ 1.34 "Reporting Company" shall mean a corporation which registers its equity securities pursuant to Sections 12(b) or 12(g) of the Exchange Act; provided, however, any foreign corporation which registers its equity securities as a "foreign private issuer" shall not be deemed a Reporting Company for purposes of this Plan unless and until such time as it is required or elects to register its equity securities as a foreign issuer other than a foreign private issuer. -7- 1.35 "Stock Appreciation Rights" or "SARs" shall have the meaning ascribed to such terms in section 9.01. ------------ 1.36 "Securities Act" shall mean the Securities Act of 1933, as amended, including all regulations or rules promulgated by the Commission thereunder (references herein to sections of the Securities Act are intended to refer to sections of the Securities Act as enacted at the time of the adoption of the Plan by the Board and as subsequently amended, or to any substantially similar successor provisions of the Securities Act resulting from recodification, renumbering or otherwise). 1.37 "Securities Laws" shall collectively refer to the Securities Act, the Exchange Act, the Blue Sky Laws and the Provincial Securities Laws. 1.38 "Subsidiary" shall mean any "majority-owned subsidiary" of the Company, as such term is defined by, or interpreted under, Rule 405 of Regulation C promulgated under the Securities Act, including any such subsidiary which is a corporation, partnership, limited partnership or limited liability company to the extent permitted under Rule 405. The term Subsidiary shall specifically exclude any majority-owned subsidiaries (other than the Company, if applicable) of any Parent. 1.39 "Tandem SAR" shall have the meaning ascribed to such term in section ------- 9.01. ---- 1.40 "Termination Of Recipient" is defined as the time when the Recipient's status as a Director ceases for any reason whatsoever, whether voluntary or involuntary (including death or Disability), or with or without good cause, but excluding cases where the Recipient remains a Director of the Company (if such termination relates to the Recipient's status as a Director of any Parent and/or any Subsidiary) and/or by any Parent and/or any Subsidiary (if such termination relates to the Recipient's status as a Director of the Company). 1.41 "Transfer" shall mean any transfer or alienation of an Award which would directly or indirectly change the legal or beneficial ownership thereof, whether voluntary or by operation of law, and regardless of payment or provision of consideration, including, by way of example and not limitation: A. the sale, assignment, bequest or gift of the Award; B. any transaction that creates or grants an option, warrant, or right to obtain an interest in the Award; C. any transaction that creates a form of joint ownership in the Award between the Recipient and one or more other Persons; D. any Transfer of the Award to a creditor of the Recipient, including the hypothecation, encumbrance or pledge of the Award or any interest therein, or the attachment or imposition of a lien by a creditor of the Recipient on the Award or any interest therein which is not released within thirty (30) days after the imposition thereof; E. any distribution by a Recipient which is an entity to its stockholders, partners, co-venturers or members, as the case may be; or F. any distribution by a Recipient which is a fiduciary such as a trustee or custodian to its settlors or beneficiaries. -8- 1.42 "Withholding Taxes" means any federal, state, territorial, provincial or local employment taxes which the Company shall have the obligation to withhold from a Recipient in connection with the grant of any Award and/or exercise of any Option, as the case may be. ARTICLE II TERM OF PLAN ------------ 2.01 Effective Date for Plan; Termination Date for Plan. The Plan shall be -------------------------------------------------- effective as of such time and date as the Plan is adopted by the Board, and the Plan shall terminate on the first business day prior to the ten (10) year anniversary of the date the Plan became effective. No Awards shall be granted or awarded under the Plan before the date the Plan becomes effective or after the date the Plan terminates; provided, however: A. all Awards granted pursuant to the Plan prior to the effective date of the Plan shall not be affected by the termination of the Plan; and B. all other provisions of the Plan shall remain in effect until the terms of all outstanding Awards have been satisfied or terminated in accordance with the Plan and the terms of such Awards. ARTICLE III PLAN ADMINISTRATION ------------------- 3.01 General. The Plan shall be administered exclusively by the Board and/or, ------- to the extent authorized pursuant to this Article III, the Plan Committee ----------- or Director-Officers (collectively, the "Plan Administrator"). 3.02 Delegation to Plan Committee. Subject to the authority granted to the ---------------------------- Board under the Articles of Incorporation and the Bylaws of the Company, the Board may, in its sole discretion and at any time, establish a committee comprised of two (2) or more members of the Board (the "Plan Committee") to administer the Plan either in its entirety or to administer such functions concerning the Plan as delegated to such Committee by the Board. Members of the Plan Committee may resign at any time by delivering written notice to the Board. Vacancies in the Plan Committee shall be filled by the Board. The Plan Committee shall act by a majority of its members in office. The Plan Committee may act either by vote at a meeting or by a memorandum or other written instrument signed by a majority of the Plan Committee. 3.03 Compliance with Rule 16b-3 of the Exchange Act. Anything in this Article ---------------------------------------------- ------- III to the contrary notwithstanding, so long as this Company continues as --- a Reporting Company, or is otherwise required to register its equity securities under Sections 12(b) or 12(g) of the Exchange Act, any matter concerning a grant or award of an Award under the Plan to any Director shall, to the extent desirable to qualify such Awards as exempt under Rule 16b-3(b)(3) promulgated under the Exchange Act, be made only by: A. the Board; B. the Plan Committee (provided it is comprised solely of "non-employee directors" within the meaning of Rule 16b-3(b)(3)); or C. a special committee of the Board, or subcommittee of the Plan Committee, comprised solely of two (2) or more members of the Board who are non-employee directors. -9- 3.04 Compliance with Section 162(m) of the Code. Anything in this Article III ------------------------------------------ ----------- to the contrary notwithstanding, in the event and commencing at such time as any grant of an Award shall be subject to the deduction limitations prescribed by Section 162(m) of the Code, and the Plan Administrator determines it to be desirable to qualify Awards granted hereunder as "performance-based compensation" within the meaning of Section 162(m), the Plan Administrator shall (for purposes of making such grant) consist of a special committee of the Board comprised solely of two or more "outside directors" within the meaning of Section 162(m). 3.05 Delegation to Director-Officers. Subject to the authority granted to the ------------------------------- Board under the Articles of Incorporation and the Bylaws of the Company, the Board may, in its sole discretion and at any time, and subject to the authority granted to it by the Board, the Plan Committee may, in its sole discretion and at any time, delegate all or any portion of their authority described below under section 3.06A through section 3.07 to one or more ------------- ------------ Directors who are also Director-Officers, provided that the Board or the Plan Committee (as the case may be) ratifies such actions by such designated Director-Officers. Notwithstanding the foregoing, so long as this Company continues as a Reporting Company, no authority shall be delegated to the aforesaid Director-Officers with respect to any matter concerning a grant or award of an Award under the Plan to any Director. 3.06 Authority to Make Awards and to Determine Terms and Conditions of Awards. ------------------------------------------------------------------------ Subject to any limitations prescribed by the Articles of Incorporation and Bylaws of the Company, and further subject to the express terms, conditions, limitations and other provisions of the Plan, the Plan Administrator shall have the full and final authority, in its sole discretion at any time and from time-to-time, to do any of the following: A. designate and/or identify the Persons or classes of Persons who are considered Eligible Directors; B. grant Awards to such selected Eligible Directors or classes of Eligible Directors in such form and amount as the Plan Administrator shall determine; C. determine the number of Plan Shares to be covered by each Award; D. approve forms of Award Agreements for use under the Plan; E. impose such terms, limitations, restrictions and conditions upon any Award as the Plan Administrator shall deem appropriate and necessary including, without limitation: (1) the date of grant of the Award; (2) the time or times when Options or SARs may be exercised (which may be based on performance criteria); (3) any vesting and/or forfeiture conditions placed upon any Awards; and (4) and repurchase conditions placed upon grants or awards of Grant Shares; F. require as a condition of the grant of an Award that the Recipient surrender for cancellation some or all of any unexercised Options which have previously been granted to the Recipient under the Plan or otherwise (an Award, the grant of which is conditioned upon such surrender; may have a price or value lower (or -10- higher) than the surrendered Option; may cover the same (or a lesser or greater) number of shares of Common Stock as such surrendered Option; may contain such other terms as the Plan Administrator deems appropriate and necessary; and shall be exercisable in or granted in accordance with its terms, without regard to the number of shares, price, exercise period or any other term or condition of such surrendered Option); G. approve the reduction in the exercise price of any Option or SAR to the then current Fair Market Value if the Fair Market Value of the Common Stock covered by such Option or SAR shall have declined since the date such Option or SAR was granted; H. determine the type and value of consideration which the Company will accept from Recipients in payment for the exercise of Options and/or the award of Grant Shares; I. determine the type and value of consideration which the Company will pay in connection with the exercise of SARs; J. adopt, amend and rescind rules and regulations relating to the Plan, including rules and regulations relating to sub-plans established for the purpose of qualifying for preferred tax treatment under foreign tax laws, and make all other determinations and take all other action necessary or advisable for the implementation and administration of the Plan; K. modify or amend each Award (subject to Article XVIII), including the ------------- discretionary authority to extend the post-termination exercisability period of Options or SARs longer than is otherwise provided for in the Plan; and L. agree to withhold Plan Shares in satisfaction of any applicable Withholding Taxes. In determining the recipient, form and amount of Awards, the Plan Administrator shall consider any factors it may deem relevant such as, by way of example and not limitation or obligation, the Recipient's functions, responsibilities, value of services to the Company, and past and potential contributions to the Company's profitability and sound growth. 3.07 Authority to Interpret Plan; Binding Effect of All Determinations. The ----------------------------------------------------------------- Plan Administrator shall, in its sole and absolute discretion, interpret and determine the effect of all matters and questions relating to the Plan including, without limitation, all questions relating to whether a Termination Of Recipient has occurred. All interpretations and determinations of the Plan Administrator under the Plan (including, without limitation, determinations pertaining to the eligibility of Persons to receive Awards, the form, amount and timing of Awards, the methods of payment for Awards, the restrictions and conditions placed upon Awards, and the other terms and provisions of Awards and the certificates or agreements evidencing same) need not be uniform and may be made by the Plan Administrator selectively among Persons who receive, or are eligible to receive, Awards under the Plan, whether or not such Persons are similarly situated. All actions taken and all interpretations and determinations made under the Plan in good faith by the Plan Administrator shall be final and binding upon the Recipient, the Company, and all other interested Persons. No member of the Plan Administrator shall be personally liable for any action taken or decision made in good faith relating to the Plan, and all Persons constituting the Plan Administrator shall be fully protected and indemnified to the fullest extent permitted under applicable law by the Company in -11- respect to any such action, determination, or interpretation. 3.08 Compensation; Advisors. Members of the Plan Administrator shall receive ---------------------- such compensation for their services hereunder as may be determined by the Board. All expenses and liabilities incurred by members of the Plan Administrator in connection with the administration of the Plan shall be borne by the Company. The Plan Administrator may, at the cost of the Company, employ attorneys, consultants, advisors, accountants, appraisers, brokers or other Persons to provide advice, opinions or valuations, and the Plan Administrator shall be entitled to rely upon any such advice, opinions or valuations. ARTICLE IV SHARES OF COMMON STOCK ISSUABLE UNDER PLAN ------------------------------------------ 4.01 Maximum Number of Shares Authorized Under Plan. Plan Shares which may be ---------------------------------------------- issued or granted under the Plan shall be authorized and unissued or treasury shares of Common Stock. The aggregate maximum number of Plan Shares which may be issued, whether upon exercise of Options or as a grant of Grant Shares, or in payment of SARs, shall not exceed four hundred thousand (400,000) shares of Common Stock; provided, however, that such number shall be increased by the following: --------- A. Any shares of Common Stock tendered by a Recipient as payment for Option Shares (in connection with the exercise of the associated Option) or Grant Shares; B. Any shares of Common Stock underlying any options, warrants or other rights to purchase or acquire Common Stock which options, warrants or rights are surrendered by a Recipient as payment for Option Shares (in connection with the exercise of the associated Option) or Grant Shares; C. Any shares of Common Stock subject to an Option which, for any reason, is terminated unexercised or expires; D. Any Forfeitable Grant Shares which, for any reason, are forfeited by the holder thereof or repurchased by the Company; and E. Any SAR Shares subject to an Independent SAR which, for any reason, is terminated unexercised or expires. 4.02 Calculation of Number of Shares Available for Awards. For purposes of ---------------------------------------------------- calculating the maximum number of Plan Shares which may be issued under the Plan, the following rules shall apply: A. When Options are exercised, and when cash is used as full payment for Option Shares issuable upon exercise of such Options, all Option --- Shares issued in connection with such exercise (including Option Shares, if any, withheld in satisfaction of any applicable Withholding Taxes) shall be counted; B. When Options are exercised, and when shares of Common Stock are used as full or partial payment for Option Shares issuable upon exercise of such Options, the net Option Shares issued in connection with such --- exercise (including Option Shares, if any, withheld in satisfaction of any Applicable Withholding Tax Requirements) shall be counted; -12- C. When Grant Shares are granted, and when shares of Common Stock are used as full or partial payment therefore, the net Grant Shares issued (including Grant Shares, if any, withheld in satisfaction of any applicable Withholding Taxes) shall be counted; D. When SARs are exercised, only the Plan Shares issued in payment thereof (including Plan Shares, if any, withheld in satisfaction of any applicable Withholding Taxes) shall be counted; and E. If the exercise price of an Option or SAR is reduced, the transaction will be treated as a cancellation of the Option or SAR, and the grant of a new Option or SAR. 4.03 Date of Awards. The date an Award is granted shall mean the date selected -------------- by the Plan Administrator as of which the Plan Administrator allots a specific number of Plan Shares to a Recipient with respect to such Award pursuant to the Plan. ARTICLE V OPTIONS (TO PURCHASE OPTION SHARES) ----------------------------------- 5.01 Grant. The Plan Administrator may from time to time, and subject to the ----- provisions of the Plan and such other terms and conditions as the Plan Administrator may prescribe, grant to any Eligible Director one or more options ("Options") to purchase the number of Plan Shares allotted by the Plan Administrator ("Option Shares"). The grant of an Option shall be evidenced by a written Stock Option Certificate, executed by the Recipient and an authorized officer of the Company, stating: A. the number of Option Shares subject to the Option; B. the Option Price (as such term is defined below) for the Option; and C. all other material terms and conditions of such Option. 5.02 Option Price. The purchase price per Option Share deliverable upon the ------------ exercise of an Option (the "Option Price") shall be such price as may be determined by the Plan Administrator. 5.03 Option Term; Expiration. The term of each Option shall commence at the ----------------------- grant date for such Option as determined by the Plan Administrator, and shall expire (unless an earlier expiration date is expressly provided in the underlying Stock Option Certificate or another section of the Plan including, without limitation, section 5.05), on the first business day ------------ prior to the ten (10) year anniversary of the date of grant thereof. The Plan Administrator may extend the term of any outstanding Option should the Plan Administrator, in its sole and absolute discretion, determine it advisable or necessary to do so including, without limitation, in connection with any Termination Of Recipient. 5.04 Exercise Date. Unless a later exercise date is expressly provided in ------------- the underlying Stock Option Certificate or another section of the Plan, each Option shall become exercisable on the later of: ----- A. the date of its grant as determined by the Plan Administrator; or -13- B. the date of delivery to the Recipient, and execution by the Company and the Recipient, of the underlying Stock Option Certificate evidencing the grant of the Option. No Option shall be exercisable after the expiration of its applicable term as set forth in section 5.03. Subject to the foregoing, each Option shall ------------ be exercisable in whole or in part during its applicable term unless expressly provided otherwise in the underlying Stock Option Certificate. 5.05 Vesting Conditions. Subject to the limitations in Article X relating to ------------------ --------- Termination Of Recipient, the Plan Administrator may subject any Options granted to such vesting conditions as the Plan Administrator, in its sole discretion, determines are appropriate and necessary, such as, by way of example and not obligation: A. the attainment of goals by the Recipient; or B. the continued service by the Recipient as a Director to the Company and/or to any Parent or Subsidiary. If no vesting is expressly provided in the underlying Stock Option Certificate, the Option Shares shall be deemed fully vested upon date of grant. Where vesting conditions are based upon continued performance of services to the Company, the special rules of Article X relating to --------- Termination Of Recipient shall apply. No vesting conditions may be imposed which are not permitted, or exceed those permitted, under the exemption from registration or qualification to be relied upon under applicable Securities Laws, as selected by the Company in its sole discretion. If no vesting is expressly provided in the underlying Stock Option Certificate, the Option Shares shall be deemed fully vested upon date of grant. The Plan Administrator may waive the acceleration of any vesting and/or expiration provision of any outstanding Option should the Plan Administrator, in its sole and absolute discretion, determine it advisable or necessary to do so including, without limitation, in connection with any Termination Of Recipient. 5.06 Manner of Exercise. An exercisable Option, or any exercisable portion ------------------ thereof, may be exercised solely by delivery to the Secretary of the Company at its principal executive offices prior to the time when such Option (or such portion) becomes unexercisable under this Article V of --------- each of the following: A. a Notice of Exercise of Stock Option in the form attached to the underlying Stock Option Certificate, duly signed by the Recipient or other Person then entitled to exercise the Option or portion thereof, stating the number of Option Shares to be purchased by exercise of the associated Option; B. subject to Article VIII relating to non-cash form of consideration, ------------ payment in full for the Option Shares to be purchased by exercise of the underlying Option, together with payment in satisfaction of any applicable Withholding Taxes (collectively, the "Gross Option Exercise Price"), in immediately available funds, in U.S. dollars; provided, however, the Plan Administrator may, in its sole discretion, permit a delay in payment of the Gross Option Exercise Price for a period of up to thirty (30) days; C. a Consent of Spouse from the spouse of the Recipient, if any, duly signed by such spouse; -14- D. in the event that the Option or portion thereof shall be exercised by any Person other than the Recipient, appropriate proof of the right of such person or persons to exercise the Option or portion thereof; and E. such documents, representations and undertakings as provided in the Stock Option Certificate and/or which the Plan Administrator, in its absolute discretion, deems necessary or advisable pursuant to section ------- 13.01. ----- 5.07 Net Conversion of Option. Notwithstanding section 5.06B, if and to the ------------------------ ------------- extent expressly permitted in the underlying Stock Option Certificate, or if and to the extent otherwise consented to by the Plan Administrator in writing, the Recipient may convert an Option, in whole or in part, into such net number of Option Shares as shall be determined by dividing (x) the difference between (I) the aggregate Fair Market Value of the total number Option Shares to be exercised as of the conversion date, together with payment in satisfaction of any applicable Withholding Taxes, and (II) the aggregate Exercise Price of such total number of Option Shares, by (y) the Fair Market Value of one Option Share as of the date of conversion. The Recipient shall, in the event of such permitted conversion, deliver to the Company all of the items described in section 5.06 with respect to the ------------ underlying Option (other than section 5.06B to the extent payment ------------- therefore is not required by operation of this section 5.07). ------------ 5.08 Grant of Replacement Options. In the event: ---------------------------- A. the Gross Option Exercise Price is paid in the form of shares of Common Stock owned by the Recipient pursuant to section 8.01A; and ------------- B. the exercising Recipient is then an Eligible Director, then the Plan Administrator in its sole discretion may, or the Plan Administrator (if and to the extent expressly required by the underlying Stock Option Certificate) shall, grant to the exercising Recipient options (the "Replacement Options") entitling the exercising Recipient to purchase such number of Plan Shares as shall equal the number of shares of Common Stock delivered to the Company in payment of the Gross Option Exercise Price with respect to the underlying Stock Option Certificate. Each Replacement Option shall: (1) Be immediately exercisable upon its grant (without any vesting conditions); (2) have an Option Price for each Option Share which equals the Fair Market Value of the Common Stock so paid as determined for purposes of payment pursuant to section 8.01A; ------------- (3) have an Option Term co-terminus with that of the underlying Option; and (4) contain such other terms and conditions as contained in the underlying Stock Option Certificate. Shares of Common Stock received by the Recipient in connection with the grant of the Replacement Option may not be used as consideration in connection with the exercise of the Replacement Option, unless such shares of Common Stock have been held by the Recipient for a period of at least one (1) year, and such form of payment is otherwise permitted pursuant to the terms of Article VIII. ------------ -15- The grant of a Replacement Option shall be evidenced by a written Stock Option Certificate, executed by the Recipient and an authorized officer of the Company, stating: (i) the number of Option Shares subject to the Option; (ii) the Option Price (determined in the manner prescribed above in this section) for the Option; and (iii) all other material terms and conditions of such Option. 5.09 Conditions to Issuance of Option Shares. The Company shall not be --------------------------------------- required to issue or deliver any certificate or certificates representing the Option Shares purchased upon exercise of any Option or any portion thereof prior to fulfillment of all of the following conditions: A. the delivery of the documents described in section 5.06; ------------ B. the receipt by the Company of full payment for such Option Shares, together with payment in satisfaction of any applicable Withholding Taxes; C. subject to Article XIII, the satisfaction of any requirements or ------------ conditions of the Applicable Laws; and D. the lapse of such reasonable period of time following the exercise of the Option as the Plan Administrator may establish from time-to- time for administrative convenience. ARTICLE VI GRANT SHARES ------------ 6.01 Grant. The Plan Administrator may from time to time, subject to the ----- provision of the Plan and such other terms and conditions as the Plan Administrator may prescribe, grant to any Eligible Director one or more Plan Shares allotted by the Plan Administrator ("Grant Shares"). The grant of Grant Shares or the grant of the right to receive Grant Shares shall be evidenced by a written Stock Grant Agreement, executed by the Recipient and an authorized officer of the Company on or before the time of the grant of such Grant Shares, setting forth: A. the number of Grant Shares granted; B. the consideration (if any) for such Grant Shares; and C. all other material terms and conditions of such grant. 6.02 Consideration (Purchase Price). The Plan Administrator, in its sole ------------------------------ discretion, may grant or award Grant Shares in any of the following instances: A. As Bonus/Reward. As a "bonus" or "reward" for services previously --------------- rendered and otherwise fully compensated, in which case the recipient of the Grant Shares shall not be required to pay any consideration to the Company for such Grant Shares, and the value of each Grant Shares shall be the Fair Market Value of a share of Common Stock on the date of grant. -16- B. As Compensation. As "compensation" for the previous performance or --------------- future performance of services or attainment of goals, in which case the recipient of the Grant Shares shall not be required to pay any consideration to the Company for such Grant Shares (other than the performance of the Recipient's services), and the value of each Grant Share received (together with the value of such services or attainment of goals attained by the Recipient), shall be the Fair Market Value of a share of Common Stock on the date of grant. C. As Purchase Price Consideration. In "consideration" for the payment ------------------------------- of a purchase price to the Company for each of such Grant Shares (the "Stock Grant Purchase Price") in an amount established by the Plan Administrator, provided, however: (1) The Stock Grant Purchase Price shall not be less than that allowed under the exemption from registration under the applicable Blue Sky Laws (as selected by the Company in its sole discretion) of the state or territory in which the Recipient then resides; (2) If the Common Stock is traded on a stock exchange or over-the- counter on Nasdaq, the purchase price shall not be less than the minimum price per share permitted by such stock exchange or Nasdaq; and (3) Under no circumstances shall the Stock Grant Purchase Price per Grant Share be less than the then current par value per share of Common Stock. 6.03 Term; Expiration. The term in which a Recipient may purchase any Grant ---------------- Shares awarded for which the Recipient is required to pay consideration shall commence at the grant date of the underlying Stock Grant Agreement as determined by the Plan Administrator, and shall expire on the date specified in the underlying Stock Grant. 6.04 Deliveries; Manner of Payment. The Grant Shares may be purchased solely ----------------------------- by delivery to the Secretary of the Company at the principal executive offices at the Company prior to the time the Grant Shares become purchasable under this Article VI of each of the following: ---------- A. the Stock Grant Agreement for the Grant Shares, duly signed by the Recipient; B. a Consent of Spouse from the spouse of the Recipient, if any, duly signed by such spouse; C. subject to Article VIII relating to non-cash form of consideration, ------------ payment in full of the Stock Grant Purchase Price (where payment thereof is required), together with payment in satisfaction of any applicable Withholding Taxes (collectively, the "Gross Stock Grant Purchase Price"), in immediately available funds, in U.S. dollars; provided, however, the Plan Administrator may, in its sole discretion, permit a delay in payment of the Gross Stock Grant Purchase Price for a period of up to thirty (30) days; and D. such documents, representations and undertakings as provided in the Stock Grant Agreement and/or which the Plan Administrator, in its absolute discretion, deems necessary or advisable pursuant to section ------- 13.01. ----- 6.05 Conditions to Issuance of Grant Shares. The Company shall not be -------------------------------------- required to issue or deliver any certificate or certificates representing the Grant Shares prior to fulfillment of all of the following conditions: -17- A. the delivery of the documents described in section 6.04; ------------ B. the receipt by the Company of full payment (if applicable) for such Grant Shares, together with payment in satisfaction of any applicable Withholding Taxes; C. subject to Article XIII, the satisfaction of any requirements or ------------ conditions of the Applicable Laws; and D. the lapse of such reasonable period of time following the award of the Grant Shares as the Plan Administrator may establish from time-to-time for administrative convenience. ARTICLE VII FORFEITURE CONDITIONS PLACED UPON GRANT SHARES ---------------------------------------------- 7.01 Vesting Conditions; Forfeiture of Unvested Grant Shares. Subject to the ------------------------------------------------------- limitations in Article X relating to Termination Of Recipient, the Plan --------- Administrator may subject or condition Grant Shares granted or awarded (hereinafter referred to as "Forfeitable Grant Shares") to such vesting conditions based upon continued provision of services or attainment of goals subsequent to such grant of Forfeitable Grant Shares as the Plan Administrator, in its sole discretion, may deem appropriate and necessary, such as, by way of example and not obligation: A. the attainment of goals by the Recipient; or B. the continued service by such Recipient as a Director to the Company and/or to any Parent or Subsidiary; subject to the provisions set forth below. Where vesting conditions are based upon continued performance of services to the Company, the special rules of Article X relating to Termination Of --------- Recipient shall apply. In the event the Recipient does not satisfy any vesting conditions, the Company may require the Recipient, subject to the repurchase payment terms of section 7.02, to forfeit such unvested ------------ Forfeitable Grant Shares to the Company. All vesting conditions imposed on the grant of Forfeitable Grant Shares, including repurchase payment terms complying with section 7.02, shall be set forth in a written Stock Grant ------------ Agreement, executed by the Company and the Recipient on or before the time of the grant of such Forfeitable Grant Shares, stating the number of said Forfeitable Grant Shares subject to such conditions, and further specifying the vesting conditions. If no vesting conditions are expressly provided in the underlying Stock Grant Agreement, the Grant Shares shall not be deemed to be Forfeitable Grant Shares, and will not be subject to forfeiture. The Plan Administrator may waive the acceleration of any vesting conditions placed upon any Forfeitable Grant Shares should the Plan Administrator, in its sole and absolute discretion, determine it advisable or necessary to do so including, without limitation, in connection with any Termination Of Recipient. 7.02 Repurchase of Forfeitable Grant Shares Which Are Forfeited. ---------------------------------------------------------- A. Repurchase Rights and Price. In the event the Company does not waive --------------------------- its right to require the Recipient to forfeit any or all of such unvested Forfeitable Grant Shares, the Company shall be required to -------- pay the Recipient, for each unvested Forfeitable Grant Share which the Company requires the Recipient to forfeit, the amount per Forfeitable Grant Share set forth in the Stock Grant Agreement, provided, however: -18- (1) The repurchase price per Forfeitable Grant Share in any event may not be less that the "original cost" (as such term is defined below) of such Forfeitable Grant Shares to be forfeited or, if elected by the Plan Administrator in its sole discretion and without any obligation to do so in the underlying Stock Grant Agreement, the "book value" (as such term is defined below) of such Forfeitable Grant Shares to be forfeited, if higher than the original cost; and (2) The "original cost" per Forfeitable Grant Share means the aggregate amount originally paid to the Company by the Recipient (or his, her or its predecessor) to purchase or acquire all of the Grant Shares to be forfeited, divided by the total number of such shares. The amount of consideration paid by any Recipient (or his, her or its predecessor) who originally received the Grant Shares as compensation for services or a bonus, or otherwise without payment of consideration in cash or property, shall be zero The "book value" per Forfeitable Grant Share means the difference between the Company's total assets and total liabilities as of the close of business on the last day of the calendar month preceding the date of forfeiture, divided by the total number of shares of Common Stock then outstanding. The book value per Forfeitable Grant Share shall be determined by the independent certified public accountant regularly engaged by the Company. The determination shall be conclusive and binding and made in accordance with generally accepted accounting principles applied on a basis consistent with those previously applied by the Company. B. Form of Payment. The repurchase payments to be made by the Company --------------- to a Recipient for forfeited Forfeitable Grant Shares shall be in the form of cash or cancellation of purchase money indebtedness with respect to the initial purchase of said Forfeitable Grant Shares by the Recipient, if any, and must be paid no later than ninety (90) days after the date of termination. 7.03 Restrictive Legend. Until such time as all conditions placed upon ------------------ Forfeitable Grant Shares lapse, the Plan Administrator may place a restrictive legend on the share certificate representing such Forfeitable Grant Shares which evidences said restrictions in such form, and subject to such stop instructions, as the Plan Administrator shall deem appropriate and necessary, including the following legend with respect to vesting conditions based upon continued provision of services by the Recipient: THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO FORFEITURE IN THE EVENT CERTAIN VESTING CONDITIONS BASED UPON THE CONTINUED PROVISION OF SERVICES TO THE COMPANY BY THE HOLDER HEREOF ARE NOT SATISFIED. THIS RISK OF FORFEITURE AND UNDERLYING VESTING CONDITIONS ARE SET FORTH IN FULL IN THAT CERTAIN STOCK GRANT AGREEMENT BETWEEN THE HOLDER OF THIS CERTIFICATE AND THE COMPANY DATED THE _______DAY OF ___________, _____________, AND THAT CERTAIN 2000 PINNACLE OIL INTERNATIONAL. INC. DIRECTORS' STOCK pLAN DATED FEBRUARY 15, 2000, A COPY OF WHICH MAY BE INSPECTED BY AUTHORIZED PERSONS AT THE PRINCIPAL OFFICE OF THE COMPANY AND ALL THE PROVISIONS OF WHICH ARE INCORPORATED BY REFERENCE IN THIS CERTIFICATE. The conditions shall similarly apply to any new, additional or different securities the Recipient may become entitled to receive with respect to such Forfeitable Grant Shares by -19- virtue of a stock split or stock dividend or any other change in the corporate or capital structure of the Company. The Plan Administrator shall also have the right, should it elect to do so, to require the Recipient to deposit the share certificate for the Forfeitable Grant Shares with the Company or its agent, endorsed in blank or accompanied by a duly executed irrevocable stock power or other instrument of transfer, until such time as the conditions lapse. The Company shall remove the legend with respect to any Forfeitable Grant Shares which become vested, and remit to the Recipient a share certificate evidencing such vested Grant Shares. ARTICLE VIII NON-CASH PURCHASE CONSIDERATION ------------------------------- 8.01 General. Notwithstanding section 5.06B or section 6.04, if and to the ------- ------------- ------------ extent expressly permitted in the underlying Stock Option Certificate or Stock Grant Agreement (as the case may be), or if and to the extent otherwise consented to by the Plan Administrator in writing, payment of the Gross Option Exercise Price or the Gross Stock Grant Purchase Price (as the case may be) may be made by one or more of the following non-cash forms of payment in lieu of cash consideration: A. Shares of Common Stock owned by the Recipient duly endorsed for transfer to the Company, with a Fair Market Value on the date of delivery equal: (1) in the case of the exercise of an Option, to the aggregate Gross Option Exercise Price of the Option Shares with respect to which the Option or portion thereof is thereby exercised, or (2) in the case of the purchase of Grant Shares, to the Gross Stock Grant Purchase Price; B. The surrender or relinquishment of options, warrants or other rights to acquire Common Stock held by the Recipient, with a Fair Market Value on the date of delivery (or date of grant if permitted by the Plan Administrator) equal: (1) in the case of the exercise of an Option, to the aggregate Gross Option Exercise Price of the Option Shares with respect to which the Option or portion thereof is thereby exercised, or (2) in the case of the purchase of Grant Shares, to the Gross Stock Grant Purchase Price; C. A reduction in the amount of any Company liability to the Recipient, including any liability attributable to the Recipient's participation in any Company-sponsored deferred compensation program or arrangement; D. A full recourse promissory note bearing interest at a rate as shall then preclude the imputation of interest under the Code, and payable upon such terms as may be prescribed by the Plan Administrator. The Plan Administrator shall prescribe the form of such note and the security to be given for such note. Notwithstanding the foregoing, no Option may be exercised by delivery of a promissory note or by a loan from the Company if such loan or other extension of credit is prohibited by law at the time of exercise of this Option or does not comply with the provisions of -20- Regulation G promulgated by the Federal Reserve Board with respect to "margin stock" if the Company and the Recipient are then subject to such Regulation; E. Any combination of the foregoing methods of payment; and/or F. Such other good and valuable consideration and method of payment for the issuance of Plan Shares to the extent permitted by Applicable Laws. ARTICLE IX STOCK APPRECIATION RIGHTS ------------------------- 9.01 Grant. The Plan Administrator may from time to time, and subject to ----- the provisions of the Plan and such other terms and conditions as the Plan Administrator may prescribe, in its sole discretion, grant to any Eligible Director the following Stock Appreciation Rights ("SARs"): A. in connection with all or any part of an Option granted to such Eligible Director, either concurrently with the grant of such underlying Option or at any time thereafter during the term of such underlying Option (a "Tandem SAR"); or B. independently of the grant of any Option to such Eligible Director (an "Independent SAR"). The grant of an SAR shall be evidenced by a written Stock Appreciation Rights Agreement ("SAR Agreement"), executed by the Recipient and an authorized officer of the Company, stating: C. if the SAR is a Tandem SAR, the underlying Option to which the SAR relates; D. if the SAR is an Independent SAR, the number of Plan Shares covered by the SAR (the "SAR Shares"); E. if the SAR is an Independent SAR, the term of the SAR; and F. all other material terms and conditions of such SAR. 9.02 Tandem SARs. The following provisions apply to each grant of a Tandem ----------- SAR: A. The Tandem SAR shall entitle the Recipient to exercise such Tandem SAR by surrendering to the Company unexercised a portion of the underlying Option. The Recipient shall receive in exchange from the Company an amount, payable pursuant to section 9.04, equal to the excess of (x) ------------ the aggregate Fair Market Value on the date of exercise of the Tandem SAR of the Option Shares covered by the surrendered portion of the underlying Option, over (y) the aggregate Option Price of the Option Shares covered by the surrendered portion of the underlying Option. Notwithstanding the foregoing, the Plan Administrator may place limits on the amount that may be paid upon exercise of a Tandem SAR; provided, however, that such limit shall not restrict the exercisability of the underlying Option; B. When a Tandem SAR is exercised, the underlying Option, to the extent surrendered, shall no longer be exercisable; -21- C. A Tandem SAR shall be exercisable only when and to the extent that the underlying Option is exercisable, and shall expire no later than the date on which such underlying Option expires; and D. A Tandem SAR may only be exercised at a time when the Fair Market Value of the Option Shares covered by the underlying Option exceeds the exercise price of the Option Shares covered by the underlying Option. 9.03 Independent SARs. The following provisions apply to each grant of an ---------------- Independent SAR: A. The Independent SAR shall entitle the Recipient, by exercising the Independent SAR, to receive from the Company an amount equal to the excess of (x) the Fair Market Value of the SAR Shares covered by exercised portion of the Independent SAR, as of the date of such exercise, over (y) the Fair Market Value of the SAR Shares covered by the exercised portion of the Independent SAR, as of the date on which the Independent SAR was granted; provided, however, that the Plan Administrator may place limits on the amount that may be paid upon exercise of a Independent SAR; and B. Independent SARs shall be exercisable, in whole or in part, at such times as the Plan Administrator shall specify in the SAR Agreement. 9.04 Form of Payment. The Company's obligation arising upon the exercise of --------------- A. Tandem SARs shall be paid in cash (either outright or pursuant to such deferred payment arrangement as the Plan Administrator specifies in the underlying SAR Agreement); and B. Independent SARs shall be paid in cash (either outright or pursuant to such deferred payment arrangement as the Plan Administrator specifies in the underlying SAR Agreement) or SAR Shares, or in any combination of cash and SAR Shares, as the Plan Administrator, in its sole discretion, may determine; provided, however, the Plan Administrator may, in the case of the exercise of either Tandem SARs or Independent SARS, withhold such amount of cash and, if applicable, SAR Shares, as the Plan Administrator deems necessary to satisfy any applicable Withholding Taxes. SAR Shares issued upon the exercise of an Independent SAR shall be valued at their Fair Market Value as of the date of exercise. 9.05 SAR Term; Expiration. The term of each SAR shall commence at the grant -------------------- date for such SAR as determined by the Plan Administrator, and shall expire (unless, in the case of a Tandem SAR, an earlier expiration date is expressly provided in the underlying SAR Agreement or another section of the Plan including, without limitation, section 9.07), on the first ------------ business day prior to the ten (10) year anniversary of the date of grant thereof. The Plan Administrator may extend the term of any outstanding SAR should the Plan Administrator, in its sole and absolute discretion, determine it advisable or necessary to do so including, without limitation, in connection with any Termination Of Recipient. 9.06 Exercise Date. Unless a later exercise date is expressly provided in ------------- the underlying SAR Agreement or another section of the Plan, each SAR shall become exercisable on the later of: ----- A. the date of its grant as determined by the Plan Administrator; or -22- B. the date of delivery to the Recipient, and execution by the Company and the Recipient, of the underlying SAR Agreement evidencing the grant of the SAR. No SAR shall be exercisable after the expiration of its applicable term as set forth in section 9.05. Subject to the foregoing, each SAR shall be ------------ exercisable in whole or in part during its applicable term unless expressly provided otherwise in the underlying SAR Agreement. 9.07 Vesting Conditions. Subject to the limitations in Article X relating to ------------------ --------- Termination Of Recipient, the Plan Administrator may subject any SARs granted to such vesting conditions (in addition, in the case of any Tandem SARs, to such vesting conditions as are specified in the underlying Option) as the Plan Administrator, in its sole discretion, determines are appropriate and necessary, such as, by way of example and not obligation: A. the attainment of goals by the Recipient; or B. the continued service by the Recipient as a Director to the Company and/or to any Parent or Subsidiary. Where vesting conditions are based upon continued performance of services to the Company, the special rules of Article X relating to Termination Of --------- Recipient shall apply. If no vesting is expressly provided in the underlying SAR Agreement, the SAR shall be deemed fully vested upon date of grant (subject, in the case of any Tandem SAR, to such vesting conditions as are specified under the underlying Option). The Plan Administrator may waive the acceleration of any vesting and/or expiration provision of any outstanding SAR should the Plan Administrator, in its sole and absolute discretion, determine it advisable or necessary to do so including, without limitation, in connection with any Termination Of Recipient. 9.08 Manner of Exercise. An exercisable SAR, or any exercisable portion ------------------ thereof, may be exercised solely by delivery to the Secretary of the Company at its principal executive offices prior to the time when such SAR (or such portion) becomes unexercisable under this Article IX of each of ---------- the following: A. a Notice of Exercise of the SAR in the form attached to the underlying SAR Agreement, duly signed by the Recipient or other Person then entitled to exercise the SAR or portion thereof, stating the number of Option Shares (in the case of a Tandem SAR) or SAR Shares (in the case of an Independent SAR) to be exercised; B. a Consent of Spouse from the spouse of the Recipient, if any, duly signed by such spouse; C. in the event that the SAR or portion thereof shall be exercised by any Person other than the Recipient, appropriate proof of the right of such person or persons to exercise the SAR or portion thereof; and D. such documents, representations and undertakings as provided in the SAR Agreement and/or which the Plan Administrator, in its absolute discretion, deems necessary or advisable pursuant to section 13.01. ------------- 9.09 Conditions to Issuance of SAR Shares. The Company shall not be required ------------------------------------ to issue or deliver any certificate or certificates representing the SAR Shares purchased upon -23- exercise of any Independent SAR or any portion thereof prior to fulfillment of all of the following conditions: A. the delivery of the documents described in section 9.08; ------------ B. the receipt by the Company of full payment in satisfaction of any applicable Withholding Taxes; C. subject to Article XIII, the satisfaction of any requirements or ------------ conditions of the Applicable Laws; and D. the lapse of such reasonable period of time following the exercise of the Independent SAR as the Plan Administrator may establish from time- to-time for administrative convenience. ARTICLE X SPECIAL RULES FOR VESTING OR FORFEITURE CONDITIONS BASED ON CONTINUED PERFORMANCE OF SERVICES ----------------------------------------------------- 10.01 Lapse of Unvested Options, Unvested SARs, and Forfeitable Grant Shares. ---------------------------------------------------------------------- Where vesting conditions are imposed upon Options or SARs, or forfeiture conditions are imposed upon Forfeitable Grant Shares, and such conditions are based upon continued performance of services to the Company, then, in the event of Termination Of Recipient: A. in the case of unvested Options, the prospective right to purchase -------- unvested Option Shares shall immediately lapse upon such termination -------- if not exercised prior thereto; B. in the case of unvested SARs, the prospective right to exercise the -------- unvested portion of such SARs shall immediately lapse upon such termination if not exercised prior thereto; and C. in the case of unvested Forfeitable Grant Shares, all such unvested -------- Forfeitable Grant Shares shall be immediately forfeited upon such termination unless such forfeiture is expressly waived in writing by the Company; provided, however, in each of the foregoing cases, the Plan Administrator may, but without any obligation to do so, provide in the underlying Award Agreement that such unvested Options, SARs or Forfeitable Grant Shares shall immediately vest upon the occurrence of one or more events expressly ---------------- specified in the underlying Award Agreement. 10.02 Immediate Vesting of Unvested Options, Unvested SARs, and Forfeitable --------------------------------------------------------------------- Grant Shares Upon Specified Events. The Plan Administrator may, but ---------------------------------- without any obligation to do so, provide in the underlying Award Agreement that unvested Options, SARs or Forfeitable Grant Shares shall immediately vest upon the occurrence of one or more of the following ---------------- events as selected by the Plan Administration in its sole and absolute discretion: A. in the event of a Change In Control; and/or B. in the event of an Approved Corporate Transaction. -24- 10.03 Acceleration of Expiration Date - Vested Options and SARs. Where vesting ------------------------------- conditions are imposed upon Options or SARs, and such conditions are based upon continued performance of services to the Company, then, in the event of Termination Of Recipient, unless otherwise expressly waived or extended by the underlying Award Agreement, the following rules shall apply: A. The expiration date for vested Options and vested SARs shall be --------------- ------ ------ accelerated to thirty (30) days after the effective date of Termination Of Recipient; provided, however, the Plan Administrator may, but without any obligation to do so, provide in the underlying Award Agreement that the expiration date for vested Options or vested ------ ------ SARs shall not be accelerated in any event, or be accelerated to a date later than said thirty (30) days after the effective date of Termination Of Recipient. B. The expiration date for unvested Options and unvested SARs (insofar as --------------- -------- -------- they do not become immediately vested pursuant to section 10.02)) ------------- shall be upon Termination Of Recipient if earlier than the expiration date specified in section 5.03 in the case of an Option and section ------------ ------- 9.05 in the case of an SAR. ---- ARTICLE XI ASSIGNABILITY OF CERTAIN AWARDS ------------------------------- 11.01 Exercise of Options and SARs. Options and SARs (whether vested or ---------------------------- unvested) may be exercised only by the original Recipient thereof or, to the extent a Transfer is permitted pursuant to section 11.02 and/or ------------- section 11.03 below, by a permitted transferee of such Options or SARs. ------------- 11.02 Transfer of Options, SARs and Unvested Forfeitable Grant Shares. Except --------------------------------------------------------------- as provided in section 11.03 below, neither Options and SARs (whether ------------- vested or unvested), nor unvested Forfeitable Grant Shares, may be -------- Transferred by a Recipient, including upon the Death of a Recipient and/or pursuant to a Qualified Domestic Relations Order as defined by Section 414(p) of the Code, unless (A) such Transfer is expressly ------ permitted in the underlying Award Agreement, or (B) the Plan Administrator, in its sole and absolute discretion, otherwise consents to such Transfer in writing; provided, however, anything in the preceding sentence to the contrary notwithstanding, the following Options may not in any circumstances be Transferred: A. Options registered under the Securities Act with the Commission on Form S-8; and/or B. Options granted pursuant to any other exemption from registration or qualification to be relied upon by the Company under applicable Securities Laws which prohibits such assignment. 11.03 Death of Recipient. Upon the death of the Recipient (if the Recipient ------------------ is a natural Person, vested Options, vested SARs and unvested Forfeitable ------ ------ -------- Grant Shares may, if such Transfer is expressly permitted in the underlying Award Agreement, or if the Plan Administrator, in its sole and absolute discretion, otherwise consents to such Transfer in writing, be Transferred to such Persons who are the deceased Recipient's successors pursuant to will or the laws of descent or distribution by reason of the death of the Recipient (the "Recipient's Successors") and, in the case of vested Options, and vested SARs, may thereafter be exercised by the ------ ------ Recipient's Successors. -25- Options, SARs and unvested Forfeitable Grant Shares so Transferred shall -------- not be further Transferred by the Recipient's Successors except to the extent the original Recipient of such Options, SARs and unvested -------- Forfeitable Grant Shares would have been permitted to Transfer such Options and SARs pursuant to section 11.02. ------------- 11.04 Effect of Prohibited Transfer or Exercise. Any Transfer or exercise of ----------------------------------------- any Option or SAR or unvested Forfeitable Grant Share so Transferred in -------- violation of this Article XI shall be null and void ab initio and of no ---------- further force and effect. 11.05 Application to Vested Grant Shares. Under no circumstances shall the ---------------------------------- prohibition against Transfer contained in this Article XI be construed to ---------- apply to vested Grant Shares. ------ ARTICLE XII NO STOCKHOLDER RIGHTS FOR HOLDERS OF OPTIONS OR SARs ---------------------------------------------------- 12.01 General. The Recipient of any Option or SAR (whether vested or unvested) ------- shall not be, nor shall such Recipient have any of the rights or privileges of, a stockholder of the Company with respect to the Option Shares underlying the Option or SAR Shares underlying the SAR including, by way of example and not limitation, the right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action, or to receive notice of meetings or other actions affecting stockholders, or to receive dividends, distributions, subscription rights or otherwise, unless and until all conditions for exercise of the Option or SARs shall be satisfied, and the Option or SAR duly exercised and underlying Option Shares or SAR Shares duly issued and delivered, at which time the Recipient shall become a stockholder of the Company with respect to such issued Option Shares or SAR Shares and, in such capacity, shall thereafter be fully entitled to receive dividends (if any are declared and paid), to vote, and to exercise all other rights of a stockholder with respect to such issued Option Shares or SAR Shares. ARTICLE XIII COMPLIANCE WITH APPLICABLE SECURITIES LAWS ------------------------------------------ 13.01 Registration or Exemption from Registration. Unless expressly ------------------------------------------- stipulated in the underlying Award Agreement, in no event shall the Company be required at any time to register any securities issued under or derivative from the Plan, including any Option, Option Shares, Grant Shares or SAR Shares awarded or granted hereunder (collectively, the "Plan Securities"), under the Securities Act (including, without limitation, as part of any primary or secondary offering, or pursuant to Form S-8) or to register or qualify the Plan Securities under any applicable Securities Laws. In the event the Company does not register or qualify the Plan Securities, the Plan Securities shall be issued in reliance upon such exemptions from registration or qualification under the applicable Securities Laws that the Company and its legal counsel, in their sole discretion, shall determine to be appropriate and necessary with respect to any particular offer or sale of securities under the Plan. 13.02 Failure or Inability to Obtain Regulatory Consents or Approvals. In --------------------------------------------------------------- the event the Company is unable to obtain, without undue burden or expense, such consents or approvals that may be required from any applicable regulatory authority (or may be deemed reasonably necessary or advisable by legal counsel for the Company) with respect to the applicable exemptions from registration or qualification under the applicable Securities Laws which the Company is reasonably relying upon, the Company -26- shall have no obligation under this Agreement to issue or sell the Plan Securities until such time as such consents or approvals may be reasonably obtained without undue burden or expense, and the Company shall be relieved of all liability therefor; provided, however, the Company shall, if requested by the Recipient, rescind the Recipient's investment decisions and return all funds or payments made by the Recipient to the Company should the Company fail to obtain such consents or approvals within a reasonable time after the Recipient tenders such funds or property to the Company. 13.03 Provision of Other Documents, Including Recipient's Representative's -------------------------------------------------------------------- Letter. If requested by the Company, the Recipient shall provide such ------ further representations or documents as the Company or its legal counsel, in their reasonable discretion, deem necessary or advisable in order to effect compliance with the conditions of any and all of the aforesaid exemptions from registration or qualification under the applicable Securities Laws which the Company is relying upon, or with all applicable rules and regulations of any applicable securities exchanges or Nasdaq. If required by the Company, the Recipient shall provide a Recipient's Representative's Letter from a purchaser representative with credentials reasonably acceptable to the Company to the effect that such purchaser representative has reviewed the Recipient's proposed investment in the Plan Securities and has determined that an investment in the Plan Securities: A. is appropriate in light of the Recipient's financial circumstances, B. that the purchaser representative and, if applicable, the Recipient, have such knowledge and experience in financial and business matters that such persons are capable of evaluating the merits and risks of an investment in the Plan Securities, and C. that the purchaser representative and, if applicable, the Recipient, have such business or financial experience to be reasonably assumed to have the capacity to protect the Recipient's interests in connection with the purchase of the Plan Securities. 13.04 Legend on Plan Shares. In the event the Company delivers unregistered --------------------- Plan Shares, the Company reserves the right to place the following legend or such other legend as it deems necessary on the share certificate or certificates to comply with the applicable Securities Laws being relied upon by the Company. THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN (1) REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION AFFORDED BY SUCH ACT, OR (2) REGISTERED UNDER THE SECURITIES LAWS OF ANY STATE OR TERRITORY OF THE UNITED STATES OR PROVINCE OF CANADA WHICH MAY BE APPLICABLE, IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION AFFORDED BY SUCH STATE, TERRITORIAL AND/OR PROVINCIAL SECURITIES LAWS. THESE SECURITIES HAVE BEEN ACQUIRED FOR THE HOLDER'S OWN ACCOUNT FOR INVESTMENT PURPOSES AND NOT WITH A VIEW FOR RESALE OR DISTRIBUTION. THESE SECURITIES MAY NOT BE SOLD OR TRANSFERRED UNLESS (A) THEY HAVE BEEN REGISTERED UNDER THE SECURITIES ACT AS WELL AS UNDER THE SECURITIES LAWS OF ANY STATE OR TERRITORY OF THE UNITED STATES AS MAY THEN BE APPLICABLE, OR (B) THE TRANSFER AGENT (OR THE COMPANY IF THEN ACTING AS ITS TRANSFER AGENT) IS PRESENTED WITH EITHER A WRITTEN OPINION SATISFACTORY TO COUNSEL FOR THE COMPANY OR A NO-ACTION OR INTERPRETIVE LETTER FROM -27- THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION AND ANY APPLICABLE STATE, TERRITORIAL AND/OR PROVINCIAL SECURITIES REGULATORY AGENCY TO THE EFFECT THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE CIRCUMSTANCES OF SUCH SALE OR TRANSFER. ARTICLE XIV REPORTS TO RECIPIENTS OF AWARDS ------------------------------- 14.01 Financial Statements. The Company shall provide each Recipient with the -------------------- Company's financial statements, in the form generally distributed to its stockholders, at least annually. ARTICLE XV ADJUSTMENTS ----------- 15.01 Common Stock Recapitalization or Reclassification; Combination or Reverse ------------------------------------------------------------------------- Stock Split; Forward Stock Split. If: -------------------------------- A. (outstanding shares of Common Stock are subdivided into a greater number of shares by reason of recapitalization or reclassification, B. a dividend in Common Stock shall be paid or distributed in respect of the Common Stock, then the number of Plan Shares, if any, available for issuance under the Plan, and the Option Price of any outstanding Options in effect immediately prior to such subdivision or at the record date of such dividend shall, simultaneously with the effectiveness of such subdivision or immediately after the record date of such dividend, be proportionately increased and reduced, respectively. If outstanding shares of Common Stock are combined into a lesser number of shares by reason of combination or reverse stock split, then the number of Plan Shares, if any, available for issuance under the Plan, and the Option Price of any outstanding Option in effect immediately prior to such combination shall, simultaneously with the effectiveness of such combination, be proportionately reduced and increased, respectively. 15.02 Consolidation or Merger; Exchange of Securities; Divisive Reorganization; ------------------------------------------------------------------------- Other Reorganization or Reclassification. In case of ---------------------------------------- A. the consolidation, merger, combination or exchange of shares of capital stock with another entity, B. the divisive reorganization of the Company (i.e., split-up, spin-off or split-off), or C. any capital reorganization or any reclassification of Common Stock (other than a recapitalization or reclassification described above in section 15.01), ------------- then the Recipient shall thereafter be entitled upon exercise of the Option to purchase the kind and number of shares of capital stock or other securities or property of the Company (or its successor{s}) receivable upon such event by a Recipient of the number of Option Shares which such Option entitles the Recipient to purchase from the Company immediately prior to such event. In every such case, the Company may appropriately adjust the number of Option Shares which may be issued under the Plan, the number of Option Shares subject to Options theretofore granted under the Plan, the Option Price of -28- Options theretofore granted under the Plan, and any and all other matters deemed appropriate by the Plan Administrator. 15.03 Adjustments Determined in Sole Discretion of Board. All adjustments to -------------------------------------------------- be made pursuant to the foregoing subsections shall be made in such manner as the Plan Administrator shall deem equitable and appropriate, the determination of the Plan Administrator shall be final, binding and conclusive. 15.04 No Other Rights to Recipient. Except as expressly provided in this ---------------------------- Article XV: ---------- A. the Recipient shall have no rights by reason of any subdivision or consolidation of shares of capital stock of any class or the payment of any stock dividend or any other increase or decrease in the number of shares of stock of any class, and B. the dissolution, liquidation, merger, consolidation or divisive reorganization or sale of assets or stock to another corporation (including any Approved Corporate Transactions), or any issue by the Company of shares of capital stock of any class, or warrants or options or rights to purchase securities (including securities convertible into shares of capital stock of any class), shall not affect, and no adjustment by reason thereof shall be made with respect to, the number of, or the Option Price for, the Option Shares. The grant of an Award pursuant to the Plan shall not in any way affect or impede the right or power of the Company to make adjustments, reclassifications, reorganizations or changes of its capital or business structure or to merge, consolidate, dissolve or liquidate, or to sell or transfer all or any part of its business or assets. ARTICLE XVI APPROVED CORPORATE TRANSACTIONS -- AFFECT ON OPTIONS ---------------------------------------------------- 16.01 General. Notwithstanding Article XV above, in the event of the ------- ---------- occurrence of any Approved Corporate Transaction, or in the event of any change in applicable laws, regulations or accounting principles, the Plan Administrator in its discretion is hereby authorized to take any one or more of the following actions whenever the Plan Administrator determines that such action is appropriate in order to facilitate such Approved Corporate Transactions or to give effect to changes in laws, regulations or principles: A. Purchase or Replacement of Option. In its sole and absolute --------------------------------- discretion, and on such terms and conditions as it deems appropriate, the Plan Administrator may provide, either by the terms of the underlying Award Agreement or by action taken prior to the occurrence of such transaction or event and either automatically or upon the Recipient's request, for any one or combination of the following: (1) the purchase of any such Option for an amount of cash equal to the amount that could have been attained upon the exercise of such Option, or realization of the Recipient's rights had such Option been currently exercisable or payable or fully vested; and/or (2) the replacement of such Option with other rights or property (which may or may not be securities) selected by the Plan Administrator in its sole discretion. -29- B. Acceleration of Vesting and Exercise. In its sole and absolute ------------------------------------ discretion, and on such terms and conditions as it deems appropriate, the Plan Administrator may provide, either by the terms of the underlying Award Agreement or by action taken prior to the occurrence of such transaction or event, that such Option may not be exercised after the occurrence of such event; provided, however, the Recipient must be given the opportunity, for a specified period of time prior to the consummation of such transaction, to exercise the Option as to all Option Shares (i.e., both fully vested and unvested) covered thereby. C. Assumption or Substitution. In its sole and absolute discretion, -------------------------- and on such terms and conditions as it deems appropriate, the Plan Administrator may provide, either by the terms of the underlying Award Agreement or by action taken prior to the occurrence of such transaction or event, that such Option be assumed by the successor or survivor corporation, or a parent or subsidiary thereof, or shall be substituted for by similar options covering the capital stock of the successor or survivor corporation, or a parent or subsidiary thereof, with appropriate adjustments as to the number and kind of shares and prices. ARTICLE XVII CERTAIN TRANSACTIONS WITHOUT CHANGE IN BENEFICIAL OWNERSHIP -- AFFECT ON OPTIONS ------------------------------------------ 17.01 General. Notwithstanding Article XV above, in the event of a transaction ------- ---------- whose principal purpose is to change the State in which the Company is incorporated, or to form a holding company, or to effect a similar reorganization as to form of entity without change of beneficial ownership, including, without limitation, through: A. a merger or consolidation or stock exchange or divisive reorganization (i.e., spin-off, split-off or split-up) or other reorganization with respect to the Company and/or its stockholders, or B. the sale, transfer, exchange or other disposition by the Company of its assets in a single or series of related transactions, then the Plan Administrator may provide, in its sole and absolute discretion, and on such terms and conditions as it deems appropriate, either by the terms of the underlying Award Agreement or by action taken prior to the occurrence of such transaction or event, that such Option shall be assumed by the successor or survivor corporation, or a parent or subsidiary thereof, or shall be substituted for by similar options covering the capital stock of the successor or survivor corporation, or a parent or subsidiary thereof, with appropriate adjustments as to the number and kind of shares and prices. ARTICLE XVIII DRAG-ALONG RIGHTS ----------------- 18.01 General. In the event the Board and, to the extent required by law, the ------- stockholders of the Company, approve the sale, transfer, exchange or other disposition of fifty percent (50%) or more of the capital stock of the Company in a single or series of related transactions (an "Approved Stock Sale Transaction"), the Company shall have the right (the "Drag- Along Right") to require the Recipient and/or his, her or its permitted successors, to sell, transfer, exchange or otherwise dispose of any Plan Shares held by such Persons as part of such Approved Stock Sale Transaction, notwithstanding that such Persons did not approve of such Approved Stock Sale Transaction and/or did not otherwise consent to the sale, transfer, exchange or other disposition of their Plan Shares -30- in accordance with the terms of such Approved Stock Sale Transaction; provided, however, in the event less than all of the shares of Common Stock are to be sold, transferred, exchanged or otherwise disposed as part of the Approved Stock Sale Transaction, the Recipient and/or his, her or its permitted successors will not be required to sell, transfer, exchange or otherwise dispose of a number of Plan Shares which exceeds the aggregate number of Plan Shares held by such Person multiplied by a fraction, the numerator of which is the number of Plan Shares held by such Persons and the denominator of which is the total number of share of Common Stock then issued and outstanding. 18.02 Legend on Shares. To facilitate compliance with the terms of this ---------------- Article XVIII, the Company shall have the right to place the following ------------- legend on the certificates representing the Plan Shares: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN DRAG-ALONG RIGHTS SET FORTH IN FULL IN THAT CERTAIN 2000 PINNACLE OIL INTERNATIONAL. INC. DIRECTORS' STOCK PLAN DATED FEBRUARY 15, 2000, AS IT MAY BE AMENDED OR RESTATED FROM TIME TO TIME, A COPY OF WHICH MAY BE INSPECTED BY AUTHORIZED PERSONS AT THE PRINCIPAL OFFICE OF THE COMPANY, AND ALL THE PROVISIONS OF WHICH ARE INCORPORATED BY REFERENCE IN THIS CERTIFICATE." 18.03 Escrow; Irrevocable Power Of Attorney. For purposes of facilitating the ------------------------------------- obligation to transfer set forth in this Article XVIII, the Company, in ------------- its sole discretion, may require each Recipient and/or his, her or its permitted successors, at the Company's cost, to deliver the share certificate(s) representing the Plan Shares held by such Recipient and/or his, her or its permitted successors (the "Stock Certificate") with a stock power executed by such Recipient and/or his, her or its permitted successors in blank, to the Secretary of the Company or the Company's designee, to hold the Stock Certificate and stock power in escrow and to take all such actions and to effectuate all such transfers or releases as are in accordance with the terms of this Article XVIII. The Stock ------------- Certificate may be held in escrow so long as the Plan Shares represented by the Stock Certificate are subject to the terms of this Article XVIII. ------------- The Recipient and/or his, her or its permitted successors each hereby irrevocably constitutes and appoints the Secretary of the Company, with full power of substitution, as the true and lawful attorney to act as escrow holder for such Persons under this Article XVIII, and any ------------- amendments to it. The power of attorney hereby granted is irrevocable and shall be deemed to be coupled with an interest, and it shall survive death, disability, dissolution or termination of the Recipient and/or his, her or its permitted successors. The escrow holder will not be liable to any party for any act or omission unless the escrow holder is grossly negligent in performing such act or omission. The escrow holder may rely upon any letter, notice or other document executed by any signature purported to be genuine. ARTICLE XIX AMENDMENT AND DISCONTINUATION OF PLAN; MODIFICATION OF AWARDS ------------------------------------------------------------- 19.01 Amendment, Modification or Termination of Plan. The Board may amend or ---------------------------------------------- modify the Plan or suspend or discontinue the Plan at any time or from time-to-time; provided, however, no such action may adversely alter or impair any Award previously granted under the Plan without the consent of each Recipient affected thereby. 19.02 Modification of Terms of Outstanding Options. Subject to the terms and -------------------------------------------- conditions and within the limitations of the Plan, the Plan Administrator may modify the terms and conditions of any outstanding Options granted under the Plan, including extending the -31- expiration date of such Options or renewing such Options or repricing such options or modifying any vesting conditions, or accept the surrender of outstanding Options (to the extent not theretofore exercised) and authorize the granting of new Options in substitution therefor (to the extent not theretofore exercised); provided, however, no modification of any outstanding Option may, without the consent of the Recipient affected thereby, adversely alter or impair such Recipients rights under such Option. 19.03 Modification of Vesting Conditions Placed on Forfeitable Grant Shares. --------------------------------------------------------------------- Subject to the terms and conditions and within the limitations of the Plan, including vesting conditions, the Plan Administrator may modify the terms and conditions placed upon the grant of any Forfeitable Grant Shares; provided, however, no modification of any conditions placed upon Forfeitable Grant Shares may, without the consent of the Recipient thereof, adversely alter or impair such Recipient's rights with respect to such Forfeitable Grant Shares. 19.04 Compliance with Laws. The Plan Administrator may, at any time or from -------------------- time-to-time, without receiving further consideration from, or paying any consideration to, any Person who may become entitled to receive or who has received the grant of an Award hereunder, modify or amend Awards granted under the Plan as required to: A. comport with changes in securities, tax or other laws or rules, regulations or regulatory interpretations thereof applicable to the Plan or Awards thereunder or to comply with the rules or requirements of any stock exchange or Nasdaq and/or B. ensure that the Plan is and remains exempt from the application of any participation, vesting, benefit accrual, funding, fiduciary, reporting, disclosure, administration or enforcement requirement of either the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or the corresponding provisions of the Internal Revenue Code of 1986, as amended (Subchapter D of Title A, Chapter 1 of the Code {encompassing Sections 400 to 420 of the Code}). ARTICLE XX MISCELLANEOUS ------------- 20.01 Performance on Business Day. In the event the date on which a party to --------------------------- the Plan is required to take any action under the terms of the Plan is not a business day, the action shall, unless otherwise provided herein, be deemed to be required to be taken on the next succeeding business day. 20.02 Employment Status. In no event shall the granting of an Award be ----------------- construed to: A. grant a continued right of employment to a Recipient if such Person is employed by the Company and/or by the Parent and/or any Subsidiary, or B. affect, restrict or interfere with in any way any right the Company and/or Parent and/or any Subsidiary may have to terminate or otherwise discharge the employment and/or engagement of such Person, at any time, with or without cause, except to the extent that such Person and the Company and/or Parent and/or any Subsidiary may have otherwise expressly agreed in writing. 20.03 Non-Liability For Debts; Restrictions Against Transfer. No Options or ------------------------------------------------------ unvested Forfeitable Grant Shares granted hereunder, or any part -------- thereof, shall: -32- A. be liable for the debts, contracts, or engagements of a Recipient, or such Recipient's successors in interest as permitted under this Plan, or B. be subject to disposition by transfer, alienation, or any other means whether such disposition be voluntary or involuntary or by operation of law, by judgment, levy, attachment, garnishment, or any other legal or equitable proceeding (including bankruptcy), and any attempted disposition thereof shall be null and void ab initio and of no further force and effect. 20.04 Relationship Of Plan To Other Options And Compensation Plans. The ------------------------------------------------------------ adoption of this Plan shall not affect any other compensation or incentive plans in effect for the Company or any Parent or Subsidiary. Nothing in this Plan shall be construed to limit the right of the Company to: A. establish any other forms of incentives or compensation for Directors of the Company and/or of any Parent and/or any Subsidiary; or B. to grant options to purchase shares of Common Stock or to award shares of Common Stock or grant any other securities or rights otherwise under this Plan in connection with any proper corporate purpose including but not by way of limitation, in connection with the acquisition by purchase, lease, merger, consolidation or otherwise, of the business, stock or assets of any corporation, partnership, firm or association. 20.05 Severability. If any term or provision of this Plan or the application ------------ thereof to any person or circumstance shall, to any extent, be determined to be invalid, illegal or unenforceable under present or future laws, then, and in that event: A. the performance of the offending term or provision (but only to the extent its application is invalid, illegal or unenforceable) shall be excused as if it had never been incorporated into this Plan, and, in lieu of such excused provision, there shall be added a provision as similar in terms and amount to such excused provision as may be possible and be legal, valid and enforceable; and B. the remaining part of this Plan (including the application of the offending term or provision to persons or circumstances other than those as to which it is held invalid, illegal or unenforceable) shall not be affected thereby, and shall continue in full force and effect to the fullest extent provided by law. 20.06 Headings; References; Incorporation; Gender; Statutory References. ----------------------------------------------------------------- The headings used in this Plan are for convenience and reference purposes only, and shall not be used in construing or interpreting the scope or intent of this Plan or any provision hereof. References to this Plan shall include all amendments or renewals thereof. All cross-references in this Plan, unless specifically directed to another agreement or document, shall be construed only to refer to provisions within this Plan, and shall not be construed to be referenced to the overall transaction or to any other agreement or document. Any Exhibit referenced in Plan shall be construed to be incorporated in this Plan by such reference. As used in this Plan, each gender shall be deemed to include the other gender, including neutral genders appropriate for entities, if applicable, and the singular shall be deemed to include the plural, and vice versa, as the context requires. Any reference to statutes or laws will include all amendments, modifications, or replacements of the specific sections and provisions concerned. 20.07 Applicable Law. This Plan and the rights and remedies of each party -------------- arising out of or relating to this Plan (including, without limitation, equitable remedies) shall (with the -33- exception of the Securities Laws) be solely governed by, interpreted under, and construed and enforced in accordance with the laws (without regard to the conflicts of law principles) of the State of Nevada, as if this Plan were made, and as if its obligations are to be performed, wholly within the State of Nevada. -34- EX-4.2 3 STOCK OPTION CERTIFICATE Exhibit 4.2 ----------- ================================================================================ STOCK OPTION CERTIFICATE 2000 PINNACLE OIL INTERNATIONAL, INC. DIRECTORS' STOCK PLAN ----------------------------------------------------------- [To be prepared by the Company and signed by the Recipient]
========================================================================================================== Name of Recipient...................... ------------------------------------------------------------------ Capacity of Recipient.................. Director Legal Address/Domicile of Recipient.... ------------------------------------------------------------------ Citizenship of Recipient............... [_] United States [_] Canada [_] Other: ------------------------------------------------------- Number of Option Shares................ ------------------------------------------------------------------ Option Price per Option Share.......... U.S. $ -------------- Classification of Option............... [_] Non-Qualified Option [_] Incentive Option Vesting................................ [_] Fully Vested [_] Continuous Service Vesting (see sections 2 through 4 below) ---------- - Continuous Services Vesting Date: Option Expiration Date................. (subject to section 4 below) --------- Option Effective Date.................. ------------------------------------------------------------------ U.S. Federal Exemption To Be Relied Upon at the Time of Exercise........... Form S-8 of the United States Securities Act of 1933 (if filed); otherwise Regulation D of the United States Securities Act (Rule 505 or 506) Blue Sky Exemption Relied Upon......... ------------------------------------------------------------------ ==========================================================================================================
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED WITH, OR APPROVED OR DISAPPROVED BY, THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION OR ANY STATE, TERRITORIAL OR PROVINCIAL SECURITIES REGULATORY AGENCY, INCLUDING THE ALBERTA SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE, TERRITORIAL OR PROVINCIAL SECURITIES REGULATORY AGENCY, INCLUDING THE ALBERTA SECURITIES COMMISSION, REVIEWED OR PASSED UPON OR ENDORSED THE MERITS OF THE OFFERING CONTEMPLATED BY THIS STOCK OPTION CERTIFICATE OR THE ACCURACY OR ADEQUACY OF ANY OFFERING MATERIALS, INCLUDING THE 2000 PINNACLE OIL INTERNATIONAL, INC. DIRECTORS' STOCK PLAN OR THE PLAN SUMMARY FOR SUCH DIRECTORS' STOCK PLAN. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THESE SECURITIES ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK AND SUBSTANTIAL AND IMMEDIATE DILUTION. THERE IS A LIMITED PUBLIC MARKET FOR THE SALE OF THESE SECURITIES BY THE RECIPIENT. THESE SECURITIES MAY NOT BE SOLD OR TRANSFERRED UNLESS REGISTERED, OR THE RECIPIENT PROVIDES THE COMPANY AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY, OR ITS LEGAL COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED BY REASON OF AN EXEMPTION OR OTHERWISE. AS A RESULT, THESE SECURITIES ARE SUITABLE ONLY FOR CERTAIN SOPHISTICATED AND QUALIFIED INVESTORS WHO CAN BEAR THE FINANCIAL RISK OF AN INVESTMENT IN THESE SECURITIES FOR AN INDEFINITE PERIOD OF TIME. ================================================================================ No. ---- ================================================================================ THIS STOCK OPTION CERTIFICATE is entered into between Pinnacle Oil International, Inc., a Nevada corporation (the "Company"), whose principal executive office is located at 840 7th Avenue, Suite 750, Phoenix Place, S.W., Calgary, Alberta, Canada, T2P 3G2, and the Recipient identified on the first page of this Stock Option Certificate (the "Recipient"), pursuant to that certain 2000 Pinnacle Oil International, Inc. Directors' Stock Plan dated February 15, 2000, as such Plan may be amended and/or restated from time to time (the "Plan"). Subject to the terms of this Stock Option Certificate, the Recipient's rights to purchase the Option Shares are governed by the Plan, the terms of which are incorporated herein by this reference. Defined terms in this Stock Option Certificate shall have the same meaning as defined terms in the Plan. 1. GRANT OF OPTION This Stock Option Certificate certifies that the Company has granted to the Recipient, pursuant to the terms of the Plan, a stock option (the "Option") to purchase, in whole or in part, the number of Option Shares designated on the first page of this Stock Option Certificate (collectively and severally, the "Option Shares"), representing shares of the common stock, par value $0.001 (the "Common Stock") of the Company, at the exercise or Option Price per Option Share designated on the first page of this Stock Option Certificate (the "Option Price"), subject to the following terms and conditions. 2. CONTINUOUS SERVICE VESTING If the Option Shares are subject to vesting by reason of the Continuous Service Vesting designation set forth on the first page of this Stock Option Certificate, then, subject to section 5.05 of the Plan, the Option ------------ Shares are subject to vesting based upon continued performance of services in the capacity set forth on the first page of this Stock Option Certificate through the Continuous Service Vesting Date (as such date is defined on the first page of this Stock Option Certificate), subject, however, to the following: (a) Death. In the event of the death of the Recipient, all unvested ----- -------- Options Shares which would have vested within the twelve (12) month period following the date of death will vest effective as of the date of death, and the prospective right to purchase the balance of the remaining unvested Option Shares shall lapse. -------- (b) Change Of Control. In the event of a Change in Control (as such term ----------------- is defined in the Plan); then the prospective right to purchase unvested Option Shares shall vest as of the effective date of -------- termination. 3. CONTINUOUS SERVICE VESTING -- ACCELERATION OF VESTING IN THE EVENT OF TERMINATION OF RECIPIENT If the Option Shares are subject to vesting by reason of the Continuous Service Vesting designation set forth on the first page of this Stock Option Certificate, then the prospective right to purchase unvested Option -------- Shares shall, subject to the vesting provisions of section 2 of this Stock --------- Option Certificate, immediately lapse if such right does not vest prior to Termination Of Recipient. 4. TERM OF OPTION The right to exercise the Options granted by this Stock Option Certificate shall commence on the Option Effective Date designated on the first page of this Stock Option Certificate, and shall expire and be null and void ab initio and of no further force or effect to the extent not exercised by 5:00 p.m. M.S.T., on the Option Expiration Date designated on the first page of this Stock Option -2- No. ---- ================================================================================ Certificate (the "Option Expiration Date"); provided, however, if the Option Shares are subject to the Continuous Service Vesting designation set forth on the first page of this Stock Option Certificate, then, pursuant to section 5.05 of the Plan but subject to the vesting provisions of section 2 ------------ --------- of this Stock Option Certificate, in the event of Termination Of Recipient, the expiration date shall be accelerated to two (2) years after the effective date of Termination Of Recipient (if earlier than the Option Expiration Date). 5. DELIVERIES; MANNER OF EXERCISE AND PAYMENT This Option shall be exercised by delivery of the following to the Secretary of the Company at the Company's principal executive offices: (i) this Stock Option Certificate, duly signed by the Recipient; (ii) full payment for the Option Shares to be purchased in (1) immediately available funds (in U.S. dollars); (2) if and to the extent consented to by the Board, shares of Common Stock pursuant to section 8.01A of the Plan; (3) ------------- if and to the extent consented to by the Board, surrender or relinquishment of rights to acquire Common Stock pursuant to section 8.01B of the Plan; ------------- (4) if and to the extent consented to by the Board, a promissory note pursuant to section 8.01D of the Plan; and/or (5) if and to the extent ------------- consented to by the Board, other property constituting good and valuable consideration pursuant to section 8.01F of the Plan; and (iii) a Consent of ------------- Spouse (as such consent is defined in the Plan) from the spouse of the Recipient, if any, duly signed by such spouse. 6. EXERICISE AND TRANSFER OF OPTION Options may only be exercised by the original Recipient hereof, and may not be Transferred by such Recipient, except upon and following the Death of a Recipient (if a natural person), but only to the Recipient's Successors as provided in sections 11.02 and 11.03 of the Plan. Any Transfer or exercise -------------- ----- of an Option so Transferred in violation of this Stock Option Certificate shall be null and void ab initio and of no further force and effect. 7. MISCELLANEOUS (a) Preparation of Stock Option Certificate; Costs and Expenses. This ----------------------------------------------------------- Stock Option Certificate was prepared by the Company solely on behalf of the Company. Each party acknowledges that: (i) he, she or it had the advice of, or sufficient opportunity to obtain the advice of, legal counsel separate and independent of legal counsel for any other party hereto; (ii) the terms of the transaction contemplated by this Stock Option Certificate are fair and reasonable to such party; and (iii) such party has voluntarily entered into the transaction contemplated by this Stock Option Certificate without duress or coercion. Each party further acknowledges such party was not represented by the legal counsel of any other party hereto in connection with the transaction contemplated by this Stock Option Certificate, nor was such party under any belief or understanding that such legal counsel was representing his, her or its interests. Except as expressly set forth in this Stock Option Certificate, each party shall pay all legal and other costs and expenses incurred or to be incurred by such party in negotiating and preparing this Stock Option Certificate; in performing due diligence or retaining professional advisors; in performing any transactions contemplated by this Stock Option Certificate; or in complying with such party's covenants, agreements and conditions contained herein. Each party agrees that no conflict, omission or ambiguity in this Stock Option Certificate, the Plan and/or the Plan Summary or the interpretation thereof, shall be presumed, implied or otherwise construed against the Company or any other party to this Stock Option Certificate on the basis that such party was responsible for drafting this Stock Option Certificate. (b) Cooperation. Each party agrees, without further consideration, to ----------- cooperate and diligently perform any further acts, deeds and things, and to execute and deliver any -3- No. ---- ================================================================================ documents that may be reasonably necessary or otherwise reasonably required to consummate, evidence, confirm and/or carry out the intent and provisions of this Stock Option Certificate, all without undue delay or expense. (c) Interpretation. -------------- (i) Survival. All representations and warranties made by any party -------- in connection with any transaction contemplated by this Stock Option Certificate shall, irrespective of any investigation made by or on behalf of any other party hereto, survive the execution and delivery of this Stock Option Certificate and the performance or consummation of any transaction described in this Stock Option Certificate. (ii) Entire Agreement/No Collateral Representations. Each party ---------------------------------------------- expressly acknowledges and agrees that this Stock Option Certificate, together with and subject to the Plan and the Plan Summary: (1) is the final, complete and exclusive statement of the agreement of the parties with respect to the subject matter hereof; (2) supersedes any prior or contemporaneous agreements, proposals, commitments, guarantees, assurances, communications, discussions, promises, representations, understandings, conduct, acts, courses of dealing, warranties, interpretations or terms of any kind, whether oral or written (collectively and severally, the "prior agreements"), and that any such prior agreements are of no force or effect except as expressly set forth herein; and (3) may not be varied, supplemented or contradicted by evidence of prior agreements, or by evidence of subsequent oral agreements. No prior drafts of this Stock Option Certificate, and no words or phrases from any prior drafts, shall be admissible into evidence in any action or suit involving this Stock Option Certificate. (iii) Amendment; Waiver; Forbearance. Except as expressly provided ------------------------------ otherwise herein, neither this Stock Option Certificate nor any of the terms, provisions, obligations or rights contained herein may be amended, modified, supplemented, augmented, rescinded, discharged or terminated (other than by performance), except as provided in the Plan or by a written instrument or instruments signed by all of the parties to this Stock Option Certificate. No waiver of any breach of any term, provision or agreement contained herein, or of the performance of any act or obligation under this Stock Option Certificate, or of any extension of time for performance of any such act or obligation, or of any right granted under this Stock Option Certificate, shall be effective and binding unless such waiver shall be in a written instrument or instruments signed by each party claimed to have given or consented to such waiver and each party affected by such waiver. Except to the extent that the party or parties claimed to have given or consented to a waiver may have otherwise agreed in writing, no such waiver shall be deemed a waiver or relinquishment of any other term, provision, agreement, act, obligation or right granted under this Stock Option Certificate, or any preceding or subsequent breach thereof. No forbearance by a party to seek a remedy for any noncompliance or breach by another party hereto shall be deemed to be a waiver by such forbearing party of its rights and remedies with respect to such noncompliance or breach, unless such waiver shall be in a written instrument or instruments signed by the forbearing party. (iv) Remedies Cumulative. The remedies of each party under this ------------------- Stock Option Certificate are cumulative and shall not exclude any other remedies to which such party may be lawfully entitled, at law or in equity. -4- No. ---- ================================================================================ (v) Severability. If any term or provision of this Stock Option ------------ Certificate or the application thereof to any person or circumstance shall, to any extent, be determined to be invalid, illegal or unenforceable under present or future laws, then, and in that event: (1) the performance of the offending term or provision (but only to the extent its application is invalid, illegal or unenforceable) shall be excused as if it had never been incorporated into this Stock Option Certificate, and, in lieu of such excused provision, there shall be added a provision as similar in terms and amount to such excused provision as may be possible and be legal, valid and enforceable; and (2) the remaining part of this Stock Option Certificate (including the application of the offending term or provision to persons or circumstances other than those as to which it is held invalid, illegal or unenforceable) shall not be affected thereby, and shall continue in full force and effect to the fullest extent provided by law. (vi) Parties in Interest. Notwithstanding anything else to the ------------------- contrary herein, nothing in this Stock Option Certificate shall confer any rights or remedies under or by reason of this Stock Option Certificate on any persons other than the parties hereto and their respective successors and assigns, if any, as may be permitted under the Plan or hereunder, nor shall anything in this Stock Option Certificate relieve or discharge the obligation or liability of any third person to any party to this Stock Option Certificate, nor shall any provision give any third person any right of subrogation or action over or against any party to this Stock Option Certificate. (vii) No Reliance Upon Prior Representation. Each party ------------------------------------- acknowledges that: (i) no other party has made any oral representation or promise which would induce them prior to executing this Stock Option Certificate to change their position to their detriment, to partially perform, or to part with value in reliance upon such representation or promise; and (ii) such party has not so changed its position, performed or parted with value prior to the time of the execution of this Stock Option Certificate, or such party has taken such action at its own risk. (viii) Headings; References; Incorporation; "Person"; Gender; ------------------------------------------------------ Statutory References. The headings used in this Stock Option -------------------- Certificate are for convenience and reference purposes only, and shall not be used in construing or interpreting the scope or intent of this Stock Option Certificate or any provision hereof. References to this Stock Option Certificate shall include all amendments or renewals thereof. All cross- references in this Stock Option Certificate, unless specifically directed to another agreement or document, shall be construed only to refer to provisions within this Stock Option Certificate, and shall not be construed to be referenced to the overall transaction or to any other agreement or document. Any Exhibit referenced in this Stock Option Certificate shall be construed to be incorporated in this Stock Option Certificate by such reference. As used in this Stock Option Certificate, the term "person" is defined in its broadest sense as any individual, entity or fiduciary who has legal standing to enter into this Stock Option Certificate such as, by way of example and not limitation, individual or natural persons and trusts. As used in this Stock Option Certificate, each gender shall be deemed to include the other gender, including neutral genders appropriate for entities, if applicable, and the singular shall be deemed to include the plural, and vice versa, as the context requires. Any reference to statutes or laws will include all amendments, modifications, or replacements of the specific sections and provisions concerned. -5- No. ---- ================================================================================ (d) Enforcement. ----------- (i) Applicable Law. This Stock Option Certificate and the rights -------------- and remedies of each party arising out of or relating to this Stock Option Certificate (including, without limitation, equitable remedies) shall (with the exception of the Securities Act and the Blue Sky Laws) be solely governed by, interpreted under, and construed and enforced in accordance with the laws (without regard to the conflicts of law principles) of the Province of Alberta, Canada, as if this Stock Option Certificate were made, and as if its obligations are to be performed, wholly within the Province of Alberta, Canada. (ii) Consent to Jurisdiction; Service of Process. Any "action or ------------------------------------------- proceeding" (as such term is defined below) arising out of or relating to this Stock Option Certificate shall be filed in and heard and litigated solely before the provincial courts of Alberta, Canada, located within the City of Calgary, Alberta, Canada. Each party generally and unconditionally accepts the exclusive jurisdiction of such courts and venue therein; consents to the service of process in any such action or proceeding by certified or registered mailing of the summons and complaint in accordance with the notice provisions of this Stock Option Certificate; and waives any defense or right to object to venue in said courts based upon the doctrine of "forum non conveniens." The term "action or proceeding" is defined as any and all claims, suits, actions, hearings, arbitrations or other similar proceedings, including appeals and petitions therefrom, whether formal or informal, governmental or non-governmental, or civil or criminal. (iii) Waiver of Right to Jury Trial. Each party hereby waives such ----------------------------- party's respective right to a jury trial of any claim or cause of action based upon or arising out of this Stock Option Certificate. Each party acknowledges that this waiver is a material inducement to each other party hereto to enter into the transaction contemplated hereby; that each other party has already relied upon this waiver in entering into this Stock Option Certificate; and that each other party will continue to rely on this waiver in their future dealings. Each party warrants and represents that such party has reviewed this waiver with such party's legal counsel, and that such party has knowingly and voluntarily waived its jury trial rights following consultation with such legal counsel. (e) Successors and Assigns. All of the representations, warranties, ---------------------- covenants, conditions and provisions of this Stock Option Certificate shall be binding upon and shall inure to the benefit of each party and such party's respective successors and permitted assigns, spouses, heirs, executors, administrators, and personal and legal representatives. (f) Notices. Except as otherwise specifically provided in this Stock ------- Option Certificate, all notices, demands, requests, consents, approvals or other communications (collectively and severally called "notices") required or permitted to be given hereunder shall be given in accordance with the notice provisions in the Plan. (g) Counterparts. This Stock Option Certificate may be executed in ------------ counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the same instrument, binding on all parties hereto. Any signature page of this Stock Option Certificate may be detached from any counterpart of this Stock Option Certificate and reattached to any other counterpart of this Stock Option Certificate identical in form hereto by having attached to it one or more additional signature pages. -6- No. ---- ================================================================================ WHEREFORE, the parties hereto have for purposes of this Stock Option Certificate executed this Stock Option Certificate in Calgary, Alberta, Canada, effective as of the Option Effective Date first set forth on the first page of this Stock Option Certificate. COMPANY: Pinnacle Oil International, Inc., a Nevada corporation By: ---------------------------------------- Daniel C. Topolinsky, President and Chief Operating Officer RECIPIENT: - ------------------------------------------- -7- No. ---- ================================================================================ Attachment to Stock Option Certificate NOTICE OF EXERCISE OF STOCK OPTION ---------------------------------- [To be signed by the Recipient only upon exercise of Option] TO: Secretary Pinnacle Oil International, Inc. 840 7th Avenue, Suite 750, Phoenix Place, S.W. Calgary, Alberta, Canada T2P 3G2 The undersigned, the holder of Options under that certain Stock Option Certificate (the "Option Certificate") dated effective between Pinnacle ------- Oil International, Inc., a Nevada corporation (the "Company") and the undersigned (the "Recipient"), hereby irrevocably elects, in accordance with the terms and conditions of that certain 2000 Pinnacle Oil International, Inc. Directors' Stock Plan dated February 15, 2000, as it may be amended from time to time (the "Plan"), under which the Stock Option Certificate was granted, to exercise the undersigned's Option under the Plan to purchase ------------------ - ------------------------------------------------------------------------------- ( )/(1)/ shares of the common stock, no par value ("Common Stock") -------------- the Company (collectively and severally, the "Option Shares"), for the aggregate purchase price of ($ )./(2)/. --------------------------------------- -------------- /(1)/ Insert number of Option Shares as specified in the Stock Option Certificate which are vested Option Shares (as defined by the Plan) which the Recipient is exercising the Recipient's Option to purchase. /(2)/ Number of Option Shares to be exercised as specified above multiplied by the Option Price per share ($____ per share). The Recipient hereby makes the following acknowledgments to the Company: A. That the Company shall have the right, to the extent required by applicable law, to withhold from the Recipient's compensation such amounts as may be sufficient to satisfy any federal, state, territorial and/or provincial withholding tax requirements incident to such exercise pursuant to section ------- 5.06B of the Plan, and the Recipient shall remit to the Company any ----- additional amounts which may be required. B. That the Company shall have the right (unless the Company in its sole discretion, and without any obligation to do so) registers the Option Shares under Form S-8 or any comparable registration statement) to place the following legend (or any variation thereof determined appropriate by the Company) on the share certificate or certificates for the Option Shares to comply with applicable federal, state and territorial securities laws: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN (1) REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION AFFORDED BY SUCH ACT, OR (2) REGISTERED UNDER THE SECURITIES LAWS OF ANY STATE OR TERRITORY OF THE UNITED STATES WHICH MAY BE APPLICABLE, IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION AFFORDED BY SUCH STATE OR TERRITORIAL SECURITIES LAWS. THESE SECURITIES HAVE BEEN ACQUIRED FOR THE HOLDER'S OWN ACCOUNT FOR INVESTMENT PURPOSES AND NOT WITH A VIEW FOR RESALE OR DISTRIBUTION. -1- No. ---- ================================================================================ THESE SECURITIES MAY NOT BE SOLD OR TRANSFERRED WITHIN THE UNITED STATES OR ANY OF ITS TERRITORIES UNLESS (1) THEY HAVE BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933 AS WELL AS UNDER THE SECURITIES LAWS OF ANY STATE OR TERRITORY OF THE UNITED STATES AS MAY THEN BE APPLICABLE, OR (2) THE TRANSFER AGENT (OR THE COMPANY IF THEN ACTING AS ITS TRANSFER AGENT) IS PRESENTED WITH EITHER A WRITTEN OPINION SATISFACTORY TO COUNSEL FOR THE COMPANY OR A NO-ACTION OR INTERPRETIVE LETTER FROM THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION AND ANY APPLICABLE STATE OR TERRITORIAL SECURITIES REGULATORY AGENCY TO THE EFFECT THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE CIRCUMSTANCES OF SUCH SALE OR TRANSFER." C. That the Company shall have the right (unless the Company in its sole discretion, and without any obligation to do so) obtains a discretionary order from any applicable provincial securities commission, to place the following legend (or any variation thereof determined appropriate by the Company) on the share certificate or certificates for the Option Shares to comply with applicable provincial securities laws: "RESIDENTS OF ALBERTA OR ANY OTHER PROVINCE OF CANADA ARE SUBJECT TO AN INDEFINITE HOLD PERIOD, AND THE TRANSFER OF THESE SECURITIES BY A RESIDENT OF THESE PROVINCES CAN ONLY BE EFFECTUATED PURSUANT TO AN EXEMPTION FROM THE REGISTRATION AND PROSPECTUS REQUIREMENTS OF THE APPLICABLE SECURITIES ACT OF SUCH PROVINCES OR PURSUANT A DISCRETIONARY ORDER OF THE APPLICABLE SECURITIES COMMISSION." D. That the Company shall have the right to place the following legend (or any variation thereof determined appropriate by the Company) on the share certificate or certificates for the Option Shares to comply with the Drag- Along Rights granted to the Company pursuant to Article XVIII of the Plan: ------------- "THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN DRAG-ALONG RIGHTS SET FORTH IN FULL IN THAT CERTAIN 2000 PINNACLE OIL INTERNATIONAL, INC. DIRECTORS' STOCK PLAN DATED FEBRUARY 15, 2000, AS IT MAY BE AMENDED OR RESTATED FROM TIME TO TIME, A COPY OF WHICH MAY BE INSPECTED BY AUTHORIZED PERSONS AT THE PRINCIPAL OFFICE OF THE COMPANY, AND ALL THE PROVISIONS OF WHICH ARE INCORPORATED BY REFERENCE IN THIS CERTIFICATE." The Recipient hereby makes the following representations, warranties or covenants to the Company, each of which is deemed to be a separate representation, warranty and covenant: A. The Recipient's permanent legal residence and domicile, if the Recipient is an individual, or permanent legal executive offices and principal place of business, if the Recipient is an Entity, is in the State, territory or province specified below the Recipient's signature below on this Notice as of the time of his, her or its exercise of the Stock Option Certificate. B. The Recipient, if a natural person, is age eighteen (18) or over. C. The Recipient has received a copy of the Plan as well as a copy of the 2000 Pinnacle Oil International, Inc. Directors' Stock Plan Summary (the "Plan Summary"), which explains the administration and operation of the Plan, risk factors concerning an investment in the Common Stock and the Company, the tax consequences of grants of Options under the Plan, and certain other relevant matters pertaining to the Plan, and has read and understood the Plan and the Plan Summary. -2- No. ---- ================================================================================ D. The Recipient: 1. has taken the opportunity, prior to exercising the Option, to engage such investment professionals and advisors including, without limitation, accountants, appraisers, investment, tax and legal advisors, each of whom are independent of the Company and its advisors and agents, to: (A) conduct such due diligence review as the Recipient and/or such investment professionals and advisors deem necessary or advisable; and (B) to provide such opinions as to (i) the investment merits of a proposed investment in the Option Shares, the tax consequences of the grant and exercise of the Option, and the subsequent disposition of the Option Shares, and (ii) the effect of same upon the Recipient's personal financial circumstances, as the Recipient and/or his, her or its investment professionals and advisors have or may deem advisable; and 2. has received, to the extent he, she or it has availed himself, herself or itself of these opportunities, satisfactory information and answers from such investment professionals and advisors. E. Without limiting the generality of the immediately preceding paragraph, prior to exercising the Option: 1. the Recipient and his, her or its investment professionals and advisors have taken the opportunity, to the extent the Recipient and/or such investment professionals and advisors have determined it to be necessary, to: (A) be provided with financial and other written information (in addition to that contained in the Plan and Plan Summary); (B) ask questions and receive answers concerning the terms and conditions of the Stock Option Certificate, an investment in the Option Shares, and the business of the Company and its finances; and (C) review all documents, books and records of the Company; and 2. the Recipient and/or his, her or its investment professionals and advisors have received, to the extent they have availed themselves of these opportunities, satisfactory information and answers. F. With the exception of written information given to the Recipient by the principal executive officers of the Company, no person has provided any information (other than the provision of the Plan and Plan Summary), or made any representations to the Recipient, concerning the Company or its past, present or future business; on which the Recipient has relied in offering to purchase the Option Shares. G. The Recipient has been informed and understands and agrees as follows: 1. Unless and to the extent the Company has registered the Option Shares there are substantial restrictions on the transferability of the Option Shares as set forth in the Plan and as are more particularly described in the Plan Summary; -3- No. ---- ================================================================================ 2. as a result of such restrictions, (A) it may not be possible for the Recipient to sell or otherwise liquidate the Option Shares in the case of emergency and/or other need, and the Recipient must therefore be able to hold the Option Shares until the lapse of said restrictions, (B) the Recipient must have adequate means of providing for the Recipient's current needs and personal contingencies, and (C) the Recipient must have no need for liquidity in an investment in the Option Shares; and 3. the Recipient has evaluated the Recipient's financial resources and investment position in view of the foregoing, and the Recipient is able to bear the economic risk of an investment in the Option Shares. H. Unless and to the extent the Company has registered the Option Shares: 1. the Option Shares will be purchased by the Recipient as principal and not by any other person, with the Recipient's own funds and not with the funds of any other person, and for the account of the Recipient and not as a nominee or agent and not for the account of any other person; 2. the Recipient will purchase the Option Shares for investment purposes only for an indefinite period, and not with a view to the sale or distribution of any part or all thereof by public or private sale or other disposition; and 3. no person other than the Recipient will have any interest, beneficial or otherwise, in the Option Shares, and the Recipient is not obligated (and will not be obligated at time of exercise) to transfer the Option Shares to any other person, nor does the Recipient have any agreement or understanding to do so. I. The Recipient has complied with all applicable investment laws and regulations in force relating to the legality of an investment in the Option Shares by the Recipient in any jurisdiction in which he, she or it purchases the Option Shares, and has obtained any consent, approval or permission required of him, her or it for the purchase of the Option Shares under the investment laws and regulations in force in any jurisdiction to which he, she or it is subject, or in which he, she or it makes such purchase, and the Company shall have no responsibility therefor. J. With the exception of the provision of the Plan and the Plan Summary, the Recipient has not seen, received, been presented with or been solicited by any advertisement, article, notice, leaflet or other communication (whether published in any newspaper, magazine, or similar media or broadcast over television or radio or otherwise generally disseminated or distributed); or through any public or promotional seminar or meeting to which the Recipient was invited through any such advertisement, article, notice, leaflet or other communication. K. The Recipient has not retained any broker-dealer, placement agent or finder to whom the Company will have any obligation to pay any commissions or fees. Each of the foregoing representations, warranties and covenants of the Recipient shall be deemed made as of the date the Recipient exercises this Option, and shall survive the date of closing with respect to the exercise of the last Option hereunder. -4- No. ---- ================================================================================ Signature must conform in all respects to name of the Recipient as specified in the Plan, unless the undersigned is the Recipient's Successor, in which case the undersigned must submit appropriate proof of the right of the undersigned to exercise the Option. Signature: ----------------------------------- Print Name: ----------------------------------- Address: ----------------------------------- ----------------------------------- Date: ----------------------------------- -5- EX-4.3 4 LEASE AMENDING AGREEMENT - EXPANSION OF PREMISES EXHIBIT 4.3 ----------- LEASE AMENDING AGREEMENT - EXPANSION OF PREMISES ------------------------------------------------ AGREEMENT made May 11, 2000 BETWEEN: O&Y PROPERTIES INC. hereinafter referred to as the "Landlord", OF THE FIRST PART - and - PINNACLE OIL INTERNATIONAL INC. hereinafter referred to as the "Tenant", OF THE SECOND PART WHEREAS by a Lease (the "Lease") dated November 25, 1997, Phoenix Place Ltd. (the "Former Landlord"), leased to the Tenant certain premises consisting of 6,237 square feet on the 7th Floor, (the "Demised Premises") in the building known as Phoenix Place (the "Building") in the City of Calgary as therein described; AND WHEREAS by Assignment the Former Landlord assigned all of its title right and interest in the Lease, the Premises and Building to the Landlord; AND WHEREAS by Lease Amending Agreement dated September 15, 1999, the Lease was amended to reflect the addition of 1,007 square feet on the 7th Floor of the Building (the "First Expansion Premises")' AND WHEREAS the parties hereto desire to amend the Lease in order to include therein additional premises consisting of 6,081 square feet on the 7th Floor (the "Second Expansion Premises'"), as shown outlined in green on Schedule "A", with effect from and after June 1, 2000; NOW THEREFORE THIS AGREEMENT WITNESSETH: 1. The above recitals are true. 2. That with effect from and after June 1, 2000, the Lease is amended as follows: (a) Subsection 1.01(g)(iii) to be deleted in its entirety and replaced as follows: "Demised Premises" means the premises in the Building containing ------------------ approximately 13,325 square feet of rentable area, being composed of 6,237 square feet of rentable area (the "Original Premises") shown outlined in blue on Schedule "B", 1,007 square feet of rentable area (the "First Expansion Premises") shown outlined in red on Schedule "B", and 6,081 square ,feet of rentable area (the "Second Expansion Premises") shown outlined in green on Schedule "B" determined in accordance with the BOMA Standard Method of Measuring Floor Area. (b) Subsection 1.01(k) to be deleted in its entirety and replaced as follows: "Minimum Rent" means the sum of $159,744.00 annually, payable in equal ------------- consecutive monthly instalments of $13,312.00 each in advance on the first day of each and every calendar month during the term of this lease, without deduction, abatement, set-off or compensation whatsoever, except as provided in this lease. The foregoing rent is calculated on the basis of $11.00 per square foot for 6,237 square feet of leased space, $12.00 per square foot for 1,007 square feet of leased space and $13.00 per square foot for 6,081 square feet of leased space. (c) The following paragraph is to be added to Article 5.10 Use of Premises --------------- Furthermore, the Tenant will be entitled to use no more than 350 square feet of the Second Expansion Premises as a fabrication room, (the "Fabrication Room"), provided that the Tenant does not use, cut or manufacture any form of combustible material in such fabrication room and further provided that, at all times, the Tenant shall comply with all applicable municipal by-laws. (d) The following paragraph is to be added to Article 7.02 Tenant's -------- Improvements ------------ In addition to the Tenant's obligations as set out herein, the Tenant agrees that, at the expiration or earlier termination of the Term, it will remove all improvements which it has constructed in the Tenant's Fabrication Room, including without limitation, the ventilation system, and restore the Demised Premises to base building condition. (e) Schedule "A" attached to replace Schedule "B" in the Lease. (f) Schedule "B" attached, to replace Schedule "D" of the Lease (as revised in Lease Amending Agreement dated September 15, 1999). (g) Schedule "E" #3 of the Lease (as revised in Lease Amending Agreement dated September 15, 1999) to be deleted and replaced as follows: 3. Leasehold Improvement Allowance ------------------------------- Provided Tenant is Pinnacle Oil International Inc., and is itself in ------------------------------- possession of and conducting its business from the whole of the Second Expansion Premises in accordance with the Lease and if Tenant is not in default and has not been in default during the Term, then Landlord shall pay to Tenant a one time contribution towards the cost of Tenant's initial leasehold improvements to a maximum amount of $10.00 per square foot of the Rentable Area of the Second Expansion ------ Premises as they are constituted at the effective date of the Lease Amending Agreement dated March 23, 2000, plus GST (the "Allowance"). The Allowance will be payable to Tenant within 30 days after the following conditions have been met: (a) Tenant has obtained Landlord's approval of Tenant's architectural, structural, mechanical and electrical plans and specifications; 2 (b) the appropriate provincial lien period for construction, mechanics' or builders' liens has elapsed since completion of Tenant's work to the satisfaction of Landlord in accordance with the approved plans and specifications; (c) Tenant has produced evidence satisfactory to Landlord that all accounts relating to Tenant's work have been paid and that no such lien has or may be claimed with respect thereto; (d) Tenant has delivered to Landlord, if requested by Landlord, a clearance certificate issued under any workers' compensation or similar workplace safety legislation in force in the province in respect of each contractor and sub-contractor which did work in connection with Tenant's work in the Second Expansion Premises; (e) Landlord has received complete "as built" drawings certified by Tenant's architect with respect to all work done by Tenant in the Second Expansion Premises; and (f) the Lease Amending Agreement dated March 23, 2000 has been executed, the Effective Date has been reached and Tenant has taken occupancy of the Second Expansion Premises in accordance with the Lease. Tenant will provide Notice to Landlord confirming that all of these conditions have been met and advising Landlord of Tenant's GST registration number. Landlord has the right to apply all or any part of the Allowance against any amounts owed to Landlord by Tenant. Tenant agrees that, if the Lease is terminated as a result of any default of Tenant, Tenant will repay to Landlord, as Additional Rent, an amount equal to the full amount of the Allowance which Landlord has advanced, multiplied by a fraction, the numerator of which is the number of months left in the Term and the denominator of which is the number of months in the Term. (h) In addition to the parking set out in the Parking Agreement in the Lease, the Landlord will provide the following additional parking, on the terms and conditions as set out: If Tenant is Pinnacle Oil International Inc., and is in occupation of ------------------------------- the Second Expansion Premises throughout the Term in accordance with the Lease and if Tenant is not and has not been in default during the Term, then Landlord shall, throughout the Term of the Lease, provide Tenant with 1 permit(s) for reserved parking and 3 permit(s) for ----------- -------- ----------- random parking in the Building's parking facility, at Landlord's ------ prevailing rates for parking from time to time. At this time, the prevailing rate is $185.00 per permit per month for a permit in the ------- random parking area and $210.00 per permit per month for a permit in ------ ------- the reserved parking area. Although Landlord will attempt to -------- accommodate Tenant's request for a specific type of permit, Tenant acknowledges that permits for some types of parking areas are subject to availability. If Landlord cannot 3 accommodate Tenant's request, Landlord will, in any event, provide Tenant with its permit(s) in the 910 - 7th Avenue SW parking area. ------------------- Tenant must accept from Landlord all the permits to which it is entitled on the effective date of the Lease Amending Agreement dated March 23, 2000, or forfeit the number it has not elected to take. Tenant acknowledges and agrees that this is a contractual right only and does not form part of the Premises demised to Tenant and no landlord and tenant relationship exists with respect to this parking right, but the obligations shall be binding upon successors and assigns of Landlord's interest in the Building. Tenant agrees to sign, on Landlord's request, Landlord's standard form of parking license agreement for the Building's parking facility. 2. SAVE as aforesaid all the terms and conditions of the Lease remain unchanged. IN WITNESS WHEREOF the parties have executed this Agreement as of the date first above written. LANDLORD: O&Y PROPERTIES INC. Per: /s/ Jan Sucharda ------------------------------------------- Per: /s/ Celia Hitch ------------------------------------------- I/We have the authority to bind the corporation TENANT: PINNACLE OIL INTERNATIONAL INC. Per: /s/ Daniel C. Topolinsky, President and COO ------------------------------------------- Per: /s/ John M. Woodbury, Jr., CFO ------------------------------------------- I/We have the authority to bind the corporation 4 SCHEDULE "A" ------------ DEMISED PREMISES ---------------- [DIAGRAM] --------- 5 SCHEDULE "B" ------------ LANDLORD'S WORK AND TENANT'S WORK --------------------------------- 1. Landlord's Work --------------- The Second Expansion Premises will be provided on an "as is" basis except for the following Landlord's Work, which shall be performed by Landlord at its cost in the Second Expansion Premises, on a "once only" basis, prior to the date the Tenant takes possession of the Second Expansion Premises: (a) Provide Tenant's architect with a preliminary space plan of the Second Expansion Premises to a maximum cost of $0.15 per square foot of Rentable Area of the Second Expansion Premises; (b) Demolish and remove all existing improvements within the Second Expansion Premises Tenant does not wish to reuse; 2. Tenant's Work ------------- Tenant will take possession of the Second Expansion Premises in its present "as is" condition, except for the Landlord's Work as set out above. Tenant shall be responsible at its own expense for any modifications or renovations within the Demised Premises, subject to the prior approval of Landlord and in accordance with the Lease. Tenant shall supply and install a ventilation system for Tenant's Fabrication Room at the Tenant's sole expense. Such ventilation system shall be installed in accordance with Landlord's base building mechanical consultant's plans and specifications. Landlord shall provide such plans and specifications to Tenant within 15 days of full execution of Lease Amending Agreement dated March 23, 2000. EX-4.4 5 ACQUISITION OF PIAGGIO AVANTI P180 EXHIBIT 4.4 ----------- March 20, 2000 Via Facsimile to 0 63 32-97 20-20 - ---------------------------------- Herr Fritz Winkler Winair Winkler & Feyock Gmbh & Co. KG Flugplatz, Gebaude 324 D-66482 Zweibrucken, Germany Re: Acquisition of Piaggio Avanti P180 Dear Herr Winkler: This letter evidences the interest of Pinnacle Oil Inc., a Nevada corporation and a wholly-owned subsidiary of Pinnacle Oil International, Inc. ("Pinnacle") to purchase a 1992 P180 Piaggio Avanti aircraft, Serial Number 1017, as more particularly described in paragraph 1(a) of this letter (the "Aircraft"), together with all documentation and technical publications and records relating to the Aircraft as more particularly described in paragraph 1(b) of this letter (the "Records"), from Winair Winkler & Feyock Gmbh & Co. KG ("Seller"). When executed by you, this Agreement (the "Agreement") is intended as a binding agreement for the sale of the Aircraft by Seller and the purchase of the Aircraft by Pinnacle (the "Acquisition"). The following are the material terms and conditions relating to the Acquisition: 1. Description of Aircraft and Records. For purposes of this Agreement, the ----------------------------------- terms Aircraft and Records shall be deemed to include the following: (a) Aircraft. The Aircraft shall consist of the aircraft body configured -------- in accordance with the floorplan and specifications described in Appendix A to this Agreement, together with all engines, equipment, avionics and accessories described in Appendix A to this Agreement. (b) Records. The Records shall include all logbooks, flight logs, ------- technical records, maintenance manual and other technical records relating to the Aircraft, including those described in Appendix B to this Agreement. 2. Purchase Price. The total purchase price for the purchase of the Aircraft -------------- (the "Purchase Price") is U.S. $2,790,000 (two million seven hundred ninety thousand U.S. dollars). 3. Deposit; Escrow. --------------- (a) Escrow. The parties agree that the consummation of the transaction ------ contemplated by this Agreement shall be facilitated through an escrow account with Dixie Aire Title Service, Inc., Oklahoma City, USA (the "Escrow Agent"). Following execution of this Agreement, the parties shall each execute such standard escrow instructions as provided by the Escrow Agent. Via Facsimile to 0 63 32-97 20-20 - --------------------------------- Herr Fritz Winkler c/o Winair Winkler & Feyock Gmbh & Co. KG March 20, 2000 Page 2 (b) Initial Deposit Into Escrow. Pinnacle agrees to wire transfer the --------------------------- sum of $30,000 (thirty thousand U.S. dollars) to the Escrow Agent serve as a refundable deposit to be applied against the Purchase Price (the "Deposit"). If the Deposit is not paid by March 23, 2000, 5:00 p.m. Canadian m.s.t., then Seller may terminate this Agreement without further obligation. If the Deposit is made by Pinnacle, then it shall be remitted to either Pinnacle or Seller under the following conditions: (i) If the closing of the Acquisition is consummated pursuant to the terms of this Agreement, the Deposit shall be paid to Seller and applied to the payment of the Purchase Price. (ii) Subject to paragraph (iv), if the Agreement is terminated due to Pinnacle's inability to timely procure financing pursuant to paragraph 4 of this letter, then the Deposit shall be remitted to Seller as liquidated damages for the termination of this Agreement. (iii) Subject to paragraph (iv), if the Agreement is terminated due to Pinnacle's wrongful failure or inability to consummate the Acquisition pursuant to the terms of this Agreement, then the Deposit shall be remitted to Seller as liquidated damages for the termination of this Agreement. (iv) If the Agreement is terminated for any other reason, including the Principals refusal to ratify this Agreement or deliver title to the Aircraft to Seller or Seller's wrongful failure or inability to perform its covenants or otherwise consummate the Acquisition, then the Deposit shall be immediately returned to Pinnacle upon its unilateral instructions, and no party hereto shall have any further obligations under this Agreement except as otherwise contained herein. (c) Balance Of Purchase Price. Pinnacle agrees to remit the remaining ------------------------- balance of the Purchase Price, including additional costs to be borne by Pinnacle and paid by the Escrow Agent under this Agreement, to the Escrow Agent by no later than one (1) day before the Closing, unless this Agreement has been previously terminated. 4. Financing Contingency. Pinnacle shall use its best efforts to procure a --------------------- commitment for financing the Purchase Price on terms acceptable to it by April 14, 2000. If Pinnacle is unable to procure financing notwithstanding its best efforts by the Closing, then Pinnacle will state its intentions to continue efforts to procure financing or may terminate this transaction, in which case the Deposit shall be remitted to Seller pursuant to paragraph 3(b)(ii), and no party hereto shall have any further obligations under this Agreement except as otherwise contained herein. Via Facsimile to 0 63 32-97 20-20 - --------------------------------- Herr Fritz Winkler c/o Winair Winkler & Feyock Gmbh & Co. KG March 20, 2000 Page 3 5. Closing. The closing of the Acquisition (the "Closing') shall be April ------- 21, 2000, or such earlier date as shall be mutually agreed to by the parties, at which time (i) the Escrow Agent shall remit the Purchase Price to Seller, (ii) Seller will tender possession of the Aircraft to Pinnacle at Zweibrucken Airport, including keys and all Records, and Seller shall transfer title to the Aircraft to Pinnacle for re-registry with the United States Federal Aviation Administration ("FAA"). Pinnacle shall have the right, at a reasonable time in advance of the Closing, without cost, to conduct a final inspection flight of not more than one hour's duration, with a flight crew designated by Seller, to confirm the proper functioning of the Aircraft and its engines, and any items identified as not properly function shall be corrected by Seller in accordance with a pre-purchase check list either prior to the Closing or, if elected by Pinnacle, after the Closing subject to the reservation of an appropriate retention by the Escrow Agent for the cost of such repairs. 6. Covenants and Costs. ------------------- (a) Each of the parties shall pay all costs and expenses incurred or to be incurred by it in negotiating and preparing this Agreement. (b) Seller shall, at its sole cost, perform all maintenance items described in Appendix C to this Agreement prior to the Closing by no later than April 13, 2000. (c) Seller shall take all actions and shall pay all costs necessary to obtain good title to the transfer of the Aircraft (including its engines and other equipment and avionics), including taking all actions and paying all costs to satisfy and to obtain releases of all liens, charges, claims, options, encumbrances, security agreements or interests or other liabilities, restrictions or covenants affecting title thereto prior to the Closing. (d) Seller shall also take all actions and shall pay all costs necessary to de-register the Aircraft in Germany prior to or contemporaneously with the Closing. (e) Seller shall also take all actions and shall pay all costs necessary to obtain a Export Certificate of Airworthiness necessary for the import of the Aircraft into the United States and to qualify for a Certificate of Airworthiness with the FAA, including taking all actions and paying all costs to (i) validate the compliance of the engines with Pratt and Whitney Type Approval Certificate No. E-21 and to validate the compliance of the equipment and avionics with USA Type Approval Certificate No. A-170 Issue 2, and (ii) to remove the current "D" number identification from the aircraft and replacing it with a new "N" number reserved by Pinnacle. (f) With the exception of the matters described in subparagraphs (b) and (d) above, Pinnacle shall pay all costs to register title to the Aircraft in the United States, including costs for a title search, title insurance, filing documents with the FAA (excluding lien releases), procuring a Certificate of Registration from the FAA, Via Facsimile to 0 63 32-97 20-20 - --------------------------------- Herr Fritz Winkler c/o Winair Winkler & Feyock Gmbh & Co. KG March 20, 2000 Page 4 obtaining certified copies of documents, and satisfying any conditions imposed by any prospective lender. (g) Seller shall pay all German export, sales, income, excise or other transactional taxes, fees or duties imposed in connection with the Acquisition or the export of the Aircraft from Germany shall be paid by Seller, while all United States import, use, sales, excise or other transactional taxes, fees or duties imposed in connection with the Acquisition or the import of the Aircraft into the United States shall be paid by Pinnacle. (h) Pinnacle shall pay all escrow fees incurred by the Escrow Agent. 7. "As Is" Condition. Except for (i) the delivery of the Aircraft to ----------------- Pinnacle at the Closing free of all maintenance discrepancies and with all A/D's and Mandatory SB's up-to-date; (ii) any repairs or maintenance or other matters relating to the condition of the Aircraft which Seller has agreed to perform or remedy as a condition of this Agreement, and (iii) any material adverse matters relating to the physical condition or operation of the Aircraft not recorded in the flight logs for the Aircraft which Seller or its agents had actual knowledge and failed to disclose to Pinnacle, ------ Pinnacle will take possession of the Aircraft at the location of the Closing in "As Is" condition and shall be responsible for all further repairs and maintenance. 8. Representations and Warranties by Seller to Pinnacle. Seller represents ---------------------------------------------------- and warrants to Pinnacle that: (a) Seller is currently the authorized selling agent of T. & I. Lemp (collectively, the "Principal"), who is the current owner of the Aircraft, and that the Principal is legally bound to sell the Aircraft to Seller for sale to Pinnacle in accordance with the terms of this Agreement, although registered title will be conveyed by the Principal to Seller for purposes of effectuating the transactions contemplated by this Agreement. (b) Title to the Aircraft shall be conveyed to Pinnacle free and clear of all charges, claims, options, encumbrances, security agreements or interests or other liabilities, restrictions or covenants affecting title; and (c) Seller has no actual knowledge of any material adverse matter relating to the physical condition or operation of the Aircraft other than any such adverse matter recorded in the flight logs of the Aircraft and other support documents, manuals and maintenance releases provided to Pinnacle as part of the Records. 9. Representations and Warranties by Pinnacle to Seller. Pinnacle represents ---------------------------------------------------- and warrants to Seller that it has already made application to several reputable lenders to finance the Via Facsimile to 0 63 32-97 20-20 - --------------------------------- Herr Fritz Winkler c/o Winair Winkler & Feyock Gmbh & Co. KG March 20, 2000 Page 5 transactions contemplated by this Agreement, and it has no reason to believe that a loan commitment on terms satisfactory to Pinnacle will not be timely extended. 10. Representations and Warranties by Parties to Each Other. Each of Seller ------------------------------------------------------- and Pinnacle represent and warrant to the other that: (a) Such party, if an entity, is duly organized, validly existing and in good standing under the laws of its state, territory or province of incorporation or organization, and has all requisite corporate or other power and authority to enter into this Agreement; (b) The execution and delivery of this Agreement by such party, and the performance by such party of the transactions herein contemplated, have, if such party is an entity, been duly authorized by its governing organizational documents, and are not prohibited by its governing organization documents, and no further corporate or other action on the part of such party is necessary to authorize this Agreement, or the performance of such transactions; (c) This Agreement has been duly executed and delivered by such party and, assuming due authorization, execution and delivery by all of the other parties hereto, is valid and binding upon such party in accordance with its terms; (d) Such party has the full right, power and authority to consummate the transactions contemplated by this Agreement in accordance with its terms without obtaining the consent or approval of any other person or governmental authority or agency; and (e) Such party shall perform, execute and/or deliver or cause to be performed, executed and/or delivered any and all further acts, deeds and assurances as may, from time to time, be reasonably required to consummate the transactions contemplated in this Agreement. 11. Conditions to Pinnacle's Performance. Satisfaction of the following by ------------------------------------ Seller shall be a condition precedent to Pinnacle's obligation to fully perform hereunder: (a) The accuracy of Seller's representations and warranties at the time of at the Closing; (b) The obtaining of the consent or approval, where required, of all government agencies and administrative bodies and third parties; and (c) That there shall not be in existence any proceeding or action or threat of such proceeding or action seeking to restrain or enjoin the transaction. Via Facsimile to 0 63 32-97 20-20 - --------------------------------- Herr Fritz Winkler c/o Winair Winkler & Feyock Gmbh & Co. KG March 20, 2000 Page 6 12. Damage or Destruction. If the Aircraft is destroyed or materially damaged --------------------- prior to the Closing, Pinnacle may elect to terminate this Agreement, in which case all sums tendered by Pinnacle to the Escrow Agent shall be returned to it; provided, however, in the event the prospective cost of repair (labor and parts) is less than the sum of $50,000 (fifty thousand U.S. dollars), and the repairs can be effectuated within thirty (30) business days, then Seller shall have the right to effectuate such repairs and the Acquisition shall close as soon as possible upon completion of the repairs subject to the satisfaction of Pinnacle and its lender as to the adequacy of the repairs. 13. Brokers' Fees. Neither Pinnacle (including its respective agents or ------------- affiliates) or Seller (including its respective agents or affiliates) has incurred any liability or obligation to pay any fees or commissions, including to any broker, finder or any other third-party hired or contracted by such party in connection with or arising out of the transactions contemplated by this Agreement, for which any other party could become liable or obligated. 14. Indemnification. Seller shall indemnify, defend and hold Pinnacle --------------- harmless from any and all claims, losses, costs, expenses, damages, injuries, recoveries, deficiencies and liabilities, including interest, penalties and reasonable attorneys' fees, arising from or on account of (i) any breach of Seller's covenants, (ii) in connection the ownership, control and operation of the Aircraft before the Closing by Seller or the Principal, and (iii) any claims by the Principal relative to Seller's authority or actions in selling the Aircraft to Pinnacle pursuant to this Agreement. Pinnacle shall indemnify, defend and hold Seller and the Principal harmless from any and all such claims, losses, costs, expenses, damages injuries, recoveries, deficiencies and liabilities, including interest, penalties and reasonable attorneys' fees, arising from or in connection with Pinnacle's ownership, control and operation of the Aircraft after the Closing. 15. No Other Negotiations. Until such time as this Agreement no longer --------------------- remains in effect, Seller agrees that it will not, and it further agrees that it shall use its best efforts to ensure that none of its affiliates, nor anyone acting on their behalf, will, solicit from or negotiate with any other person or entity to purchase the Aircraft. 16. Attorneys' Fees. In the event of any litigation between the parties due --------------- to breach of this Agreement, the unsuccessful party agrees to pay the successful party all costs and expenses of litigation incurred by the successful party including, but not limited to, reasonable attorneys' fees for all legal counsel, depositions, witness fees and other expenses incurred in connection with such litigation, and if the successful party shall recover judgment in any action proceeding, the costs, expenses and attorneys' fees shall be included as part of the judgment. 17. Time of the Essence. It is expressly understood that time of performance ------------------- is of the essence to this Agreement. Via Facsimile to 0 63 32-97 20-20 - --------------------------------- Herr Fritz Winkler c/o Winair Winkler & Feyock Gmbh & Co. KG March 20, 2000 Page 7 18. Binding Effect. This Agreement shall bind and inure to the benefit of the -------------- parties hereto and their respective heirs, executors, administrators, legal representatives, successors and assigns. 19. Counterparts; Facsimile Signatures. This Agreement may be executed in ---------------------------------- several counterparts, each of which shall be deemed an original, and all of such counterparts together shall constitute one agreement, binding on all parties hereto. If a copy or counterpart of this Agreement is originally executed and such copy or counterpart is thereafter transmitted electronically by facsimile or similar device, such facsimile document shall for all purposes be treated as if manually signed by the party whose facsimile signature appears. 20. Severability. If all or any portion of any of the provisions of this ------------ Agreement shall be invalid, illegal or unenforceable by laws applicable thereto, then the performance of said offending provision or provisions shall be excused by the parties hereto and such invalidity, illegibility, or unenforceability shall not affect any other provision of this Agreement. 21. No Modifications Except in Writing. No modification hereof shall be ---------------------------------- binding unless set forth in writing and signed by the party or parties to be bound by the modification. 22. Governing Law. This Agreement shall be governed by and construed in ------------- accordance with the laws of the Federal Republic of Germany. 23. Interpretation. This Agreement is an agreement between financially -------------- sophisticated and knowledgeable parties and is entered into by the parties in reliance upon the economic and legal bargains contained herein and shall be interpreted and construed in a fair and impartial manner without regard to such factors as the party who prepared (or caused the preparation of) this instrument or the relative bargaining power of the parties. 24. Further Assurances. In addition to the acts and deeds recited herein and ------------------ contemplated to be performed, executed and/or delivered by either Pinnacle or Seller, such party shall perform, execute and/or deliver or cause to be performed, executed and/or delivered at the Closing, or if necessary, after the Closing, any and all further acts, deeds and assurances as may, from time to time, be reasonably required to consummate the transactions contemplated in this Agreement. If the terms and conditions of this Agreement are satisfactory, then indicate your approval by executing and dating this letter below and delivering it to the undersigned by 5:00 p.m., Canadian m.s.t., on March 21, 2000. In the event the terms and conditions described above are not satisfactory, or you have any question or comments, then please refrain from signing this letter and call me at your earliest convenience. Please note that this Agreement will terminate if the undersigned does not receive delivery of (or a facsimile of) this Agreement executed draft by the above-mentioned date. Via Facsimile to 0 63 32-97 20-20 - --------------------------------- Herr Fritz Winkler c/o Winair Winkler & Feyock Gmbh & Co. KG March 20, 2000 Page 8 If you are in agreement with the foregoing, please execute and return to us one copy of this Agreement. Very truly yours, /s/ Daniel C. Topolinsky - ------------------------------- Daniel C. Topolinsky, President By signature below in the space provided, the undersigned hereby evidence their agreement with the terms of this Agreement as they pertain to them, and their intention to be legally bound hereby. Seller : Winair Winkler & Feyock Gmbh & Co. KG By: /s/ Fritz P. Winkler ---------------------------------- Title: Managing Director ------------------------------- Date: March 20, 2000 -------------------------------- APPENDIX A Description of Aircraft ----------------------- AIRFRAME & EQUIPMENT Make:.............. Piaggio Model:............. P180 Avanti Serial Number:..... #1017 Year:.............. 1992 First Certificate of Airworthiness:.. 1992 Total Time:........ 1600 hrs Annual:............ 2000 Paint:............. White, Turquoise/Beige Interior:.......... Taupe Leather, Teal Carpet (Option 1 Arrangement), Wood Veneer, Stereo System, Cabin Display Options:........... Freon Air Conditioning Propeller Synchrophaser Cockpit Handles and Curtain Single Point Refueling New style Windscreens Cabin Display Standby Gyro Autopilot:......... Collins APS 65 System EFIS 85 B 3-Tube Avionics:.......... Collins Proline II Package UNS 1 M FMS/GPS Meets ICAO Annex 10 and B-RNAV COMM'S 8,33 KHz spacing Misc:.............. 350 hrs. SHSI, Prop OH 7/97 ENGINES Make:.............. Pratt and Whitney Model.............. Two (2) PT 6A-66 Horsepower:........ 2 X 850 shp Serial Numbers:.... Left Engine: PC-E 104044 Right Engine: PC-E 104047 Engine Time:....... 1600 hrs APPENDIX B Documentation and Technical Publications/Records ------------------------------------------------ (Include both USA and German documents as applicable) 1.) Certificate of Conformity 2.) Standard Democratic Republic of Germany Certificate of Airworthiness 3.) Aircraft Log with Discrepancies Records 4.) Pilot's Operating Handbook with Deviation Compass Card 5.) Maintenance Manual 6.) Parts Catalogue 7.) Wiring Manual 8.) Engine Log (RH) 9.) Export Certificate 10.) Engine Log (LH) 11.) Export Certificate 12.) Propeller Log (RH) 13.) Export Certificate 14.) Hartzell Assembly Report 15.) PIAGGIO Assembly Report 16.) Propeller Log (LH) 17.) Export Certificate 18.) Hartzell Assembly Report 19.) PIAGGIO Assembly Report 20.) Serialized Components List 21.) Warranty Certificate Application Forms for: Avionics (COLLINS); Propellers (HARTZELL); Engines and miscellaneous 22.) List of Service Bulletins and Service Letters issued 23.) List of the warranties remaining lives from Avionics manufacturers APPENDIX C Required Maintenance -------------------- 1.) Phase A (Due 71 Hrs) 2.) Phase B (Due 118 Hrs) 3.) 1 Year Inspection (Due 8 Months) 4.) 3 Year Inspection (Due 3 Months) 5.) 450 Flt. Hr. Inspection (Due 225 Hours) 6.) Cabin Blower Electro Mech. O/H (Due 426 Hours) 7.) Horizontal Tail Trim Actuator (Due 426 Hours) 8.) Refrigeration Pack Oil Change (Due 100 Hours) 9.) ELT Battery Replacement (Due 2 Months) 10.) Replace fuel Filter Cartridge (Due 150 Hours) 11.) Engine Oil Filter Replacement Ser # 104044 (Due 138 Hours) Ser # 104047 (Due 138 Hours) 12.) P3 Filter Replacement Ser # 104044 (Due 239 Hours) Ser # 104047 (Due 239 Hours) 13.) Fuel Nozzles - Clean/Inspect Ser # 104044 (Due 250 Hours) Ser # 104047 (Due 250 Hours) 14.) Lube Inboard Flap Jackscrew (Due 100 Hours) 15) Six months specials 16) Oxygen 3-position valve (Due July 2000) 17) Oxygen bottle hydro-static test (Due June 2000) EX-27 6 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PINNACLE OIL INTERNATIONAL INC.'S CONSOLIDATED BALANCE SHEET AT MARCH 31, 2000, AND PINNACLE OIL INTERNATIONAL INC.'S CONSOLIDATED STATEMENT OF LOSS FOR THE THREE-MONTH PERIOD ENDED MARCH 31, 2000, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 3-MOS DEC-31-2000 JAN-01-2000 MAR-31-2000 9,375,858 0 161,581 0 0 9,774,490 1,799,363 365,959 11,607,562 347,417 0 0 800 13,070 0 11,260,145 0 0 0 (603,728) 112,830 0 0 (490,898) 0 (490,898) 0 0 0 (492,898) (0.04) (0.04)
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