DEFR14A 1 defr14a.txt REVISED DEFINITIVE PROXY STATEMENT AMENDMENT NO. 1 TO SCHEDULE 14A INFORMATION Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934 Filed by the Registrant [X] Filed by a party other than the Registrant [ ] Check the appropriate box: [ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) [X] Definitive Proxy Statement [ ] Definitive Additional Materials [ ] Soliciting Material under ss. 240.14a-12 FX Energy, Inc. ------------------------------------------------ (Name of Registrant as Specified in its Charter) n/a ------------------------------------------------------------------------ (Name of Person(s) Filing Proxy Statement, if other than the Registrant) Payment of Filing Fee (Check the appropriate box): [X] No fee required. [ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11. 1) Title of each class of securities to which transaction applies: ________________________________________________________________________ 2) Aggregate number of securities to which transaction applies: ________________________________________________________________________ 3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined): ________________________________________________________________________ 4) Proposed maximum aggregate value of transaction: ________________________________________________________________________ 5) Total fee paid: ________________________________________________________________________ [ ] Fee paid previously with preliminary materials. [ ] Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. 1) Amount Previously Paid: 2) Form, Schedule or Registration Statement No.: 3) Filing Party: 4) Date Filed: FX ENERGY, INC. 3006 Highland Drive, #206 Salt Lake City, Utah 84106 USA Telephone: (801) 486-5555 Facsimile: (801) 486-5575 May 16, 2005 Dear FX Energy Stockholder: Our Proxy Statement for the 2005 Annual Stockholders' Meeting of FX Energy, Inc. and our 2004 Annual Report are enclosed. At this meeting, we will seek your support for the election of directors, for the approval of certain amendments to our Articles of Incorporation and Bylaws, and for the approval of our 2005 Long-Term Incentive Plan. These are important considerations for all stockholders. Therefore, the Board of Directors urges you to review each of these proposals carefully. The enclosed proxy statement discusses the intended benefits as well as possible disadvantages of these proposals. Your Board of Directors believes that the adoption of each of the proposals is in the best interests of all stockholders. Sincerely, FX ENERGY, INC. David N. Pierce President FX ENERGY, INC. 3006 HIGHLAND DRIVE, SUITE 206 SALT LAKE CITY, UTAH 84106 NOTICE OF ANNUAL MEETING OF STOCKHOLDERS TO BE HELD JUNE 15, 2005 To the Stockholders of FX Energy, Inc.: The 2005 Annual Stockholders' Meeting (the "Annual Meeting") of FX Energy, Inc. (the "Company") will be held June 15, 2005, in the Ponderosa Room, Little America Hotel, 500 South Main Street, Salt Lake City, Utah. The Annual Meeting will convene at 10:00 a.m., local time, to consider and take action on the following proposals: (1) to elect two directors to serve until the expiration of their respective terms and until their respective successors are elected and qualified; (2) to approve an amendment to the Company's Articles of Incorporation to ensure that the officer and director liability provisions continue to conform to Nevada law; (3) to approve amendments to the Company's Bylaws to ensure that the officer and director indemnification provisions continue to conform to Nevada law; (4) to approve the Company's 2005 Long-Term Incentive Plan; and (5) to transact such other business as may properly come before the Annual Meeting or any adjournment(s) thereof. Only owners of record of the Company's common stock outstanding as of the close of business May 13, 2005 (the "Record Date"), will be entitled to notice of and to vote at the Annual Meeting. Each share of common stock is entitled to one vote. Holders of at least a majority of the shares of common stock outstanding on the Record Date must be represented at the meeting to constitute a quorum for conducting business. The attendance at and/or vote of each stockholder at the Annual Meeting is important, and each stockholder is encouraged to attend. FX ENERGY, INC. By Order of the Board of Directors Scott J. Duncan, Secretary Salt Lake City, Utah May 16, 2005 IMPORTANT Regardless of whether you plan to attend the meeting in person, please fill in, sign, date and return the enclosed proxy promptly in the self-addressed, stamped envelope provided. No postage is required if mailed in the United States. If you prefer, you may send the Company your proxy by facsimile transmission at 1-801-486-5575. SPECIAL REQUEST If your shares are held in the name of a brokerage firm, nominee or other institution, only it can vote your shares. Please contact promptly the person responsible for your account and give instructions for your shares to be voted. FX ENERGY, INC. 3006 HIGHLAND DRIVE, SUITE 206 SALT LAKE CITY, UTAH 84106 PROXY STATEMENT INTRODUCTION This proxy statement is furnished in connection with the solicitation of proxies, on behalf of the management of FX Energy, Inc., to be voted at the Annual Meeting to be held in the Ponderosa Room, Little America Hotel, 500 South Main Street, Salt Lake City, Utah, on June 15, 2005, at 10:00 a.m., local time, or at any adjournment thereof. The enclosed proxy, when properly executed and returned in a timely manner, will be voted at the Annual Meeting in accordance with the directions set forth thereon. If no instructions are indicated on the enclosed proxy, the proxy will be voted as follows at the Annual Meeting: (1) FOR the election of two nominees of management set forth herein as directors of the Company to serve as directors until the expiration of their respective terms and until their successors are elected and qualified; (2) FOR approval of an amendment to the Company's Articles of Incorporation to ensure that the officer and director indemnification provisions continue to conform to Nevada law; (3) FOR approval of certain amendments to the Company's Bylaws to ensure that the officer and director indemnification provisions continue to conform to Nevada law; (4) FOR approval of the Company's 2005 Long-Term Incentive Plan; and (5) IN accordance with the best judgment of the persons acting as proxies on other matters presented for a vote. The enclosed proxy, even though executed and returned to the Company, may be revoked at any time before it is voted, either by giving a written notice, mailed or delivered to the Secretary of the Company or sent by facsimile transmission to 1-801-486-5575, by submitting a new proxy bearing a later date, or by voting in person at the Annual Meeting. If the proxy is returned to the Company without specific direction, the proxy will be voted in accordance with the Board of Directors' recommendations as set forth above. The entire expense of this proxy solicitation will be borne by the Company. In addition to this solicitation, officers, directors and regular employees of the Company, who will receive no extra compensation for such services, may solicit proxies by mail, by telephone or in person. This proxy statement and form of proxy were first mailed to stockholders on or about May 16, 2005. Only holders of the Company's 34,593,772 shares of common stock, par value $0.001, outstanding as of the close of business on May 13, 2005 (the "Record Date"), will be entitled to vote at the Annual Meeting. Each share of common stock is entitled to one vote. Holders of at least a majority of the shares of common stock outstanding on the Record Date must be represented at the Annual Meeting to constitute a quorum for conducting business. All properly executed and returned proxies as well as shares represented in person at the meeting will be counted for purposes of determining if a quorum is present, whether the proxies are instructed to abstain from voting or consist of broker nonvotes. Under Nevada corporate law and the Company's Articles of Incorporation and Bylaws, the election of directors requires the vote of a plurality of the shares present at the Annual Meeting. Abstentions and broker nonvotes will not be counted for the election of directors. Routine matters are considered approved by the stockholders if the number of votes cast in favor of the action exceeds the number of shares cast in opposition to the action. Therefore, abstentions and broker nonvotes are not counted and will have the same legal effect as a vote in favor of matters other than the election of directors. The proposed amendment to the Company's Articles 3 of Incorporation will be considered approved by the stockholders if approved by the holders of a majority of the outstanding common stock at a meeting of the stockholders at which a quorum is present. The proposed amendment to the Company's Bylaws will be considered approved by the stockholders if approved by the holders of a two-thirds majority of the outstanding common stock at a meeting of the stockholders at which a quorum is present. Officers and directors holding an aggregate of 879,705 shares of common stock, or approximately 2.6% of the outstanding shares, have indicated their intent to vote in favor of all proposals. The Company's policy is that each member of the Board of Directors is encouraged, but not required, to attend the Annual Meeting. One of the Company's directors attended the Company's 2004 Annual Meeting. CORPORATE GOVERNANCE Executive Officers, Directors The following sets forth the name, age, term of directorship, and principal business experience of each executive officer and director of the Company.
Year --------------------- Director Term Business Experience During Past Name Age Since Expires Five Years and Other Information ----------------------- ------- ---------- --------- --------------------------------------------------------------- Directors --------- David N. Pierce 59 1992 2005 President and a director of the Company since 1992, Chairman from 1992 through 2003. For more than three years prior to 1992, Vice-President and a director of the Company's predecessor, Frontier Exploration Company, co-founded with his brother, Andrew W. Pierce, in January 1989, which was acquired by the Company in 1992. Executive capacities with privately held oil and gas companies since 1979. An attorney with more than 30 years of experience in natural resources, securities and international business law. Graduate of Princeton University and Stanford University Law School. Thomas B. Lovejoy 69 1995 2007 Chairman of the Board of Directors since October 27, 2003, Chief Financial Officer since 1999, Vice-Chairman from 1995 through 2003, and a consultant to the Company from 1995 to 1999. Between 1992 and 1999, principal of Lovejoy & Associates, Inc., Greenwich, Connecticut, which provided financial strategic advice respecting private placements, mergers and acquisitions. From 1989 through 1992, managing director and head of natural resource, utility and mining groups of Prudential Securities, Inc., New York City. From 1980 through 1988, managing director and head of the energy and natural resources group of Paine Webber, Inc. From 1993 to 2001, director of Scaltech, Inc., Houston, Texas, a processor of petroleum refinery oil waste. Graduate of Massachusetts Institute of Technology and Harvard Business School. 4 Year --------------------- Director Term Business Experience During Past Name Age Since Expires Five Years and Other Information ----------------------- ------- ---------- --------- --------------------------------------------------------------- Jerzy B. Maciolek 55 1995 2006 Vice-President of International Exploration and a director of the Company since 1995. Employed by the Company since September 1995. Instrumental in the Company's exploration efforts in Poland. Prior to becoming the Company's employee, a private consultant for over five years, including consulting on exploration projects in the western United States, the hydrocarbon potential of Poland and Kazakhstan, and developing applied integrated geophysical interpretations over gold mines in Nevada, California and Mexico. Graduate of the Mining and Metallurgy Academy in Krakow, Poland. David L. Worrell 59 2003 2007 Director of the Company since 2003. Founder and President of David Worrell Associates, a commercial real estate consulting and development firm with emphasis on the hospitality industry, from 1990 through 1997 and 1999 through the present. Served in 1998 as Senior Vice-President, Development, for Homestead Village, Inc., a New York Stock Exchange listed, lodging company. From 1993 through 1997, served as Chief Executive Officer, and from 1998 through the present, as Chairman of Subway Russia Franchising Company, exclusive master franchisee of the Subway Sandwich Shop restaurant concept in Russia; from 1981 through 1990, Managing Director, Vice-President and Director of Development for MAT Associates, a national real estate developer specializing in hotel and related commercial development. Prior to 1981, practicing attorney in the areas of real estate acquisition and development and international transactions. Graduate of Stanford Graduate School of Business, Stanford Law School, and Cornell University. Mr. Worrell is a member of the Company's Nomination and Governance Committee and its Audit Committee, and is Chairman of the Company's Compensation Committee. Arnold S. Grundvig, Jr. 56 2003 2007 Director of the Company since 2003. President and Chief Financial Officer of A-Systems Corporation, a developer of accounting software, since 1993. From 1990 to 1992, served as Controller for Weider Health & Fitness, a sports nutrition company, and Schiff Vitamin, a nutrition enhancement company. From 1985 to 1989, served as a Financial Analyst for Petro Source Corporation, a crude oil trading firm. From 1983 to 1985, worked as an independent turn-around consultant on several projects. From 1977 to 1983, worked for First Interstate Bank (now Wells Fargo Bank) as Manager of the Credit Department and as a Commercial Loan officer. From 1971 to 1977, served as a Financial Analyst for Dun & Bradstreet, Inc., a commercial credit rating bureau. Graduate of Phoenix University (MBA) and the University of Utah. Mr. Grundvig is Chairman of the Company's Audit Committee and a member of the Company's Nomination and Governance Committee and its Compensation Committee. 5 Year --------------------- Director Term Business Experience During Past Name Age Since Expires Five Years and Other Information ----------------------- ------- ---------- --------- --------------------------------------------------------------- Richard Hardman CBE 69 2003 2006 Exploration Advisor since February 2003 and director since October 27, 2003. From January 2002 through January 2003, Advisor on Exploration to the Chief Executive Officer of Enterprise Oil and worked in an advisory capacity to Neptune Oil and Gas. Between 1983 and January 2002, served in various executive capacities with Amerada Hess, a worldwide, integrated oil and gas firm. Vice-President of Worldwide Exploration based in London between May 1998 and May 2001 and Exploration Advisor thereafter until January 2002. Over a career spanning more than 40 years, worked in oil and gas exploration as a geologist in Libya, Kuwait, Colombia, Norway and the North Sea. Chairman of the Petroleum Society of Great Britain, President of the Geological Society of London, as the European member of the Advisory Counsel of the American Association of Petroleum Geologists, and currently Chairman of APPEX, a farmout fair organization based in London. Commander of the British Empire in New Year Honours List of 1998 for services to the oil industry. Mr. Hardman is a member of the Company's Nomination and Governance Committee and its Compensation Committee. Dennis B. Goldstein 59 2003 2005 Mr. Goldstein has been a director since October 27, 2003, and was appointed Lead Director November 10, 2003. He previously served as a member of the Board of Directors from 1999 to 2002, and was a member of the Audit Committee of the Company prior to his resignation. Since March of 2002, Mr. Goldstein has been practicing natural resources law in San Francisco, California. From 1976 until March of 2002, Mr. Goldstein was with Homestake Mining Company, a New York Stock Exchange listed, international gold mining company in various capacities. When Homestake was purchased by Barrick Gold Corporation in 2002, he was Vice-President and Corporate Counsel. Mr. Goldstein is a graduate of Brown University ('67), Stanford University Law School ('71) and the Executive Program of the Stanford Graduate School of Business ('87). He is a member of the California and the American Bar Associations. Mr. Goldstein is Chairman of the Company's Nomination and Governance Committee and is a member of its Audit Committee and its Compensation Committee. Executive Officers ------------------ Andrew W. Pierce 57 -- -- Vice-President and Chief Operating Officer of the Company since 1992, director from 1992 through his resignation in 2003. For more than three years prior to 1992, President and a director of the Company's predecessor, Frontier Exploration Company, co-founded with his brother, David N. Pierce, in January 1989, which was acquired by the Company in 1992. More than 25 years of experience in oil and gas exploration, drilling, production and leasing experience, with primary management and line responsibility for drilling and completion activities in the western United States. 6 Year --------------------- Director Term Business Experience During Past Name Age Since Expires Five Years and Other Information ----------------------- ------- ---------- --------- --------------------------------------------------------------- Scott J. Duncan 56 -- -- Vice-President Investor Relations and Secretary of the Company, director from 1993 through 2004, when he did not stand for reelection. Financial consultant to the Company from its inception through April 1993, when he became the Company's Treasurer. Prior to becoming a consultant with the Company, an executive and director of several small businesses in Salt Lake City. Graduate of the University of Utah School of Business. Clay Newton 48 -- -- Vice-President of Finance, Treasurer and Chief Accounting Officer since 2003 and a director from 2002-2003. Worldwide Controller for LANDesk Software, Inc. from 2002-2003, a private technology company with operations and entities in eight countries. Director of Corporate Finance and Administration for Talk2 Technology, Inc., a private technology company, from 2000 to 2002. Chief Financial Officer and Corporate Secretary for Equity Oil, Inc., a publicly-traded international oil and gas company, from 1986 to 2000. Graduate, University of Utah. Certified Public Accountant, Certified Equity Professional.
The Board of Directors has determined that Dennis B. Goldstein, Arnold S. Grundvig, Jr., Richard Hardman, and David L. Worrell are "independent directors" as that term is defined in Rule 4200(a)(15) of the National Association of Securities Dealers. Board of Directors' Meetings and Committees Board of Directors The Board of Directors held six meetings during 2004 and one meeting to date in 2005. The directors also discussed the Company's business and affairs informally on numerous occasions throughout the year and took several actions through unanimous written consents in lieu of meetings. Audit Committee On November 10, 2003, the Board of Directors formally adopted an amended Audit Committee Charter, which was amended on March 30, 2004, and is available on the Company's website, www.fxenergy.com. The Audit Committee of the Board of Directors is currently composed of three independent directors: Arnold S. Grundvig, Jr., its Chairman, whom the Board of Directors has determined to be an audit committee financial expert, and David L. Worrell and Dennis B. Goldstein, each of whom the Board of Directors has determined to be independent, all as required by Rule 10A-3(b)(1) adopted pursuant to the Securities Exchange Act of 1934. The Audit Committee selects the Company's independent auditors, approves the scope of audit and related fees, and reviews financial reports, audit results, internal accounting procedures, related-party transactions, when appropriate, and programs to comply with applicable requirements relating to financial accountability. The Audit Committee's responsibilities also include the development of policies and procedures for compliance by the Company and its officers and directors with applicable laws and regulations. The Audit Committee met eleven times during 2004 and has met three times to date in 2005, including meetings in early 2005 to review the results of the audit of the Company's 2004 financial statements by its independent accountants and other related matters, as reported below. 7 Compensation Committee On November 10, 2003, the Board of Directors formally adopted a written charter for the Compensation Committee, which is available on the Company's website, www.fxenergy.com. The Compensation Committee is responsible for reviewing performance of senior management, recommending compensation, and developing compensation strategies and alternatives throughout the Company. The Compensation Committee met five times during 2004 and has met once to date during 2005, in addition to several informal telephone meetings throughout 2004. The Compensation Committee of the Board of Directors is composed of four independent directors: David L. Worrell, its Chairman, Richard Hardman, Dennis B. Goldstein and Arnold S. Grundvig, Jr. Nomination and Governance Committee On November 10, 2003, the Board of Directors formally adopted a written charter for the Nomination and Governance Committee, which is available on the Company's website, www.fxenergy.com. The Nomination and Governance Committee is responsible for recommendations to the Board of Directors respecting corporate governance principles; prospective nominees for director; Board member performance and composition; function, composition and performance of Board committees; succession planning; director and officer liability insurance coverage; and directors' responsibilities. The Nomination and Governance Committee met four times during 2004 and has met once to date during 2005. The Nomination and Governance Committee of the Board of Directors is composed of four independent directors: Dennis B. Goldstein, its Chairman, Richard Hardman, David L. Worrell and Arnold S. Grundvig, Jr. When considering candidates for directors, the Nomination and Governance Committee takes into account a number of factors, including the individual's reputation for judgment, skill, integrity and other relevant qualities; whether the candidate has relevant business experience; whether the candidate has achieved a high level of professional accomplishment; independence from management under both Nasdaq and Securities and Exchange Commission definitions; existing commitments to other businesses; potential conflicts of interest with other pursuits; corporate governance background and experience; financial and accounting background that would permit the candidate to serve effectively on the Audit Committee; and the size, composition, and experience of the existing Board of Directors. The committee will also consider candidates for directors suggested by stockholders using the same considerations. Stockholders wishing to suggest a candidate for director should write to Scott J. Duncan and include a statement that the writer is a stockholder and is proposing a candidate for consideration by the committee; the name of and contact information for the candidate; a statement that the candidate is willing to be considered and would serve as a director if elected; a statement of the candidate's business and educational experience, preferably in the form of a resume or curriculum vitae; information regarding each of the factors identified above, other than facts regarding the existing Board of Directors, that would enable the committee to evaluate the candidate; a statement detailing any relationship between the candidate and any customer, supplier or competitor of the Company; and detailed information about any relationship or understanding between the stockholder and the proposed candidate. Before nominating a sitting director for reelection at an annual meeting, the committee considers the director's performance on the Board of Directors and attendance at Board of Directors' meetings, and whether the director's reelection would be consistent with the Company's governance guidelines and ability to meet all applicable corporate governance requirements. When seeking candidates for director, the committee may solicit suggestions from incumbent directors, management or others. After conducting an initial evaluation of the candidates, the committee will interview that candidate if it believes the candidate might be suitable for a position on the Board of Directors. The committee may also ask the candidate to meet with management. If the committee believes the candidate would be a valuable addition to the Board of Directors, it will recommend to the full Board of Directors that candidate's nomination. 8 Rights Redemption Committee In connection with the adoption of a stockholder Rights Agreement, the Board of Directors formed a Rights Redemption Committee during 1997 to perform certain functions in accordance with such plan. The Rights Redemption Committee, which shall be appointed by the Board of Directors as necessary, must consist of at least three continuing directors, a majority of whom may not be Company employees. The Rights Redemption Committee did not meet during 2004. Policy on Stockholder Communications with Directors Company stockholders that want to communicate with the Board, any of its committees, or with any individual director can write to the Company at 3006 Highland Drive, Suite 206, Salt Lake City, Utah 84106. Such letter should indicate that it is from a Company stockholder. Depending upon the subject matter, management will: o forward the communication to the director, directors or committee to whom it is addressed; o attempt to handle the inquiry directly if it is a request for information about the Company or other matter appropriately dealt with by management; or o not forward the communication if it is primarily commercial in nature or if it relates to an improper or irrelevant topic. At each Board of Directors' meeting, a member of management will present a summary of all communications received since the last meeting that were not forwarded to the directors and make those communications available to the directors on request. Code of Ethics The Company has adopted a Code of Ethics that applies to all of its employees, including its principal executive officer, principal financial officer, and its principal accounting officer. The Code of Ethics is available on the Company's website, www.fxenergy.com. Stockholder Proposals No proposals have been submitted by the Company's stockholders for consideration at the Annual Meeting. It is anticipated that the next annual meeting of stockholders will be held during June 2006. Stockholders may present proposals for inclusion in the proxy statement to be mailed in connection with the 2006 Annual Meeting of Stockholders of the Company, provided such proposals are received by the Company no later than January 13, 2006, and are otherwise in compliance with applicable laws and regulations and the governing provisions of the Company's Articles of Incorporation and Bylaws. PROPOSAL 1. ELECTION OF DIRECTORS The Company's Articles of Incorporation provide that the Board of Directors shall be divided into three classes, with each class as equal in number as practicable. One class is to be elected each year for a three-year term. At the Annual Meeting, two directors will be elected to serve three-year terms. The Board of Directors has nominated David N. Pierce and Dennis B. Goldstein for election as directors of the Company at the Annual Meeting, each to serve for a term of three years expiring at the 2008 annual meeting and until his successor is elected and qualified. Such nominations have been approved unanimously by the Company's Nomination and Governance Committee and by the Board of Directors. Votes will be cast, pursuant to authority granted by the enclosed proxy when properly executed and returned to the Company, for the election of the nominees named below as directors of the Company, except as otherwise specified in the proxy. In the event a nominee shall be unable to serve, votes will be cast, pursuant to authority granted by the enclosed proxy, for such person as may be designated by the Board of Directors. The Company's officers are elected at the Annual Meeting of the Board of Directors to hold office until their respective successors are elected and qualified. The information concerning the 9 nominees and directors and their security holdings has been furnished by them to the Company. Biographical information and business experience of each person nominated and for each director whose term of office will continue after the Annual Meeting are discussed below. (See "Principal Stockholders.") Recommendation of the Board of Directors The Board of Directors recommends a vote "FOR" the election of the nominees David N. Pierce and Dennis B. Goldstein as directors of the Company, to serve in such capacities until the expiration of their term at the 2008 annual meeting of stockholders and until their successors are elected and qualified. Vote Required Directors are elected by the affirmative vote of the holders of a plurality of the shares of common stock voted at the Annual Meeting. Abstentions and broker nonvotes will not be counted in the election of directors. PROPOSAL 2. AMENDMENT TO THE COMPANY'S ARTICLES OF INCORPORATION TO ENSURE PROVISIONS REGARDING LIABILITY OF DIRECTORS AND OFFICERS CONTINUE TO CONFORM TO NEVADA LAW General The Board of Directors has unanimously approved an amendment to Article V of the Articles of Incorporation (the "Article Amendment") to delete language tracking the Nevada statutory exemptions, so that any amendments or deletions in the Nevada Revised Statutes would not create inconsistencies with the Articles of Incorporation. Article V of the Articles of Incorporation, as proposed to be amended, reads as follows: ARTICLE V LIMITATION ON LIABILITY OF DIRECTORS AND OFFICERS To the fullest extent permitted by the Nevada Revised Statutes or any other applicable law as now in effect or as it may hereafter be amended, a director or officer of the Corporation shall have no personal liability to the Corporation or its stockholders for damages for breach of fiduciary duty as a director or officer. The Board of Directors believes that this amendment does not reflect any change in the Company's position on the liability of its directors and officers. Rather than attempting to restate Nevada law in the Articles of Incorporation, which would require an amendment to the Articles of Incorporation every time the relevant Nevada law is changed, the Board of Directors has concluded that it is in the best interests of the stockholders to amend Article V of the Articles of Incorporation to delete the language tracking the Nevada Revised Statutes in favor of the more general reference to the Nevada Revised Statutes in the introductory clause. Recommendation of the Board of Directors The Board of Directors recommends a vote "FOR" the adoption of the proposed Article Amendment. It is intended that, in the absence of contrary specifications, votes will be cast pursuant to the enclosed proxies for the adoption of the proposed Article Amendment. Vote Required The above proposal will be approved if the number of votes cast for such proposal constitutes at least a majority of the Company's issued and outstanding shares of common stock. Abstentions and broker nonvotes will have the same legal effect as a vote against the proposal. Directors and officers holding 879,705 shares, or approximately 2.6% of the issued and outstanding shares, have indicated their intention to vote in favor of adoption. 10 PROPOSAL 3: AMENDMENT TO THE COMPANY'S BYLAWS TO ENSURE PROVISIONS REGARDING INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS CONTINUE TO CONFORM TO NEVADA LAW General The Board of Directors has unanimously approved an amendment to Article VIII of the Bylaws (the "Bylaw Amendment") to delete provisions tracking the Nevada Revised Statutes, so that any amendments or deletions in the Nevada Revised Statutes would not create inconsistencies with the Bylaws regarding the indemnification of directors, officers, employees and agents. The proposed amendment to Article VIII of the Bylaws deletes the current Sections 8.01 through 8.03 in favor of a new Section 8.01 and renumbers the remaining sections. The new Section 8.01 would read as follows: ARTICLE VIII INSURANCE AND OFFICER AND DIRECTOR CONTRACTS Section 8.01 Indemnification. The corporation shall indemnify any officer or director and may indemnify any other person to the fullest extent permitted by law as the same exists or may hereafter be amended (but in the case of any amendment, only to the extent that such amendment permits the corporation to provide broader indemnification than was permitted prior to such amendment). The Board of Directors believes that this Bylaw Amendment does not reflect any change in the Company's position on the indemnification of its directors, officers, employees and agents. The deleted provisions, at the time they were adopted and subsequently, were intended to require the indemnification of the Company's directors and officers and to permit the Company to indemnify its employees and agents to the fullest extent permitted by Nevada law, as provided in Article VI of the Articles of Incorporation. The Bylaws include detailed provisions about how such indemnification is to be effected. In the intervening years subsequent to the 1993 adoption of the Company's Bylaws, the Nevada statute has been amended, highlighting the potential for conflict between the Company's Bylaws and the statute. Therefore, the Board of Directors has concluded that it is in the best interests of the stockholders that these portions of the indemnification provisions of Article VIII of the Bylaws be deleted in favor of the simpler statement in this Article VIII and in Article VI of the Articles of Incorporation, which provides that the Company shall indemnify its directors and officers and may indemnify its employees and agents to the fullest extent permitted by Nevada law. Recommendation of the Board of Directors The Board of Directors recommends a vote "FOR" the adoption of the proposed Bylaw Amendment. It is intended that, in the absence of contrary specifications, votes will be cast pursuant to the enclosed proxies for the adoption of the proposed Bylaw Amendment. Vote Required The above proposal will be approved if the number of votes cast for such proposal constitutes at least a two-thirds majority of the Company's issued and outstanding shares of common stock. Abstentions and broker non-votes will have the same legal effect as a vote against the proposal. Directors and officers holding 879,705 shares, or approximately 2.6% of the issued and outstanding shares, have indicated their intention to vote in favor of adoption. 11 PROPOSAL 4. APPROVAL OF THE 2005 LONG-TERM INCENTIVE PLAN General On March 29, 2005, the Board of Directors of the Company approved the terms of the 2005 Long-Term Incentive Plan (the "2005 Plan"). In order for certain 2005 Plan provisions relating to incentive stock options to be effective, it must be approved by the stockholders of the Company and is being submitted for such approval pursuant to this proxy statement. Plan Summary The Board of Directors of the Company believes that it is important that senior management as well as other employees and individuals who contribute to the success of the Company have a stake in the enterprise as stockholders. Consistent with this belief, the award of stock options and stock purchase rights has been and will continue to be an important element of their compensation program. The Board of Directors and the stockholders previously approved and adopted the 1995, 1996, 1997, 1998, 1999, 2000 and 2001 Stock Option and Award Plans and the 2003 and 2004 Long-Term Incentive Plans. As of December 31, 2004, options to purchase an aggregate of 3,851,733 shares were outstanding under such plans, leaving 954,566 shares available for issue under such plans. As the award of equity participation is an important element of the Company's compensation program, the Board of Directors believes that another plan should be adopted. This year, the Board of Directors is proposing to add restricted stock units to the 2005 plan, which would provide the Company another equity instrument to use in its compensation program. The 2005 Plan is intended to (a) attract competent directors, executive personnel and other employees, (b) ensure the retention of the services of existing directors, executive personnel and employees, and (c) provide incentives to all of such personnel to devote the utmost effort and skill to the advancement and betterment of the Company, by permitting them to participate in ownership and thereby permitting them to share in increases in the value that they help produce. The 2005 Plan is to be administered either by the Board of Directors or by the appropriate committee to be appointed from time to time by such Board of Directors. Currently, the Compensation Committee recommends actions respecting the 2005 Plan to the Board of Directors. Awards granted under the 2005 Plan may be incentive stock options ("ISOs") as defined in the Internal Revenue Code, appreciation rights, options that do not qualify as ISOs, restricted stock units, or stock bonus awards that are awarded to employees, officers and directors who, in the opinion of the Board of Directors or the committee, have contributed or are expected to contribute materially to the success of the Company. In addition, at the discretion of the Board of Directors or the committee, options or bonus stock may be granted to individuals who are not employees, officers or directors but contribute to the success of the Company. The exercise price of options granted under the 2005 Plan is to be determined by the Board of Directors or the committee at the time of grant and, in the case of ISOs, may not be less than 100% of the fair market value of such capital stock on the date the option is granted (110% of the fair market value in the case of 10% stockholders). Options granted under the 2005 Plan must expire not later than 10 years after the date of grant (five years in the case of ISOs granted to 10% stockholders). The 2005 Plan permits payment to be made for the exercise of options by means of cash, check, other shares of the Company's common stock (with some restrictions), cashless exercise, a reduction in the amount of any Company liability to the optionee, any other form of consideration permitted by applicable law, or by any combination of those means. All of the employees, officers and directors of the Company are eligible to participate under the 2005 Plan. A maximum of 1,000,000 shares are available for grant under the 2005 Plan. The identification of individuals entitled to receive awards, the terms of the awards, and the number of shares subject to individual awards are determined by the Board of Directors or the committee, in its sole discretion; provided, however, that in no event may the aggregate fair market value of shares for which an ISO is first exercisable in any calendar year by any eligible employee exceed $100,000. 12 Options, stock purchase rights, and restricted stock units granted under the 2005 Plan are nontransferable other than by will or by the laws of descent or distribution, and may be exercised and shares issued during the optionee's or participant's lifetime only by the optionee or participant or by an optionee's or participant's family member who has acquired the option, stock purchase right, or restricted stock unit through a gift or a transfer for value pursuant to a domestic relations order in settlement of marital property rights or a transfer to an entity in which more than 50% of the voting interests are owned by an optionee's or participant's family members or the optionee or participant in exchange for an interest in that entity. In the case of an ISO, however, the options are nontransferable other than by will or by the laws of descent or distribution and may only be exercised by the optionee during the lifetime of the optionee or by the optionee's executor, personal representative (or person acting in a substantially similar capacity), or heir. The aggregate number of shares with respect to which options, stock awards, or restricted stock units may be granted under the 2005 Plan, the number of shares covered by each outstanding option, and the purchase price per share shall be adjusted for any increase or decrease in the number of issued shares resulting from a recapitalization, reorganization, merger, consolidation, exchange of shares, stock dividend, stock split, reverse stock split, or other subdivision or consolidation of shares. In the case of an ISO, the ratio of the option price immediately after the change to the fair market value of the stock subject to the option immediately after the corporation transaction must not be more favorable to the optionee on a share-by-share basis than the ratio of the old option price to the fair market value of the stock subject to the option immediately before such transaction. All such adjustments shall be made by the Board of Directors or the committee, whose good faith determination shall be binding absent manifest error. The Board of Directors or the committee may from time to time alter, amend, suspend or discontinue the 2005 Plan with respect to any shares as to which options, stock awards, or restricted stock units have not been granted. However, no such alteration or amendment (unless approved by the stockholders) shall (a) increase (except adjustment for an event of dilution) the maximum number of shares for which options or stock awards may be granted under the 2005 Plan either in the aggregate or to any eligible employee; (b) reduce (except adjustment for an event of dilution) the minimum option prices that may be established under the 2005 Plan; (c) extend the period or periods during which options may be granted or exercised; (d) materially modify the requirements as to eligibility for participation in the 2005 Plan; (e) change the provisions relating to events of dilution; or (f) materially increase the benefits accruing to the eligible participants under the 2005 Plan. Certain Tax Matters The following summary of the major United States income tax consequences of participation in the 2005 Plan is based on the pertinent provisions of the Internal Revenue Code, the applicable regulations promulgated by the Treasury Department under the Internal Revenue Code (the "Regulations"), and judicial and administrative interpretations of the Internal Revenue Code and Regulations. The Internal Revenue Code, the Regulations, and the interpretations thereof are subject to change and such changes may be given retroactive effect. Options to be granted under the 2005 Plan do not qualify under Section 401(a) of the Internal Revenue Code as qualified pension, profit sharing, or stock bonus plans. Nonqualified Stock Options Under the current provisions of the Internal Revenue Code, the following consequences will result from the grant and exercise of the options that are not granted and issued in accordance with the requirements of Section 422 of the Internal Revenue Code and, therefore, do not qualify as ISOs under the Internal Revenue Code (assuming there is not an active trading market for options of the Company): (1) Income will not be recognized by the optionee at the time of the grant of the options, except that in the event options are granted with an exercise price lower than the then-current fair market value of the shares, the difference between the exercise price and the then-current fair market value will be treated as deferred compensation income recognized as of the date the options are granted. 13 (2) If income is not recognized at the time of the grant of the options pursuant to clause (1) above, on exercise of the options, in whole or in part, the optionee will realize ordinary income in an amount equal to the excess of the fair market value of the option shares acquired at the time of exercise over the option exercise price. (3) Upon the sale of any option shares acquired pursuant to the exercise of the options, the optionee will realize short-term or long-term capital gain or loss, as the case may be, in an amount equal to the difference between the amount realized on such sale and the optionee's tax basis in the option shares (as described below). (4) The Company will be entitled to record a compensation expense for federal income taxation purposes in an amount equal to the ordinary income recognized by the optionee as set forth in clauses (1) and (2) above. If payment of the exercise price is made entirely in cash, the tax basis of the option shares will be equal to the option exercise price paid, if any, plus the ordinary income recognized by the optionee, which sum should equal the fair market value of the option shares acquired on the date of exercise. The holding period will begin on the day after the tax basis of the shares is so determined. The ordinary income received by the optionee on the exercise of a nonqualified option is considered compensation from the Company. As with other forms of compensation, withholding taxes, FICA and Medicare payments will be owed with respect to the exercise of options by employees. The Company may accept payment of such withholding taxes, FICA and Medicare payments in one or more of the following ways: (a) the optionee delivering shares of common stock with a fair market value equal to such requirements; (b) the Company withholding option shares subject to the option, with a fair market value equal to such requirements; or (c) the Company withholding from payroll or other amounts owed to the holder. The Company may, in its sole discretion, discuss with the securities broker-dealer through which an optionee subject to withholding sells stock issued on the exercise of options the use of a portion of the sales proceeds to pay the withholding obligation, so that such payment is not an advance out-of-pocket expense to the optionee. Incentive Stock Options Under the current provisions of the Internal Revenue Code, if shares of common stock are issued to the original holder of an ISO granted and exercised in accordance with the 2005 Plan, then: (1) no income will be realized by such holder at the time of the grant of the option or on the transfer of such shares of common stock to the holder pursuant to the exercise of the option; (2) the excess of the fair market value of such shares of common stock at the time of exercise over the option exercise price will be treated as an "item of tax preference" to such holder under the alternative minimum tax provisions of the Internal Revenue Code, and therefore, may be subject to tax at the minimum tax rate under certain conditions; (3) no compensation deduction will be allowed to the Company for federal income tax purposes in connection with the grant or exercise of such option; and (4) upon a sale or exchange of shares of common stock acquired on exercise of the option after the later of (a) one year after the date of transfer of shares of common stock to the original holder, or (b) two years after the date of the grant of the option, any amount realized by such holder in excess of the option exercise price will be taxed to the holder as a long-term capital gain, and any loss sustained will be a long-term capital loss. If such shares are disposed of before the expiration of the holding periods described in clause (4) above, then (i) the holder will realize ordinary taxable income in the year of disposition in an amount equal to the difference between the fair market value of the stock as of the date of exercise of the option determined under the rules of the Internal Revenue Code and the exercise price of the options; (ii) the holder will also realize capital gain or loss, 14 short-term or long-term, as the case may be, in an amount equal to the difference between the amount realized by the holder on sale or exchange of the shares and the option price paid by the holder increased by the amount of ordinary income, if any, recognized by the holder on exercise of the option; (iii) the Company will be entitled to a deduction in the amount of the compensation (ordinary) income so realized by the holder; and (iv) the tax preference otherwise arising on the exercise of the option would be inapplicable. If an option is exercised by payment in common stock (to the extent allowed), such exercise generally will not be considered a taxable disposition of the previously owned shares and, thus, no gain or loss will be recognized with respect to such shares upon exercise. However, if the previously owned shares were acquired on the exercise of an incentive or other tax-qualified stock option and the holding period requirement for those shares was not satisfied at the time they were used to exercise the outstanding option or to satisfy the withholding obligations, such use would constitute a disqualifying disposition of such previously owned shares resulting in the recognition of ordinary income (but, under proposed Regulations, not any additional capital gain) in the amount described above. Stock Awards Under the terms of the 2005 Plan, stock awards may be granted as determined by the Board of Directors or authorized committee. Such stock awards may be subject to forfeiture under conditions imposed by the Board of Directors or the committee. Recipients of stock awards will realize ordinary income at the time of receipt of a stock award or, if such award is subject to forfeiture, upon the lapse of any such forfeiture provisions. The ordinary income realized by the recipient will be equal to the fair market value of the shares less the amount, if any, paid in connection with the issuance (the Board of Directors or the committee can require the payment of par value at the time of the grant). The Company will realize a corresponding compensation deduction. The holder will have a basis in the shares acquired equal to any amount paid on receipt plus the amount of any ordinary income recognized by the holder. On sale of the shares, the holder will have a capital gain or loss equal to the sales proceeds minus his or her basis in the shares. Restricted Stock Units Restricted stock units may also be granted as determined by the Board of Directors or authorized committee in the same manner as stock awards. However, in the case of restricted stock units, the shares of stock will not be issued until the satisfaction of such vesting conditions or other requirements, conditions, or restrictions imposed by the Board of Directors or authorized committee. A holder of a restricted stock unit generally will recognize no income upon the grant of such award. Upon the issuance of the shares in settlement of the award, holders will recognize ordinary income in the year of receipt in an amount equal to the fair market value of the shares received as of such date. The ordinary income generally is subject to withholding of income and employment taxes. The Company will be entitled to a corresponding compensation deduction equal to the amount of ordinary income recognized by the holder. As with stock awards, the holder of a restricted stock unit will have a basis in the shares acquired equal to any amount paid on receipt, if any, plus the amount of any income or gain recognized by the holder. On the sale of the shares, the holder will have a capital gain or loss equal to the sales proceeds less his or her basis in the shares. Vote Required Adoption of the 2005 Plan requires the approval of a majority of the shares present, in person or represented by proxy, and voting at the Annual Meeting. Abstentions and broker nonvotes will not be counted and will have the same legal effect as a vote in favor of the approval of the 2005 Plan. The Board of Directors recommends a vote "FOR" the approval of the 2005 Plan. It is intended that, in the absence of contrary specifications, votes will be cast pursuant to the enclosed proxies for the approval of the 2005 Plan. 15 PRINCIPAL STOCKHOLDERS The following table sets forth, as of March 29, 2005, the name and shareholdings of each person who owns of record, or was known by the Company to own beneficially, 5% or more of the common stock currently outstanding; the name and shareholdings of each director; and the shareholdings of all executive officers and directors as a group. Unless indicated otherwise in the footnotes, each person named below has, to the best of the Company's knowledge, sole voting and investment power with respect to all shares of common stock shown as beneficially owned by each person: Amount and Nature of Percent Name Beneficial Ownership of Class(1) ======================================== ====================== ============= Principal Stockholders: ----------------------- Wellington Management Company(2)........ 2,179,900 6.4% Directors: ---------- David N. Pierce(3)...................... 483,408 1.4 Thomas B. Lovejoy(4).................... 695,134 2.0 Jerzy B. Maciolek(5).................... 229,000 0.7 David L. Worrell(6)..................... 47,333 0.1 Arnold S. Grundvig, Jr.(7).............. 5,333 -- Dennis B. Goldstein(8).................. 64,666 0.2 Richard B. Hardman(9)................... 10,000 -- All executive officers and directors as a group (9 persons)(10)............ 2,302,537 6.4% ----------------- (1) Calculations of total percentages of ownership outstanding for each individual assume the exercise of currently vested options held by that individual to which the percentage relates. Percentages calculated for totals of all executive officers and directors as a group assume the exercise of all vested options held by the indicated group. (2) According to a Schedule 13-G dated February 14, 2005, by Wellington Management Company, LLP, 75 State Street, Boston, MA 02109. (3) The calculation of beneficial ownership includes 325,000 shares subject to outstanding options that were exercisable within 60 days of the table date, 40,000 shares held by David N. Pierce as custodian for minor children, and 21,918 shares held in Mr. Pierce's IRA accounts. Excludes 2,000 shares held by Mr. Pierce's wife, Mary Phillips, as custodian for minor children, of which Mr. Pierce disclaims beneficial ownership. (4) The calculation of beneficial ownership includes 225,000 shares subject to outstanding options that were exercisable within 60 days of the table date, 26,000 shares held in trust for the benefit of Thomas B. Lovejoy's children, 56,268 shares held in Mr. Lovejoy's retirement accounts, 10,000 shares held by Mr. Lovejoy's spouse's IRA account, and 200,000 shares held by Lovejoy & Associates, Inc. (of which Mr. Lovejoy is sole owner). (5) The calculation of beneficial ownership includes 229,000 shares subject to outstanding options that were exercisable within 60 days of the table date. (6) The calculation of beneficial ownership includes 10,333 shares subject to outstanding options and warrants that were exercisable within 60 days of the table date. Includes 20,000 shares held by David L. Worrell jointly with his wife, Julianne Shedd Worrell, 7,000 shares held by Mr. Worrell's IRA, and 5,000 shares held solely by Julianne Shedd Worrell's IRA. (7) The calculation of beneficial ownership includes 5,333 shares subject to outstanding options that were exercisable within 60 days of the table date. (8) The calculation of beneficial ownership includes 44,666 shares subject to outstanding options that were exercisable within 60 days of the table date. (9) The calculation of beneficial ownership includes 10,000 shares subject to outstanding options that were exercisable within 60 days of the table date. (10) The calculation of beneficial ownership includes 1,417,832 shares subject to outstanding options that were exercisable within 60 days of the table date. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company's directors and executive officers, and persons who own more than 10% of a registered class of the Company's equity securities, to file 16 with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of equity securities of the Company. Officers, directors and greater than 10% stockholders are required to furnish the Company with copies of all Section 16(a) forms they file. Based solely upon a review of Forms 3, 4 and 5 and amendments thereto furnished to the Company during or respecting its last fiscal year ended December 31, 2004, no person who, at any time during the most recent fiscal year, was a director, officer, beneficial owner of more than 10% of any class of equity securities of the Company, or any other person known to be subject to Section 16 of the Exchange Act failed to file, on a timely basis, reports required by Section 16(a) of the Securities Exchange Act. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The written charter of the Company's Audit Committee requires that all related-party transactions, including any between the Company and its executive officers, directors and principal stockholders (i.e., stockholders owning beneficially 5% or more of the outstanding voting securities of the Company) must be approved by the Audit Committee. For this purpose, a transaction is deemed material if such transaction, alone or together with a series of similar transactions during the same fiscal year, involves an amount that exceeds $60,000. No such transactions occurred during the fiscal year ended December 31, 2004. EXECUTIVE COMPENSATION Summary Compensation The following table sets forth, for the last three fiscal years of the Company, the annual and long-term compensation earned by, awarded to, or paid to the person who was Chief Executive Officer of the Company and each of the four other highest compensated executive officers of the Company as of the end of the last fiscal year (the "Named Executive Officers"):
Long Term Compensation ------------------------------- Annual Compensation Awards Payouts ------------------------------------- ------------------------------- Securities Restricted Underlying All Other Year Other Stock Options/ LTIP Compen- Name and Principal Ended Annual Award(s) SARs Payouts sation Position Dec. 31 Salary ($) Bonus ($) Compensation($) ($) (no.) (1) ($) ($)(2) ----------------------- ---------- ----------- ----------- -------------- --------- ---------- -------- ---------- David N. Pierce 2004 $250,000 $ -- $ -- $ -- 85,000 $ -- $20,500 President 2003 248,000 -- -- -- 85,000 -- -- (CEO) 2002 152,489 -- -- -- 85,000 -- -- Andrew W. Pierce 2004 $189,000 $ -- $ -- $ -- 75,000 $ -- $18,900 Vice-President 2003 189,000 -- -- -- 75,000 -- -- (COO) 2002 113,480 -- -- -- 75,000 -- -- Thomas B. Lovejoy 2004 $189,000 $ -- $ -- $ -- 75,000 $ -- $18,900 Chairman 2003 186,000 -- -- -- 75,000 -- -- (CFO) 2002 113,480 -- -- -- 75,000 -- 4,539 Scott J. Duncan 2004 $189,000 $ -- $ -- $ -- 75,000 $ -- $18,900 Vice-President 2003 186,600 -- -- -- 75,000 -- -- Investor Relations 2002 88,657 -- -- -- 75,000 -- 4,539 Jerzy B. Maciolek 2004 $189,000 $ -- $ -- $ -- 175,000 $ -- $18,900 Vice-President 2003 186,000 -- -- -- 75,000 -- -- Exploration 2002 113,480 -- -- -- 75,000 -- 4,539 -------------------
(1) Consists of stock options only. (2) Includes employer contributions under the Company's 401(k) plan. No material benefits are payable on retirement under this plan, which was initiated in mid-1999. 17 Agreement To Accept Payment at Reduced Rate and Waiver of Accrued Compensation Effective July 1, 2002, each of the above individuals agreed to accept payment of their respective salaries at one-half of the previously-agreed rate until such time as the Board of Directors determined that the Company's financial condition was such that regular compensation could be resumed. During 2003, the Board of Directors determined that the Company's financial condition had improved such that regular compensation could be resumed. Option/SAR Grants in Last Fiscal Year The following table sets forth information respecting all individual grants of options and stock appreciation rights ("SARs") made during the last completed fiscal year to the Named Executive Officers of the Company:
Potential Realizable Value at Assumed Annual Rates Individual Grants of Stock Price Appreciation for Option Term --------------------------------------------------------------------------------------- --------------------------- (a) (b) (c) (d) (e) (f) (g) Number of Percent of Securities Total Options Underlying SARs Granted Exercise or Options/SARs to Employees/ Base Price Expiration Name Granted (#)(1) in Fiscal Year ($/share) Date 5% ($) 10% ($) ------------------------ --------------- -------------- ------------ -------------- ------------ ------------- David N. Pierce........ 85,000 8.61% $8.37 08/31/2011 $289,632 $ 674,965 Andrew W. Pierce....... 75,000 7.60 8.37 08/31/2011 255,557 595,557 Thomas B. Lovejoy...... 75,000 7.60 8.37 08/31/2011 255,557 595,557 Scott J. Duncan........ 75,000 7.60 8.37 08/31/2011 255,557 595,557 Jerzy B. Maciolek...... 175,000 17.73 8.37 08/31/2011 596,300 1,389,633 --------------------
(1) These options vest one-third on the first anniversary of the date of grant and one-third on each of the next two anniversaries thereafter. Aggregate Option/SAR Exercises in Last Fiscal Year and Year-End Option/SAR Values The following table sets forth information respecting the exercise of options and SARs during the last completed fiscal year by the Named Executive Officers and the fiscal year-end values of unexercised options and SARs:
(a) (b) (c) (d) (e) Number of Securities Underlying Unexercised Options/ Value of Unexercised Shares SARs at Fiscal In-the-Money Options/SARs Acquired on Value Year-End (#) at Fiscal Year-End ($) Exercise Realized Exercisable/ Exercisable/ Name (#) ($) Unexercisable Unexercisable(1) ------------------------ -------------- ------------- ------------------------- --------------------------- David N. Pierce......... 555,000 $3,103,875 325,000 / 170,000 $2,294,583 / $980,617 Andrew W. Pierce........ 545,000 3,068,625 275,000 / 150,000 1,948,625 / 865,250 Thomas B. Lovejoy....... 45,000 158,625 275,000 / 150,000 1,948,625 / 865,250 Scott J. Duncan......... 45,000 78,975 275,000 / 150,000 1,948,625 / 865,250 Jerzy B. Maciolek....... 79,000 292,475 241,000 / 250,000 1,634,465 / 1,196,250 --------------
(1) Based on the closing sales price for the common stock of $11.68 per share on December 31, 2004. 18 Directors' Compensation The Company pays its outside directors a retainer of $18,000, pays them a per-meeting fee of $1,500 for each Board of Directors' regularly-scheduled meeting attended, issues them options to purchase 12,000 shares of common stock per year, and reimburses costs incurred by them in attending meetings of the Board of Directors and its committees. The chairmen of the Audit Committee, currently Arnold S. Grundvig, Jr., and of the Compensation Committee, currently David L. Worrell, each receive $5,000 additional per year. Each director is granted options to purchase 6,000 shares of common stock upon initial election or appointment to the Board of Directors. The Company does not pay any separate compensation to employees who serve on the Board of Directors. The lead director, currently Mr. Goldstein, receives twice the retainer and twice the number of options received by the other outside directors. Mr. Hardman, who is the Technical Advisor to the Board of Directors, was granted options to purchase an additional 65,000 shares of common stock as a consequence of his appointment to that position. In addition to his service as a director, Mr. Hardman has been engaged by the Company as a geologic consultant. In this capacity, he receives $57,000 per year. All options issued to directors are issued at the approximate market price on the date of grant. Employment Agreements, Termination of Employment, and Change in Control On November 16, 2004, the Company entered into Employment Agreements with each of the Named Executive Officers that provide for continued service in their current capacities for a period of 18 months, concluding on May 15, 2006. The agreements provide for base salaries and participation in incentive and bonus plans at the discretion of the Company's Board of Directors, as well as participation in the Company's stock option and other employee benefit plans that are consistent with and similar to such plans provided to its employees generally. Currently, the annual salaries of the foregoing are $350,000 for David N. Pierce and $250,000 for each of the other Named Executive Officers. The Named Executive Officers have also agreed to certain confidentiality and noncompetition provisions. In the event their employment is terminated by the Company "without cause," or by the employee "for cause," they are entitled to receive an amount equal to two times the greater of (a) employee's then-current annual salary, or (b) employee's salary plus bonus compensation for the year most recently ended. The agreements also provide payment provisions in the event of the death or disability of the employee. On November 16, 2004, the Company also entered into separate Change in Control Compensation Agreements with the above executive officers. The agreements provide for certain severance and separation benefits in the event that the Company is involved in a change in control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, which generally applies if (i) any person other than the Company or a current director or officer of the Company is or becomes the beneficial owner, directly or indirectly, of securities of the Company representing 20% of the combined voting power of the Company's then-outstanding securities; or (ii) there is a merger or consolidation of the Company in which the Company does not survive as an independent public company; or (iii) the business or businesses of the Company for which the specific executive's services are principally performed are disposed of by the Company pursuant to a partial or complete liquidation of the Company, a sale of the Company's assets, or otherwise. Following such change in control, in the event their employment is terminated by the Company "without cause," or by the employee "for cause," they are entitled to receive an amount equal to two times the greater of (a) employee's then-current annual salary, or (b) employee's salary plus bonus compensation for the year most recently ended. In addition, the employee shall fully vest in and have the right to exercise all outstanding options, stock purchase awards, and other outstanding awards including shares as to which he would not otherwise be vested or exercisable. Options and Warrants Granted to Officers, Directors, Employees and Consultants As of December 31, 2004, the Company had outstanding options and warrants to purchase an aggregate of 3,851,733 shares that had been granted to officers, directors, employees and consultants of the Company. Of such options, 1,149,733 contain vesting limitations contingent on continuing association with the Company. These options and warrants are exercisable at prices ranging between $2.40 and $9.00 per share. Options issued to executive officers and 19 directors contain terms providing that, in the event of a change in control of the Company and at the election of the optionee, the unexercised options will be canceled, and the Company will pay to the optionee an amount equal to the number of unexercised options multiplied by the amount by which the fair market value of the common stock as of the date preceding the change of control event exceeds the option exercise price. The grants of options to officers and directors were not the result of arm's-length negotiations. COMPENSATION COMMITTEE REPORT General Under the supervision of the Compensation Committee, the Company has developed and implemented compensation policies, plans and programs that seek to enhance the Company's ability to recruit and retain qualified executive and other personnel, including incentive bonuses and stock option and award programs that create long-term incentive for executive management and key employees by enabling them to acquire an equity stake in the Company. The Company's basic compensation package consists of salary, bonus, stock options, and retirement plan contributions. In developing and implementing compensation policies and procedures, the Compensation Committee's objectives are to provide rewards for the long-term value of individual contribution and performance to the Company, provide rewards that are both recurring and nonrecurring, provide for fairness and consistency, pay competitively, conduct an effective performance review process, and meet all legal requirements. The functions of the Compensation Committee are to: o outside the presence of the Chief Executive Officer, review and recommend to the Board of Directors the amount and manner of compensation of the Chief Executive Officer for final determination by the Board of Directors; o consult with and consider the recommendations of the Chief Executive Officer respecting the amount and manner of compensation of the other executive officers and recommend to the Board of Directors the amount and manner of compensation for such executive officers for final determination by the Board of Directors; o consult with the Chief Executive Officer respecting the amount and manner of compensation for other executive-level personnel; o counsel with the Chief Executive Officer in personnel matters and management organization; o support an employment environment of equal opportunity without regard to discrimination on the basis of age, race, religion, sex or national origin; o prepare for inclusion in the Company's proxy or information statement for its annual stockholders' meeting disclosure of the Compensation Committee's compensation policies applicable to executive officers, including the specific relationship of corporate performance to executive compensation; o review and recommend to the Board of Directors incentive awards under the Company's stock option and stock award plans for executive officers, directors, employees and other eligible participants; and o take such further action as necessary to comply with all applicable requirements of law and related regulations and the rules of any national securities exchange or national securities association on which the Company's securities are traded. All stock option and award plans are administered by the Board of Directors or a committee thereof. At its discretion, the Board of Directors or committee may grant stock, incentive stock options or nonqualified options to any employee, including officers. In addition to the options granted under the 20 stock option plans, the Company may also issue nonqualified options outside the stock option plans. The granted options have terms ranging from five to seven years and vest over periods ranging from the date of grant to three years. Under terms of the stock option award plans, the Company may also issue restricted stock. The Compensation Committee reviews the various components of compensation from time to time during the year rather than only once annually, comparing them to those offered by similar companies when such information is available. The Compensation Committee may consider additional compensatory programs for its Chief Executive Officer, other executive officers, and other employees in an effort to broaden the range of indirect and deferred compensation and perquisites provided while attempting to mitigate adverse tax consequences. In reviewing deferred compensation alternatives, the Compensation Committee may adopt and fund benefit plans under criteria that enable the employee beneficiary to, in effect, recoup some of the benefits previously foregone because of the Company's other priorities when its financial resources were more limited. 2004 Compensation Review for Executives and Employees other than the Chief Executive Officer In late 2003, the Compensation Committee conducted a compensation review with respect to executive officers (other than the Chief Executive Officer whose salary is addressed in the following section) by reference to a review of compensation at similar companies taking into consideration such factors adjusted as the Compensation Committee deemed appropriate for variations in geographic location, size, emphasis on exploration as compared to the level of production and reserves, and profitability. Because of the foregoing factors, the group of firms reviewed by the Compensation Committee for this purpose did not include all of the firms included in the significantly larger peer group whose stock performance is reflected in the Performance Graph - Comparison of Five-Year Cumulative Total Returns included within this document. In reviewing the performance of the Company and its executives, the Compensation Committee considered the extent to which the Company and its executives had accomplished objectives for the Company developed by discussion between the Compensation Committee and management, the extent to which the Company's successes and failures in meeting objectives was or was not reasonably within the control or responsibility of the Company's management, and the recommendations of management. The Compensation Committee recommended to the Board of Directors that salary levels be set for the year 2004 at levels recommended by the Compensation Committee. Acting on the recommendations of the Compensation Committee, the Board of Directors approved the recommendation. 2004 Chief Executive Officer Compensation Review In late 2003, the Compensation Committee recommended to the Board of Directors that the 2004 salary level for the Chief Executive Officer be adjusted on the same basis as applied to other executives, except that objectives against which performance was measured also included the performance of the Company's stock price during 2003, continuing the development of the Company's relationships with the government of Poland and the Company's strategic partners, the Company's progress toward discovering, developing and marketing gas reserves in Poland, acquiring additional oil and gas assets in Poland, and expanding the Company's strategic alliances and industry position generally. Efforts to obtain additional funding, conceiving and implementing programs to achieve growth, maintaining compliance with regulatory requirements, and achieving within the stockholder and the broader business community a high regard for the integrity of the Company and its management were also considered, without any specific weight assigned to any specific factors. The Compensation Committee also weighed accomplishments and progress against various delays and impediments encountered and considered the degree to which material events and factors were or were not within the control of the Chief Executive Officer. Due to the nature of the Company's business, the Compensation Committee did not establish objective criteria in the determination of compensation for the Chief Executive Officer, but applied the subjective criteria discussed above. The Board of Directors adopted the Compensation Committee's recommendations. Compensation Committee Interlocks and Insider Participation No member of the Compensation Committee is a present or former officer of the Company or any subsidiary. There are no other interlocks. No member of the Compensation Committee, his family, or his affiliate was a party to any material transactions with the Company or any subsidiary since the beginning of 21 the last completed fiscal year. No executive officer of the Company serves as an executive officer, director or member of a Compensation Committee of any other entity, an executive officer or director of which is a member of the Company's Compensation Committee. The foregoing report has been furnished by: David L. Worrell, Chairman Dennis B. Goldstein Arnold S. Grundvig, Jr. Richard Hardman EQUITY COMPENSATION PLANS
Number of Securities Remaining Available for Future Issuance Number of Securities under Equity To Be Issued upon Weighted-Average Compensation Plans Exercise of Exercise Price of (excluding securities Outstanding Options, Outstanding Options, reflected in column Warrants and Rights Warrants and Rights (a)) Plan Category (a) (b) (c) ------------------------------------ ----------------------- ---------------------- ----------------------- Equity compensation plans approved by security holders..... 3,771,773 $5.48 954,566 Equity compensation plans not approved by security holders..... 80,000 5.47 -- ---------- -------- Total 3,851,773 954,566 ========== ========
Since inception, the Company has issued options pursuant to stock option and award plans that have been adopted by the Board of Directors and approved by the stockholders. As of December 31, 2004, the Company had outstanding options to purchase an aggregate of 3,771,773 shares under plans that have been approved by the stockholders. In addition, from time to time, the Board of Directors has authorized the issuance of options, warrants and convertible securities under arrangements that have not been submitted to the stockholders for approval. This includes compensatory options granted to employees, consultants, officers, directors and others. As of December 31, 2004, there was an aggregate of 80,000 shares reserved for issuance under currently outstanding options, warrants and convertible securities not submitted to the stockholders for approval. In addition to the specific provisions noted below, all such outstanding options, warrants and convertible securities provide for antidilution adjustments to the number of shares issuable and the exercise or conversion price in the event of any stock split, stock dividend or recapitalization of the Company's common stock; restrict transfer; require the Company to reserve for issuance that number of shares issuable on exercise or conversion; require notice to the holder prior to certain extraordinary corporate events; require payment of the exercise price of options and warrants in cash plus such other type of consideration as specifically noted; are fully vested and exercisable unless otherwise indicated; and contain other similar miscellaneous items. The Company granted to an outside consultant options to purchase 30,000 shares at $7.375 per share in 1999. The options vested one third per year after the anniversary date of the grant, are exercisable for a period of seven years after the date of vesting, and are exercisable by delivering common stock owned by the optionee for over six months or a promissory note on terms acceptable to the Board of Directors. The Company granted to a consultant in Poland options to purchase 25,000 shares at $4.0625 per share on October 18, 2000, and an additional 25,000 shares at $2.44 per share on November 12, 2001. Each option vests one third per year after the date of grant and is exercisable for a period of seven years after the date of vesting. The options may be exercised by the delivery of a promissory note in a form satisfactory to the Board of Directors, by the delivery of common stock owned by the optionee for over six months, or in such other form as the Board of Directors may deem appropriate. FIVE-YEAR PERFORMANCE COMPARISON GRAPH The following graph provides an indicator of cumulative total stockholder returns for the Company as compared with the total returns index for the Nasdaq Stock Market (U.S. companies) and an industry peer group for the past five years. The industry peer group selected by the Company is comprised of companies in the United States whose stock is traded on Nasdaq and which are included in Standard Industrial Code 1311, or SIC 1311, entitled "Crude 22 Petroleum and Natural Gas." The industry peer group comprised of firms in SIC 1311 is different than the group of firms the Compensation Committee used for comparison purposes in determining executive compensation. The Compensation Committee selected firms from SIC 1311 that were similar to the Company in terms of geographic location and size, with emphasis on exploration as compared to the level of production and reserves, and profitability. For purposes of comparing five-year cumulative total stockholder returns, the Company believes that it is appropriate to provide five-year cumulative total stockholder returns data for the industry peer group based on a broader industrial classification code group involving a larger number of firms. Comparison of Five-Year Cumulative Total Returns Performance Graph for FX Energy, Inc. (Including data to December 31, 2004) [GRAPH] The plot points for the preceding graph are detailed in the following table:
Legend -------------------------------------------------------------------------------------------------------------------- Symbol CRSP Total Returns Index for: 12/1999 12/2000 12/2001 12/2002 12/2003 12/2004 ------ ----------------------------- ------- ------- ------- ------- ------- ------- [square] FX Energy, Inc..................... 100.0 66.3 36.5 47.6 93.0 217.3 [star] Nasdaq stock market (US Companies)................... 100.0 60.3 47.8 33.1 49.4 53.8 [triangle] Industry peer group (SIC 1310-1319 US Companies) Crude Petroleum and Natural Gas.................. 100.0 207.9 155.8 154.6 273.2 423.9
Notes: A. The lines represent monthly index levels derived from compounded daily returns that include all dividends. B. The indexes are reweighted daily, using the market capitalization of the previous trading day. C. If the monthly interval, based on the fiscal year-end, is not a trading day, the preceding trading day is used. D. The index level for all series was set to $100.0 on 12/31/1999. AUDIT COMMITTEE REPORT The Audit Committee oversees the financial reporting process for the Company on behalf of the Board of Directors. In fulfilling its oversight responsibilities, the Audit Committee reviewed the annual financial statements included in the Annual Report and filed with the Securities and Exchange Commission. The Audit Committee also reviewed the unaudited financial statements filed with the Company's quarterly reports on Form 10-Q. The Committee discussed with management and the independent registered public accountants regarding the acceptability and the quality of the accounting principles used in the financial statements. These discussions included the clarity of the disclosures made therein, the underlying estimates and assumptions used in the financial reporting, the reasonableness of the significant judgments and management decisions made in developing the financial statements and the independent registered public accountants' evaluation of the Company's internal controls. In addition, the Audit Committee has discussed with the independent registered public accountants their independence from the Company and its management, including the matters in the written disclosures required by Independence Standards Board Standard No. 1. The Audit Committee has also discussed issues related to the overall scope and objectives of the audits conducted, the internal controls used by the Company, and the selection of the Company's independent registered public accountants with the Company management and its independent registered public accountants. The Audit Committee also discussed with management the Company's disclosure controls and procedures and the certifications by the Company's Chief Executive Officer and Chief Financial Officer which are required by the Securities and Exchange Commission under the Sarbanes-Oxley Act of 2002 for certain of the Company's filings with the Securities and Exchange Commission. 23 During 2004, the Company did not engage PricewaterhouseCoopers LLP to perform any management or financial information systems design consulting services. Pursuant to the reviews and discussions described above, the Audit Committee recommended to the Board of Directors that the audited financial statements be included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2004, for filing with the Securities and Exchange Commission. The foregoing report has been furnished by: Arnold S. Grundvig, Jr., Chairman Dennis B. Goldstein David L. Worrell INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS Selection of Auditors The selection of the Company's auditors will not be submitted to the stockholders for their approval in the absence of a requirement to do so. It is anticipated that representatives of PricewaterhouseCoopers LLP will be present at the Annual Meeting and will be provided the opportunity to make a statement, if they desire to do so, and be available to respond to appropriate questions. Audit Fees The aggregate fees billed by PricewaterhouseCoopers LLP for professional services rendered for the audit of the Company's annual financial statements for the fiscal year ended December 31, 2004, and for the reviews of the financial statements included in the Company's quarterly reports on Form 10-Q for that fiscal year were $254,713. The aggregate fees billed by PricewaterhouseCoopers LLP for professional services rendered for the audit of the Company's annual financial statements for the fiscal year ended December 31, 2003, for the reviews of the financial statements included in the Company's quarterly reports on Form 10-Q for that fiscal year, and for reviews of registration statements and for assistance with the Securities and Exchange Commission's review of the Company's prior year financial statements were $129,745. Audit Related Fees PricewaterhouseCoopers LLP did not bill the Company for any professional services that were reasonably related to the performance of the audit or review of financial statements for either the fiscal year ended December 31, 2004, or the fiscal year ended December 31, 2003, that are not included under Audit Fees above. Tax Fees The aggregate fees billed by PricewaterhouseCoopers LLP for professional services rendered for tax compliance, tax advice, and tax planning for the fiscal years ended December 31, 2004, and December 31, 2003, were $14,888 and $14,067, respectively. All Other Fees PricewaterhouseCoopers LLP did not perform any services for the Company or charge any fees other than the services described above under "Audit Fees" and "Tax Fees" for either the fiscal year ended December 31, 2004, or the fiscal year ended December 31, 2003. The engagements of PricewaterhouseCoopers LLP to perform all of the above-described services were approved by the Audit Committee before the Company entered into the engagements, and the policy of the Audit Committee is to require that all services performed by the independent registered public accountants be preapproved by the Audit Committee before the services are performed. OTHER MATTERS Management does not know of any business other than that referred to herein that may be considered at the Annual Meeting. If any other matters should properly come before the Annual Meeting, it is the intention of the persons named in the accompanying form of proxy to vote the proxies held by them in accordance with their best judgment. 24 In order to assure the presence of the necessary quorum and to vote on the matters to come before the Annual Meeting, please indicate your choices on the enclosed proxy and date, sign and return it promptly in the envelope provided. The signing of a proxy by no means prevents your attending the meeting. By Order of the Board of Directors FX ENERGY, INC. Salt Lake City, Utah May 16, 2005 Scott J. Duncan, Secretary 25 APPENDIX TO AMENDMENT NO. 1 OF THE DEFINITIVE PROXY STATEMENT FX ENERGY, INC. 2005 LONG-TERM INCENTIVE PLAN FX Energy, Inc., a Nevada corporation (the "Company"), hereby adopts this 2005 Long-Term Incentive Plan (the "Plan"). 1. Purposes of the Plan. The Board has adopted this Plan with the intent, and directs that it be administered as necessary, to attract and retain the best available personnel for positions of substantial responsibility; provide additional incentive to Employees, Directors and Consultants; and promote the success of the Company's business. Options granted under the Plan may be Incentive Stock Options or Nonstatutory Stock Options, as determined by the Administrator at the time of grant. Stock Purchase Rights and Restricted Stock Units may also be granted under the Plan. 2. Definitions. As used herein, the following definitions shall apply: (a) "Administrator" means the Board or any of its Committees as shall be administering the Plan in accordance with section 4 of the Plan. (b) "Applicable Laws" means the requirements relating to the administration of stock option plans under the corporate laws of the state in which the Company is incorporated, federal and state securities laws, the Code, the regulations and policies of any stock exchange or quotation system on which the Common Stock is listed or quoted, and the Applicable Laws of any foreign country or jurisdiction where Options, Stock Purchase Rights, or Restricted Stock Units are or will be granted under the Plan. (c) "Board" means the Board of Directors of the Company. (d) "Code" means the Internal Revenue Code of 1986, as amended. (e) "Committee" means a committee of Directors appointed by the Board in accordance with section 4 of the Plan. (f) "Common Stock" means the common stock of the Company. (g) "Company" means FX Energy, Inc., a Nevada corporation. (h) "Consultant" means any person, including an advisor, engaged by the Company or a Parent or Subsidiary to render services to such entity, including, at the discretion of the Administrator, an entity that is not a natural person. (i) "Director" means a member of the Board. (j) "Disability" means total and permanent disability as defined in Section 22(e)(3) of the Code. A-1 (k) "Employee" means any person, including Officers and Directors, employed by the Company or any Parent or Subsidiary of the Company. A Service Provider shall not cease to be an Employee in the case of (i) any leave of absence approved by the Company or (ii) transfers between locations of the Company or between the Company, its Parent, any Subsidiary, or any successor. For purposes of Incentive Stock Options, no such leave may exceed 90 days, unless reemployment upon expiration of such leave is guaranteed by statute or contract. If reemployment upon expiration of a leave of absence approved by the Company is not so guaranteed, then three months following the 91st day of such leave, any Incentive Stock Option held by the Optionee shall cease to be treated as an Incentive Stock Option and shall be treated for tax purposes as a Nonstatutory Stock Option. Neither service as a Director nor payment of a Director's fee by the Company shall be sufficient to constitute "employment" by the Company. (l) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (m) "Fair Market Value" means, as of any date, the value of Common Stock determined as follows: (i) if the Common Stock is listed on any established stock exchange or a national market system, including the Nasdaq National Market or the Nasdaq SmallCap Market of the Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system on the day of determination, as reported by Nasdaq, The Wall Street Journal, or such other source as the Administrator deems reliable; (ii) if the Common Stock is regularly quoted in an inter-dealer quotation medium, but selling prices are not reported, the Fair Market Value of a Share of Common Stock shall be the mean between the high bid and low asked prices for the Common Stock on the day of determination, as reported by such inter-dealer quotation medium, The Wall Street Journal, or such other source as the Administrator deems reliable; or (iii) in the absence of an established market for the Common Stock, the Fair Market Value shall be determined in good faith by the Administrator. (n) "Incentive Stock Option" means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder. (o) "Inside Director" means a Director who is an Employee. (p) "Nonstatutory Stock Option" means an Option not intended to qualify as an Incentive Stock Option. (q) "Notice of Grant" means a written or electronic notice evidencing certain terms and conditions of an individual Option, Stock Purchase Right, or Restricted Stock Unit grant. The Notice of Grant is part of, and subject to the terms of, the Option Agreement or the Restricted Stock Units Agreement as applicable. (r) "Officer" means a person who is an executive officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. (s) "Option" means a stock option granted pursuant to the Plan. A-2 (t) "Option Agreement" means an agreement between the Company and an Optionee evidencing the terms and conditions of an individual Option grant. The Option Agreement is subject to the terms and conditions of the Plan. (u) "Option Exchange Program" means a program whereby outstanding Options are surrendered in exchange for Options with a lower exercise price. (v) "Optioned Stock" means the Common Stock subject to an Option or Stock Purchase Right. (w) "Optionee" means the holder of an outstanding Option or Stock Purchase Right granted under the Plan. (x) "Outside Director" means a Director who meets the definition of both a "Non-Employee Director" (as defined in Rule 16b-3 of the Exchange Act) and "Outside Director" (as defined in Section 162(m) of the Code). (y) "Parent" means a "parent corporation," whether now or hereafter existing, as defined in Section 424(e) of the Code. (z) "Participant" means a Service Provider to whom the Company has granted a Restricted Stock Unit pursuant to section 17 of the Plan. (aa) "Plan" means this 2005 Long-Term Incentive Plan, as the same may be amended and restated from time to time. (bb) "Restricted Stock" means Shares of Common Stock acquired pursuant to a grant of Stock Purchase Rights under section 11 of the Plan. (cc) "Restricted Stock Purchase Agreement" means a written agreement between the Company and the Optionee evidencing the terms and restrictions applying to stock purchased under a Stock Purchase Right. The Restricted Stock Purchase Agreement is subject to the terms and conditions of the Plan and the Notice of Grant. (dd) "Restricted Stock Unit" means a bookkeeping entry representing a right granted to a Participant pursuant to section 12 of the Plan to receive a share of Common Stock on a date determined in accordance with section 12 of the Plan and the Participant's Restricted Stock Units Agreement. (ee) "Restricted Stock Units Agreement" means a written agreement between the Company and a Participant who is granted Restricted Stock Units under the Plan that contains the terms, conditions and restrictions pertaining to the grant of the Restricted Stock Units. (ff) "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any successor to Rule 16b-3, as in effect when discretion is being exercised with respect to the Plan. (gg) "Section 16(b)" means Section 16(b) of the Exchange Act. (hh) "Service Provider" means an Employee, Director or Consultant. A-3 (ii) "Share" means a share of Common Stock, as adjusted in accordance with section 16 of the Plan. (jj) "Stock Purchase Right" means the right to purchase Common Stock pursuant to section 11 of the Plan, as evidenced by a Notice of Grant. (kk) "Subsidiary" means a "subsidiary corporation," whether now or hereafter existing, as defined in Section 424(f) of the Code. 3. Stock Subject to the Plan. Subject to the provisions of section 16 of the Plan, the maximum aggregate number of Shares on which Options may be granted and which may be sold on the exercise of such Options and under Restricted Stock Purchase Agreements under the Plan is 1,000,000 Shares. The Shares may be authorized, but unissued, or reacquired Common Stock. If an Option or Stock Purchase Right expires or becomes unexercisable without having been exercised in full or is surrendered pursuant to an Option Exchange Program, or if Restricted Stock Units are forfeited, the unpurchased or unissued Shares that were subject thereto shall become available for future grant or sale under the Plan (unless the Plan has terminated); provided, however, that Shares that have actually been issued under the Plan, whether upon exercise of an Option or Right, or upon the vesting of Restricted Stock Units, shall not be returned to the Plan and shall not become available for future distribution under the Plan, except that if Shares of Restricted Stock are repurchased by the Company at their original purchase price, such Shares shall become available for future grant under the Plan. 4. Administration of the Plan. (a) Procedure. (i) The Board may designate different Committees to administer the Plan with respect to different groups of Service Providers. (ii) To the extent that the Administrator determines it to be desirable to qualify Options granted hereunder as "performance-based compensation" within the meaning of Section 162(m) of the Code, the Plan shall be administered by a Committee of two or more "Outside Directors" within the meaning of Section 162(m) of the Code. (iii) To the extent desirable to qualify transactions hereunder as exempt under Rule 16b-3, the transactions contemplated hereunder shall be structured to satisfy the requirements for exemption under Rule 16b-3. (iv) Other than as provided above, the Plan shall be administered by the Board or a Committee, which Committee shall be constituted to satisfy Applicable Laws. (b) Powers of the Administrator. Subject to the provisions of the Plan, and in the case of a Committee, subject to the specific duties delegated by the Board to such Committee, the Administrator shall have the authority, in its discretion: (i) to determine the Fair Market Value pursuant to section 2(m)(iii) of the Plan; (ii) to select the Service Providers to whom Options, Stock Purchase Rights, and Restricted Stock Units may be granted hereunder; A-4 (iii) to determine the number of Stock Purchase Rights and Shares of Common Stock to be covered by each Option or Stock Purchase Right granted hereunder; (iv) to approve forms of agreement for use under the Plan; (v) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any Option, Stock Purchase Right, or Restricted Stock Unit granted hereunder. Such terms and conditions include the exercise price, the time or times when Options or Stock Purchase Rights may be exercised (which may be based on performance criteria), any vesting acceleration or waiver of forfeiture restrictions, and any restriction or limitation regarding any Restricted Stock Unit, Option, or Stock Purchase Right or the Shares of Common Stock relating thereto, based in each case on such factors as the Administrator, in its sole discretion, shall determine; (vi) to cancel any Option or Stock Purchase Right if the Fair Market Value of the Common Stock covered by such Option or Stock Purchase Right shall have declined since the date the Option or Stock Purchase Right was granted and may issue replacement Options or Stock Purchase Rights with an exercise price equal to the then-current Fair Market Value; (vii) to institute an Option Exchange Program; (viii) to construe and interpret the terms of the Plan and awards granted pursuant to the Plan; (ix) to establish, amend and rescind rules and regulations relating to the Plan, including rules and regulations relating to subplans established for the purpose of satisfying applicable foreign laws; (x) to modify or amend each Option, Stock Purchase Right, or Restricted Stock Unit (subject to section 18(c) of the Plan), including the discretionary authority to extend the post-termination exercisability period of Options longer than is otherwise provided for in the Plan; (xi) to authorize any person to execute on behalf of the Company any instrument required to effect the grant of an Option, Stock Purchase Right, or Restricted Stock Unit previously granted by the Administrator; (xii) to correct any defect, supply any omission, or reconcile any inconsistency in the Plan or in any Option or Restricted Stock Units Agreement, in a manner and to the extent it shall deem necessary, all of which determinations and interpretations made by the Administrator shall be conclusive and binding on all Optionees and Participants, any other holders of Options or Restricted Stock Units, and their legal representatives and beneficiaries; (xiii) except to the extent prohibited by or impermissible in order to obtain treatment desired by the Administrator under Applicable Law or rule, to allocate or delegate all or any portion of its powers and responsibilities to any one or more of its members or to any person(s) selected by it, subject to revocation or modification by the Administrator of such allocation or delegation; and A-5 (xiv) to make all other determinations deemed necessary or advisable for administering the Plan. (c) Effect of Administrator's Decision. The Administrator's decisions, determinations, and interpretations shall be final and binding on all Optionees and Participants and any other holders of Options, Stock Purchase Rights, or Restricted Stock Units. 5. Eligibility. Nonstatutory Stock Options, Stock Purchase Rights, and Restricted Stock Units may be granted to Service Providers. Incentive Stock Options may be granted only to Employees. 6. Limitations. (a) Designation. Each Option shall be designated in the Option Agreement as either an Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding such designation, to the extent that the aggregate Fair Market Value of the Shares with respect to which Incentive Stock Options are exercisable for the first time by the Optionee during any calendar year (under all Plans of the Company and any Parent or Subsidiary) exceeds $100,000, such Options shall be treated as Nonstatutory Stock Options. For purposes of this section 6(a), Incentive Stock Options shall be taken into account in the order in which they were granted. The Fair Market Value of the Shares shall be determined as of the time the Option with respect to such Shares is granted. (b) No Right of Continuing Service or Employment. Neither the Plan nor any Option, Stock Purchase Right, or Restricted Stock Unit shall confer upon an Optionee or Participant any right with respect to continuing the Optionee's or Participant's relationship as a Service Provider with the Company, nor shall they interfere in any way with the existing right of the Optionee, Participant, or the Company to terminate such relationship. 7. Term of Plan. Subject to section 22 of the Plan, the Plan shall become effective upon its adoption by the Board. It shall continue in effect for a term of 10 years unless terminated earlier under section 18 of the Plan. 8. Term of Option. The term of each Option shall be stated in the Option Agreement. In the case of an Incentive Stock Option, the term shall be 10 years from the date of grant or such shorter term as may be provided in the Option Agreement. Moreover, in the case of an Incentive Stock Option granted to an Optionee who, at the time the Incentive Stock Option is granted, owns stock representing more than 10% of the total combined voting power of all classes of stock of the Company or any Parent or Subsidiary, the term of the Incentive Stock Option shall be five years from the date of grant or such shorter term as may be provided in the Option Agreement. 9. Option Exercise Price and Consideration. (a) Exercise Price. The per Share exercise price for the Shares to be issued pursuant to exercise of an Option shall be determined by the Administrator and specified in the Option Agreement, subject to the following: (i) In the case of an Incentive Stock Option: (1) granted to an Employee who, at the time the Incentive Stock Option is granted, owns stock representing more than 10% of the voting power of all classes of stock of the Company or any Parent or A-6 Subsidiary, the per Share exercise price shall be no less than 110% of the Fair Market Value per Share on the date of grant. (2) granted to any Employee other than an Employee described in subsection 9(a)(i)(1) immediately above, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant. (ii) In the case of a Nonstatutory Stock Option, the per Share exercise price shall be determined by the Administrator. In the case of a Nonstatutory Stock Option intended to qualify as "performance-based compensation" within the meaning of Section 162(m) of the Code, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant. (iii) In the event of a merger or other corporate transaction, a new Option may be substituted for an outstanding Option, or such outstanding Option may be assumed. (b) Waiting Period and Exercise Dates. At the time an Option is granted, the Administrator shall fix the period within which the Option may be exercised and shall determine any conditions that must be satisfied before the Option may be exercised. (c) Form of Consideration. The Administrator shall determine the acceptable form of consideration for exercising an Option, including the method of payment. Such consideration may consist entirely of: (i) cash; (ii) check; (iii) other Shares, provided Shares acquired from the Company have been owned by the Optionee for more than six months on the date of surrender and have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised; (iv) consideration received by the Company under a cashless exercise program implemented by the Company in connection with the Plan; (v) a reduction in the amount of any Company liability to the Optionee, including any liability attributable to the Optionee's participation in any Company-sponsored deferred compensation program or arrangement; (vi) any combination of the foregoing methods of payment; or (vii) such other consideration and method of payment for the issuance of Shares to the extent permitted by Applicable Laws. In the case of an Incentive Stock Option, the Administrator shall determine the acceptable form of consideration at the time of grant as set forth in the Option Agreement. Notwithstanding the form of consideration determined by the Administrator at the time of grant, the Administrator shall have the authority, in its sole and absolute discretion, to accept other forms of consideration as the method of payment. A-7 10. Exercise of Option. (a) Procedure for Exercise; Rights as a Stockholder. Any Option granted hereunder shall be exercisable according to the terms of the Plan and at such times and under such conditions as determined by the Administrator and set forth in the Option Agreement. Unless the Administrator provides otherwise, vesting of Options granted hereunder shall be tolled during any unpaid leave of absence. An Option may not be exercised for a fraction of a Share. An Option shall be deemed exercised when the Company receives: (i) written or electronic notice of exercise (in accordance with the Option Agreement) from the person entitled to exercise the Option, and (ii) full payment for the Shares with respect to which the Option is exercised. Full payment may consist of any consideration and method of payment authorized by the Administrator and permitted by the Option Agreement and the Plan. Shares issued upon exercise of an Option shall be issued in the name of the Optionee or, if requested by the Optionee, in the name of the Optionee and his or her spouse or in the name of a family trust of which the Optionee is a trustee. Until the Shares are issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such Shares promptly after the Option is exercised; provided that if the Company shall be advised by counsel that certain requirements under the federal, state or foreign securities laws must be met before Shares may be issued under this Plan, the Company shall notify all persons who have been issued Options, and the Company shall have no liability for failure to issue Shares under any exercise of Options because of delay while such requirements are being met or the inability of the Company to comply with such requirements. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Shares are issued, except as provided in section 16 of the Plan. Exercising an Option in any manner shall decrease the number of Shares thereafter available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. (b) Termination of Relationship as a Service Provider. If an Optionee ceases to be a Service Provider, other than upon the Optionee's death or Disability, the Optionee may exercise his or her Option within such period of time as is specified in the Option Agreement to the extent that the Option is vested on the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement). In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for three months following the Optionee's termination. If, on the date of termination, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified by the Administrator, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (c) Disability of Optionee. If an Optionee ceases to be a Service Provider as a result of the Optionee's Disability, the Optionee may exercise his or her Option within such period of time as is specified in the Option Agreement to the extent the Option is vested on the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement). In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for 12 months following the Optionee's termination. If, on the date of termination, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. A-8 (d) Death of Optionee. If an Optionee dies while a Service Provider, the Option may be exercised within such period of time as is specified in the Option Agreement (but in no event later than the expiration of the term of such Option as set forth in the Notice of Grant), by the Optionee's estate or by a person who acquires the right to exercise the Option by bequest or inheritance, but only to the extent that the Option is vested on the date of death. In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for 12 months following the Optionee's termination. If, at the time of death, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall immediately revert to the Plan. The Option may be exercised by the executor or administrator of the Optionee's estate or, if none, by the person(s) entitled to exercise the Option under the Optionee's will or the laws of descent or distribution. If the Option is not so exercised within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. 11. Stock Purchase Rights. (a) Rights to Purchase. Stock Purchase Rights may be issued either alone, in addition to, or in tandem with other awards granted under the Plan and/or cash awards made outside of the Plan. After the Administrator determines that it will offer Stock Purchase Rights under the Plan, it shall advise the offeree in writing or electronically, by means of a Notice of Grant, of the terms, conditions and restrictions related to the offer, including the number of Shares that the offeree shall be entitled to purchase, the price to be paid, and the time within which the offeree must accept such offer. The offer shall be accepted by execution of a Restricted Stock Purchase Agreement in the form determined by the Administrator. (b) Repurchase Option. Unless the Administrator determines otherwise, the Restricted Stock Purchase Agreement shall grant the Company a repurchase option exercisable upon the voluntary or involuntary termination of the purchaser's service with the Company for any reason (including death or Disability). The purchase price for Shares repurchased pursuant to the Restricted Stock Purchase Agreement shall be the original price paid by the purchaser plus interest at the rate of 10% per year from the date of the original purchase and may be paid by cancellation of any indebtedness of the purchaser to the Company. The repurchase option shall lapse at a rate determined by the Administrator. (c) Other Provisions. The Restricted Stock Purchase Agreement shall contain such other terms, provisions and conditions not inconsistent with the Plan as may be determined by the Administrator in its sole discretion. (d) Rights as a Stockholder. Once the Stock Purchase Right is exercised, the purchaser shall have the rights equivalent to those of a stockholder and shall be a stockholder when his or her purchase is entered upon the records of the duly authorized transfer agent of the Company. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Stock Purchase Right is exercised, except as provided in section 16 of the Plan. 12. Restricted Stock Units. (a) Restricted Stock Units Agreement. Each Restricted Stock Units award pursuant this section 12 shall be evidenced by a Restricted Stock Units Agreement between the Participant and the Company. Such award shall be subject to all applicable terms and conditions of the Plan and may be subject to any other terms and conditions that are not inconsistent with the Plan and that the Administrator deems appropriate A-9 for inclusion in a Restricted Stock Units Agreement. The provisions of the various Restricted Stock Units Agreements entered into under the Plan need not be identical. (b) Purchase Price. No monetary payment (other than applicable tax withholding, if any) shall be required as a condition of receiving a Restricted Stock Units award, the consideration for which shall be services actually rendered to the Company, a Parent or Subsidiary, or for its benefit. (c) Vesting. Restricted Stock Units may or may not be made subject to vesting conditions based upon the satisfaction of such requirements, conditions, or restrictions, as shall be established by the Administrator and set forth in the Restricted Stock Units Agreement. (d) Voting. Participant shall have no voting rights with respect to Shares represented by Restricted Stock Units until the date of the issuance of such Shares (as evidenced by the appropriate entry on the books of the Company or of a duly-authorized transfer agent of the Company). (e) Effect of Termination of Service. Unless otherwise provided by the Administrator in the grant of Restricted Stock Units and set forth in the Restricted Stock Units Agreement, if a Participant's service terminates for any reason, whether voluntary or involuntary (including the Participant's death or Disability), then the Participant shall forfeit to the Company any Restricted Stock Units that remain subject to vesting conditions as of the date of the Participant's termination of service. (f) Settlement of Restricted Stock Unit Award. The Company shall issue to the Participant as soon as practicable following the dates the vesting conditions or other requirements, conditions, or restrictions applicable thereto shall be satisfied, and in any event, within two and one-half months after such date, a number of whole Shares equal to the number of whole Restricted Stock Units as set forth in and subject to the Restricted Stock Units Agreement that are no longer subject to vesting conditions, subject to withholding of applicable taxes, if any. (g) Restrictions on Transfer of Restricted Stock Units. Restricted Stock Units shall not be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, or garnishment by creditors of the participant or the Participant's beneficiary, except: (i) by will or by the laws of descent and distribution; (ii) to a Participant's family member who has acquired the Restricted Stock Unit Award through a gift or a transfer for value pursuant to a domestic relations order in settlement of marital property rights or a transfer to an entity in which more that 50% of the voting interests owned by a Participant's family members or the Participant in exchange for an interest in that entity, all as more particularly provided in the general instructions to Form S-8 or any successor form under the Securities Act of 1933; or (iii) as determined otherwise by the Administrator, in which case such Restricted Stock Unit Award shall contain such additional terms and conditions as the Administrator deems appropriate. 13. Withholding. If the grant or exercise of an Option or a Stock Purchase Right pursuant to this Plan or any other event in connection with any such grant or exercise, or the award or vesting of a Restricted Stock Unit, the issuance of the Share represented by such Restricted Stock Unit, or any other event in connection with such award, vesting, or issuance, creates an obligation to withhold income and employment taxes pursuant to the Applicable Laws, such obligation may, at the sole and absolute discretion of the Administrator at the time of the grant of the Option, Stock Purchase Right, or Restricted Stock Unit, and to the extent permitted by the terms of the Option, Stock Purchase Right, or Restricted Stock Unit and the then-governing provisions of the Code and the A-10 Exchange Act, be satisfied (a) by the holder of the Option, Stock Purchase Right, or Restricted Stock Unit delivering to the Company an amount of cash equal to such withholding obligation; (b) by the Company withholding from any compensation or other amount owing to the holder of the Option, Stock Purchase Right, or Restricted Stock Unit the amount (in cash, stock or other property as the Company may determine) of the withholding obligation; (c) by the Company withholding Shares of stock subject to the Option, Stock Purchase Right, or Restricted Stock Unit with a Fair Market Value equal to such obligation; or (d) by the holder of the Option, Stock Purchase Right, or Restricted Stock Unit either delivering Shares of stock that have been owned by the holder for more than six months or canceling Options or Restricted Stock Units or other rights to acquire stock from the Company that have been held for more than six months with a Fair Market Value equal to such requirements. In all events, delivery of Shares of stock issuable on exercise of the Option, on grant of the Stock Purchase Right, or on vesting of the Restricted Stock Unit shall be conditioned upon and subject to the satisfaction or making provision for the satisfaction of the withholding obligation of the Company resulting from the grant or exercise of the Option, grant of the Stock Purchase Right, vesting of the Restricted Stock Unit, or any other event in accordance with the foregoing. The Company shall be further authorized to take such other action as may be necessary, in the opinion of the Company, to satisfy all obligations for the payment of such taxes. 14. Nontransferability of Options and Stock Purchase Rights. (a) An Option or Stock Purchase Right may not be sold, pledged, assigned, hypothecated, transferred or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee, all save and except only (i) an Optionee's family member who has acquired the Option or Stock Purchase Right through a gift or a transfer for value pursuant to a domestic relations order in settlement of marital property rights or a transfer to an entity in which more that 50% of the voting interests owned by an Optionee's family members or the Optionee in exchange for an interest in that entity, all as more particularly provided in the general instructions to Form S-8 or any successor form under the Securities Act of 1933; or (ii) unless determined otherwise by the Administrator, in which case such Option or Stock Purchase Right shall contain such additional terms and conditions as the Administrator deems appropriate. (b) An Incentive Stock Option may not be sold, pledged, assigned, hypothecated, transferred or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee. An Incentive Stock Option can only be exercised by Optionee. In the event of the death of Optionee while an eligible employee of the Company or within three months after termination thereof, this Option can be exercised by the executor or personal representative of the estate of Optionee or such other person who has acquired this Option as a bequest or by inheritance from Optionee. 15. Grants to Directors and Officers. To the extent the Company has a class of securities registered under Section 12 of the Exchange Act, Options, Stock Purchase Rights, or Restricted Stock Units granted under the Plan to Directors and Officers (as used in Rule 16b-3 promulgated under the Exchange Act or any amendment or successor rule of like tenor) intended to qualify for the exemption from Section 16(b) of the Exchange Act provided in Rule 16b-3 shall, in addition to being subject to the other restrictions and limitations set forth in this Plan, be made as follows: (a) Requirements for Grant to Officer or Director. A transaction whereby there is a grant of an Option, Stock Purchase Right, or Restricted Stock Unit pursuant to this Plan must satisfy one of the following: (i) The transaction must be approved by the Board or duly authorized Committee composed solely of two or more Outside Directors of the Company. A-11 (ii) The transaction must be approved or ratified, in compliance with Section 14 of the Exchange Act, by either: (1) the affirmative vote of the holders of a majority of the securities of the Company present or represented and entitled to vote at a meeting of the stockholders of the Company held in accordance with the Applicable Laws of the state of incorporation of the Company; or (2) if allowed by applicable state law, the written consent of the holders of a majority, or such greater percentage as may be required by Applicable Laws of the state of incorporation of the Company, of the securities of the Company entitled to vote. If the transaction is ratified by the stockholders, such ratification must occur no later than the date of the next annual meeting of stockholders. (iii) The stock acquired must be held by the Officer or Director for a period of six months subsequent to the date of the grant; provided that if the transaction involves a derivative security (as defined in Section 16 of the Exchange Act), this condition shall be satisfied if at least six months elapse from the date of acquisition of the derivative security to the date of disposition of the derivative security (other than on exercise or conversion) or its underlying equity security. (b) Approval Required for Disposition of Securities. Any transaction involving the disposition by the Company of its securities in connection with Options, Stock Purchase Rights, or Restricted Stock Units granted pursuant to this Plan to an Officer or Director shall: (i) be approved by the Board or duly authorized Committee composed solely of two or more Outside Directors; or (ii) be approved or ratified, in compliance with Section 14 of the Exchange Act, by either: (1) the affirmative vote of the holders of a majority of the securities of the Company present or represented and entitled to vote at a meeting duly held in accordance with the Applicable Laws of the state of incorporation of the Company; or (2) if allowed by applicable state law, the written consent of the holders of a majority, or such greater percentage as may be required by Applicable Laws of the state of incorporation of the Company, of the securities of the Company entitled to vote; provided that such ratification occurs no later than the date of the next annual meeting of stockholders; unless the securities so acquired are held by the Officer or Director for six months following the date of such acquisition, provided that this condition shall be satisfied with respect to a derivative security if at least six months elapse from the date of acquisition of the derivative security to the date of disposition of the derivative security (other than upon exercise or conversion) or its underlying equity security.. All of the foregoing restrictions and limitations are based on the governing provisions of the Exchange Act and the rules and regulations promulgated thereunder as of the date of adoption of this Plan. If, at any time, the governing provisions are amended to permit an Option, Stock Purchase Right, or Restricted Stock Unit to be granted or exercised pursuant to Rule 16b-3 or any amendment or successor rule of like tenor without one or more of the foregoing restrictions or limitations, or the terms of such restrictions or limitations are modified, the Administrator may award Options, Stock Purchase Rights, or Restricted Stock Units to Directors and Officers and may modify outstanding Options, Stock Purchase Rights, or Restricted Stock Units in accordance with such changes, all to the extent that such action by the Administrator does not disqualify the Options, Stock Purchase Rights, or Restricted Stock Units from exemption under the provisions of Rule 16b-3 or any amendment or successor rule of similar tenor. A-12 16. Adjustments upon Changes in Capitalization, Dissolution, Merger or Asset Sale. (a) Changes in Capitalization. Subject to any required action by the stockholders of the Company, the number of Shares of Common Stock covered by each outstanding Option, Stock Purchase Right, and Restricted Stock Unit, the number of Shares of Common Stock that have been authorized for issuance under the Plan but as to which no Options, Stock Purchase Rights, or Restricted Stock Units have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option or Stock Purchase Right or the forfeiture of a Restricted Stock Unit, as well as the price per Share of Common Stock covered by each such outstanding Option or Stock Purchase Right, shall be proportionately adjusted for any increase or decrease in the number of issued Shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued Shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been effected without receipt of consideration within the meaning of the preceding clause. Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of Shares of stock of any class, or securities convertible into Shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of Shares of Common Stock subject to an Option, Stock Purchase Right, or Restricted Stock Unit. (b) Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, the Administrator shall notify each Optionee or Participant as soon as practicable prior to the effective date of such proposed transaction. The Administrator in its discretion may provide for an Optionee to have the right to exercise his or her Option until 10 days prior to such transaction as to all of the Optioned Stock covered thereby, including Shares as to which the Option would not otherwise be exercisable. In addition, the Administrator may provide that any Company repurchase option applicable to any Shares purchased upon exercise of an Option or Stock Purchase Right shall lapse as to all such Shares, provided the proposed dissolution or liquidation takes place at the time and in the manner contemplated. To the extent an Option or Stock Purchase Right has not been previously exercised, or to which a Restricted Stock Unit has not vested, the Option, Stock Purchase Right, or Restricted Stock Unit will terminate immediately prior to the consummation of such proposed action. (c) Merger or Asset Sale. In the event of a merger of the Company with or into another corporation, or the sale of substantially all of the assets of the Company, each outstanding Option, Stock Purchase Right, and Restricted Stock Unit shall be assumed or an equivalent Option, right, or Restricted Stock Unit substituted by the successor corporation or a Parent or Subsidiary of the successor corporation. With respect to Options or Restricted Stock Units granted to an Outside Director pursuant to section 15 that are assumed or substituted for, if following such assumption or substitution the Optionee's or Participant's status as a Director or a director of the successor corporation, as applicable, is terminated other than upon a voluntary resignation by the Optionee or Participant, then the Optionee shall fully vest in and have the right to exercise the Option as to all of the Optioned Stock, including Shares as to which it would not otherwise be vested or exercisable, and the Participant's Restricted Stock Units shall fully vest [and the Shares shall be issued]. In the event that the successor corporation refuses to assume or substitute for the Option, Stock Purchase Right, or Restricted Stock Unit, the Optionee shall fully vest in and have the right to exercise the Option or Stock Purchase Right as to all of the Optioned Stock, including Shares as to which it would not otherwise be vested or A-13 exercisable, and the Participant's Restricted Stock Units shall fully vest [and the Shares shall be issued]. If an Option or Stock Purchase Right becomes fully vested and exercisable in lieu of assumption or substitution in the event of a merger or sale of assets, the Administrator shall notify the Optionee in writing or electronically that the Option or Stock Purchase Right shall be fully vested and exercisable for a period of 15 days from the date of such notice, and the Option or Stock Purchase Right shall terminate upon the expiration of such period. For the purposes of this subsection, the Option, Stock Purchase Right, or Restricted Stock Unit shall be considered assumed if, following the merger or sale of assets, the Option, right, or Restricted Stock Unit confers the right to purchase or receive, for each Share of Optioned Stock subject to the Option or Stock Purchase Right or for each Restricted Stock Unit immediately prior to the merger or sale of assets, the consideration (whether stock, cash or other securities or property) received in the merger or sale of assets by holders of Common Stock for each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares); provided, however, that if such consideration received in the merger or sale of assets is not solely common stock of the successor corporation or its Parent, the Administrator may, with the consent of the successor corporation, provide for the consideration to be received upon the exercise of the Option or Stock Purchase Right, or the vesting of the Restricted Stock Unit, for each Restricted Stock Unit or Share of Optioned Stock subject to the Option or Stock Purchase Right, to be solely common stock of the successor corporation or its Parent equal in Fair Market Value to the per Share consideration received by holders of Common Stock in the merger or sale of assets. 17. Date of Grant. The date of grant of an Option, Stock Purchase Right, or Restricted Stock Unit shall be, for all purposes, the date on which the Administrator makes the determination granting such Option, Stock Purchase Right, or Restricted Stock Unit or such other later date as is determined by the Administrator. Notice of the determination shall be provided to each Optionee or Participant within a reasonable time after the date of such grant. 18. Amendment and Termination of the Plan. (a) Amendment and Termination. The Board may at any time amend, alter, suspend or terminate the Plan. (b) Stockholder Approval. The Company shall obtain stockholder approval of any Plan amendment to the extent necessary and desirable to comply with Applicable Laws. (c) Effect of Amendment or Termination. No amendment, alteration, suspension or termination of the Plan shall impair the rights of any Optionee or Participant, unless mutually agreed otherwise between the Optionee or Participant and the Administrator, which agreement must be in writing and signed by the Optionee or Participant and the Company. Termination of the Plan shall not affect the Administrator's ability to exercise the powers granted to it hereunder with respect to Options or Restricted Stock Units granted under the Plan prior to the date of such termination. 19. Conditions upon Issuance of Shares. (a) Legal Compliance. Shares shall not be issued pursuant to the exercise of an Option or Stock Purchase Right or the vesting of a Restricted Stock Unit unless the exercise of such Option or Stock Purchase Right or the vesting of such Restricted Stock Unit and the issuance and delivery of such Shares shall comply with Applicable Laws and shall be further subject to the approval of counsel for the Company with respect to such compliance. A-14 (b) Investment Representations. As a condition to the exercise of an Option or Stock Purchase Right or the issuance of Shares upon vesting of a Restricted Stock Unit, the Company may require the person exercising such Option or Stock Purchase Right or whose Restricted Stock Unit is vesting to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required. 20. Inability To Obtain Authority. The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained. 21. Reservation of Shares. The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. 22. Stockholder Approval. The Plan shall be subject to approval by the stockholders of the Company within 12 months after the date the Plan is adopted. Such stockholder approval shall be obtained in the manner and to the degree required under Applicable Laws. SECRETARY'S CERTIFICATE The undersigned, the duly constituted and elected secretary of FX Energy, Inc., hereby certifies that pursuant to resolution duly adopted by the stockholders on June 15, 2005, in accordance with the requirements of law and the Company's articles of incorporation and bylaws, the foregoing FX Energy, Inc. 2005 Long-Term Incentive Plan was approved by the affirmative vote of the holders of a majority of the Shares of Common Stock. DATED this ______ day of June, 2005. ---------------------------- Scott J. Duncan, Secretary A-15