more of the shareholders only report:
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table discloses compensation for services rendered by the Company's Chief Executive Officer and all other executive officers of the Company whose compensation exceeded $100,000 in 1997, 1996, and 1995.
Annual on on
Name and Cdff Annual All@
Position Year Bonus on
GeorgeN.Faris 1997 $312,000 $257,000 $7,200(3) 750,000 $193,000(l)
Ofdr 1996 292,000 15,000 9,600(2) 1,202,500(4) 422,000(5)
BoardaridCffief 1995 240,000 - 45,000(2) 202,500(4)
Fx@e Officer
Dems J. Fi@ck 1997 $118,000 $102,000 $ - 125,000 25,000(8)
,Vice 1996 105,000 5,000 15,000(6) 120,000(4)
President and Chef 1995 105,000 - 18,000(7) 20,000(4)
F Officer
William L. Tracy 1997 $88,000 $62,000 75,000 $23,000(8)
Treasurer and 1996 (9)
Controller 1995 (9) - - -
N.Dudwn 1997 (10) - - -
@dent and Chef 1996 (10) - - -
Officer 1995 $145,000(10) - - -
(1) Includes deferred salary payment of $109,000 and income tax reimbursement of $84,000.
(2) $35,500 of this amount constituted forgiveness of interest on a debt owed to the Company, the principal of which was repaid to the Company; $9,600 was paid as a vehicle allowance in eacli of 1996 and 1995.
(3) Vehicle allowance.
5
ions
(4) The number of options shown for 1995 was issued in substitution for previously outstanding opt' and re-issued in 1996. The exercise price is now $.50 per share. See Ten Year Option Repricings table below.
(5) On October 13, 1995, the Company and Dr. Faris executed an amendment to Dr. Farls'employment agreement, pursuant to which Dr. Faris relinquished certain rights in exchange for 900,000 shares of Common Stock. See "Employment Contract" below.
(6) Mr. Fitzpatrick is reimbursed up to $15,000 per year in living expenses incurred while working in the New York office.
(7) Mr. Fitzpatrick was awarded 5,000 restricted shares of Common Stock as a signing bonus, which shares were issued in 1995.
(8) Deferred salary payment.
(9) Mr. Tracy's compensation was less than $ 1 00,000 in each of 1996 and 1995.
(IO) Mr. Durham resigned from employment with the Company effective on November 3, 1995.
1995 STOCK OPTIONPLAN
The Company has established a 1995 Stock Option Plan (the "1995 Plan"). The 1995 Plan was approved by the Board of Directors on November 8, 1995 and by the Company's shareholders on July 11, 1996. The 1995 Plan is administered by the Board of Directors of the Company or a Committee designated by them. Under the 1995 Plan employees, including officers and managerial or supervising personnel, are eligible to receive Incentive Stock Options ("ISO's") or ISO's in tandem with stock appreciation rights ("SAR's"), and employees, Directors, contractors and consultants are eligible to receive non-qualified stock options ("NQSO's") or NQSO's in tandem with SAR'S. Options may be granted under the 1995 Plan to purchase an aggregate of 3,500,000 shares of Common Stock. If an option granted under the 1995 Plan terminates or expires without having been exercised in full, the unexerciscd shares subject to that option will be available for a further grant of options under the 1995 Plan. Options may not be transferred other than by will or the laws of descent and distribution and, during the lifetime of the optionee, may be exercised only by the optionee.
Options may not be granted under the 1995 Plan after November 7, 2005. The exercise price of the options granted under the 1995 Plan cannot be less than the fair market value of the shares of Common Stock on the date the option is granted. ISO's granted to shareholders owning 10% or more of the outstanding voting power of the Company must be exercised at a price equal to at least I IO% of the fair market value of the shares of Common Stock on the date of grant. The aggregate fair market value of Common Stock, as determined at the time of the grant with respect to which ISO's are exercisable for the first time by any employee during any calendar year, shall not exceed $100,000. Any additional Common Stock as to which options become exercisable for the first time during any such year are treated as NQSO'S. The total number of options granted under the 1995 Plan, as of the Record Date was 3,477,500, which included 302,500 repriced options granted in substitution for options previously held.
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OPTION GRANTS INLASTFISC.AL YEAR
The table below includes the number of stock options granted to certain executive officers during the year ended December 31, 1997, exercise information and potential realizable value.
Individual Grants Potential Realizable
Number of Percent of Value at Assumed
Securities Total Options Annual Rates of Stock
Underlying Granted to Price Appreciation
Options Employees in Exercise Expiration for Option Term
Name Granted(#) Fiscal Year Price($/sh) Date 5%($) 1 O%($)
George Faris 750,000 45% $1.05 12/31/02 $-O- $-o-
Denis Fitzpatrick 125,000 8% $1.05 12/31/02 $-O- $-o-
William L. Tracy 75,000 5% $1.05 12/31/02 $-O- $-O-
A GGREGA TE OPTION EXERCISES IN 1997 AND OPTION VAL UES A TDECEMBER 31, 1997
The table below includes the number of shares covered by both exercisable and non-exercisable stock options owned by certain executive officers as of December 31, 1997. Also reported are the values for "in-the-money" options which represent the positive spread between exercise price of any such existing stock options and the year-end price.
Shares
Acquired or Value Number of Unexercised Value of Unexercised
Name Exercised Realized Options at Year End In-the-money Options
Exercisable Unexercisable xercisable Unexercisable
George N. Faris 1,764,000 187,500 $4,771,495 $436,875
Denis J. Fitzpatrick 202,500 42,500 $537,825 $99,025
William L. Tracy 101,000 25,500 $263,380 $59,415
EMPLOYMENTCONTRACT
Effective May 1, 1989, the Company entered into an employment agreement with George N. Faris at an annual salary of $200,000, which agreement is renewed annually. In 1992, the Board increased Dr. Faris' salary to $300,000 per year In April 1994, Dr. Faris voluntarily reduced his salary to $240,000 per year. In February 1996, Dr. Faris' salary was reinstated to $300,000 per year. Pursuant to the employment agreement, in the event of a change in control of the Company which Dr. Faris and a majority of the Company's Board of Directors approve, Dr. Faris was entitled, upon such change of control, to terminate his employment and receive 2.9 times his fixed compensation as defined in the employment agreement. However, if Dr. Faris opposed a change in control, but the majority of the Board of Directors voted in favor of such change, then Dr. Faris could have his employment terminated and received 2.5 times his fixed compensation. In the event that Dr. Faris' employment was terminated prior to the expiration of his contract for reasons other than cause or death, or if such employment 7
agreement is not renewed at termination, the Company was to pay severance to Dr. Faris in an amount equal to the product of his number of years of service, beginning with the calendar year 198 1, multiplied by $50,000.
On September 7, 1995, the Board of Directors approved an amendment to Dr. Faris' employment agreement, which was signed by Dr. Faris and the Company in October 1995 and subsequently ratified by the Company's shareholders. Pursuant to the amendment, the rights of Dr. Faris described in the previous paragraph ten-ninated, and Dr. Faris received, in exchange, 900,000 shares of restricted Common Stock.
REPORT ON REPR[CING OF OPTIONS
In October 1996, the Compensation Committee approved, and the Board of Directors authorized, the granting of repriced options to all executive officers of the Company and other employees who previously held options of the Company. The Compensation Committee and the Board so acted because the exercise price of such outstanding options was in each case so far in excess of the market price of the Common Stock that such options no longer constituted an incentive to such persons' performance. The closing market price of the Common Stock on the Nasdaq National Market on October 22, 1996 was $.41 per share. The exercise price of the options was lowered to $.50. This price was still in excess of the market price on the date of grant, but it was closer to the market price and fulfilled the original intention of the Compensation Committee and the Board to provide performance incentives to the officers and employees.
Ten-year Option Repricings
The table below provides information regarding each instance in which the options of executive officers named in the Summary Compensation Table were repriced during the last 10 fiscal years of the Company.
Number of
Securities
Underlying Market Price Exercise Price New Length of Original
Options of Stock at Time at Time of Exercise Option Term Remaining
a@m e Date Re riced of Re in Price
George Faris 11/08/95 1,202,500 $.78 $4.00 $1.00 2 years, 2 months
Chief Executive 10/22/96 1,202,500 $.41 $1.00 $ .50 1 year, 3 months
Officer
Denis Fitzpatrick 11/08/95 120,000 $.78 $1.50 $1.00 2 years, IO months
Chief Financial 10/22/96 120,000 $.41 $1.00 $ .50 1 year, I I months
Officer
William L. Tracy 11/08/95 1,000 $.78 $1.50 $1.00 2 years, 2 months
10/22/96 51,000 $.41 $1.00 $ .50 1 year, I I months
Kenneth Durham 11/08/95 20,000(l) $.78 $4.00 $1.00 (1)
President
(I)Mr. Durham left the Company on November 3, 1995, and his options expired on February 1, 1996.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDERPARTICIPATION
No member of the Compensation Committee was an officer or employee of the Company or of any of its subsidiaries during the prior year or was formerly an officer of the Company or any of its subsidiaries. During the last fiscal year, none of the executive officers of the Company has served on the Board or Compensation Committee of any other entity whose officers served either on the Board of Directors of the Company or on the Compensation Committee of the Company.
COAfPFN,5A TION COMMITTEE REPORT ON EXECUTIVE COMPENSA TION
It is the responsibility of the Compensation Committee of the Board of Directors to administer the Company's incentive plans and to review the compensation levels and perfon-nance of Management.
The Compensation Committee believes that maximizing shareholder value is the most important measure of success, and achieving this depends on the coordinated efforts of individual employees working as a team toward defined common performance goals. The objectives of the Company's compensation program are to align executive compensation with shareholder value, to reward individual and team effort and performance furthering the Company's business goals, and to attract, retain and reward employees who will contribute to the long-term success of the Company with competitive salary and incentive compensation.
The total direct compensation package for the Company's executives, including the Chief Executive Officer (the "CEO"), is made up of 3 elements: base salary, a short-term incentive program in the form of a perfon-nance-based bonus, and a long-term incentive program in the form of stock options. The total compensation level for each executive is established by individual levels of responsibility and reference to competitive compensation levels for executives performing similar functions and having equivalent levels of responsibility. In addition, the Compensation Committee factors into the total compensation of all executives an incentive element that is dependent upon overall Company performance and increases in shareholder value measured against objectives established at the beginning of the fiscal year.
Salary
Recommendations for merit increases in base salary are reviewed on an individual basis, and increases are dependent upon a favorable evaluation of individual performance relative to individual goals, the functioning of the executive's team within the corporate structure, success in furthering the corporate strategy and goals, and individual management skills, responsibilities and anticipated workload. The Compensation Committee also considers demonstrated loyalty and commitment to the Company and the competitive salaries offered by similar companies to attract executives. Merit increases for executives are subject to the same budgetary guidelines as apply to all other employees. In those cases where an executive has entered into an employment agreement, the base salary is determined pursuant to the terms thereof
As part of the Company's overall cost-reduction plan, in April 1994, all officers and management of the Company voluntarily reduced their base salary 15%, and the CEO voluntarily reduced his salary 20%. This action was applied during all of 1994 and 1995 and in January 1996. The Compensation Committee is performing a review of comparable Companies' executive salary data, which was last performed in 1993. The Compensation Committee granted no increases in base salaries for management in 1996. In February 1996, however, in order to maintain the Company's ability to attract and retain qualified management, to retain employees who contribute to the long-term success of the Company, and to recognize their contributions in meeting and exceeding the goal of the cost-reduction program to reduce the Company's general and administrative and operating expenses by an aggregate of 25%, the Board of Directors reinstated these employees' salaries to their previous levels.
9
reduce the Company's general and administrative and operating expenses by an aggregate of 25%, the Board of Directors reinstated these employees' salaries to their previous levels.
Bonuses
Bonus incentives are structured so that, if the Company achieves its target goals, an incentive bonus may be paid to the CEO and other executives, the amount of which will be established by the Board of Directors. This policy is designed to further motivate individuals to improve performance. The Company paid an aggregate of $42 1,000 in bonuses to its executive officers in 1997, approximately 26% of which consisted of shares of common stock of Mercantile International Petroleum Inc. (which the Company received as partial proceeds from the sale of certain assets in 1997) and of the Company.
Stock Options
Executives are eligible for annual stock option grants under the employee stock option plans applicable, from time to time, to employees generally. The number of options granted to any individual depends on individual performance, salary level and competitive data. In addition, in determining the number of stock options granted to each executive, the Compensation Committee reviews the unvested options of each executive to determine the future benefits potentially available to the executive. The number of options granted will depend in part on the total number of unvested options deemed necessary to provi 'de a long-term incentive and encourage executives to remain with, and exert their utmost efforts on behalf of, the Company. By giving to executives an equity interest in the Company, the value of which depends upon stock performance, the policy seeks to further align management and shareholder interests.
During 1997, an aggregate of 1,675,000 Incentive Stock Options were granted under the 1995 Plan, 1,575,000 at an exercise price of $1.05 per share and 100,000 with an exercise price of $4.22 per share.
In 1996, all officers and certain other management employees of the Company received incentive stock options and also new options to replace all of their existing options, with the only differences being that all exercise prices of the options were reduced to $.50 and that the options are to be subject to the Plan. This change was made because the exercise prices of the old options were too far above the current stock price to provide incentives to these employees.
Members of the Compensation Committee:
Daniel Y. Kim, Chairman
William R. Smart
Donald G. Rynne
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PERFORMANCE GRAPH
The graph below compares the cumulative shareholder return of the Company with the cumulative return on the S&P 500 Stock Index and the S&P Exploration and Production Index assuming a $100 investment made on December 31, 1992. Cumulative return data presented assumes reinvestment of dividends. The stock performance shown on the graph below is not necessarily indicative of future price performance.
OLDER RETU
250
225
200 -
175 -
150
125 -
100 A
75 -
50 -
25
0
Dec92 Dec93 Dec94 Dec95 Dec96 Dec97
Years Ending
1 1
TRANSACTIONS WITHMANAGEMENTAND OTHERS
In April 1997, Dr. George Faris and Mr. Donald Rynne purchased certain convertible debentures (the "Debentures") of the Company, originally issued in August 1996, for their face values of $225,000 and $75,000, respectively, from a foreign investor and subsequently converted the Debentures, pursuant to the original terms thereof, for 895,349 shares and 298,342 shares of Common Stock, respectively, which shares are still held by Dr. Faris and Mr. Rynne.
In July 1997, the Company's Chairman and CEO, Dr. George Faris, loaned the Company $500,000 on an interest-free basis, which loan was repaid in full by the Company in August 1997.
In April 1997, the Company issued as a bonus, 25,000 shares of Common Stock to each of Dr. Faris, Mr. Fitzpatrick, Mr. Tracy, and Mr. Lorrie Olivier, a Vice President of the Company. Such issuance is subject to ratification by the Shareholders at the Company's Annual Meeting. Absent such ratification, 75% of such shares will be returned to the Company.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" THE ELECTION OF THE NOMINEES NAMED ABOVE (PROPOSAL 1).
Proposal 2. Ratification of Independent Public Accountants
Hein + Associates LLP was the Company's independent public accountants for the year ended December 31, 1997. The Board has appointed these accountants to be the Company's auditors for 1998 and is seeking shareholder ratification of such appointment.
The Company has been apprised that Hein + Associates LLP has no financial interest, either direct or indirect, in the Company. A representative of Hein + Associates LLP is expected to attend the Meeting and to have an opportunity to make a statement and/or respond to appropriate questions from shareholders.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" PROPOSAL 2.
Proposal 3. Ratification of 1998 Stock Option Plan
The Board of Directors of the Company, subject to the approval of shareholders, has adopted a 1998 Stock Option Plan (the " 1998 Plan") covering an aggregate of 5,000,000 shares of Common Stock.
The Board of Directors has deemed that it is in the best interests of the Company to establish the 1998 Plan so as to provide employees of the Company and its subsidiaries, as well as Directors, independent contractors and consultants of the Company and/or its subsidiaries an opportunity to acquire a proprietary interest in the Company by means of grants of options to purchase Common Stock in order to provide a closer identification of their interests with those of the Company and its shareholders. The Company currently employs 73 persons and has 3 outside directors.
It is the opinion of the Board of Directors that by providing the employees, Directors, independent contractors and consultants of the Company and its subsidiaries the opportunity to acquire an equity investment in the Company, the 1998 Plan will maintain and strengthen their desire to remain with the Company, stimulate their efforts on the Company's behalf, and also attract other qualified personnel to become employed by or otherwise become associated with the Company. 'ne 1998 Plan was adopted by the Company's Board of Directors on April 2, 1998. As of April 12, 1998, no options have been granted 12
pursuant to the 1998 Plan. The closing market price of the Common Stock, as reported by Nasdaq on April 2, 1998 was $3.81 per share. The Board of Directors has directed that the shares underlying the 1998 Plan be registered pursuant to the Securities Act of 1933, and the Company intends to take steps to
file a Registration Statement on Form S-8 to register such shares promptly after approval of this Proposal 3.
The following discussion summarizes certain provisions of the 1998 Plan, which is qualified in its entirety by reference to the text of the Plan, copies of which are available for examination at the Securities and Exchange Commission and at the principal office of the Company, 444 Madison Avenue, New York, NY 10022.
The 1998 Plan allows the Company to grant incentive stock options ("ISOs"), as defined in Section 422(b) of the Internal Revenue Code of 1986, as amended (the "Code"), Non-Qualified Stock Options ("NQSOs") not intended to qualify under Section 422(b) of the Code, and ISOs or NQSOs in tandem with Stock Appreciation Rights ("SARs"). ISOS, NQSOs and SARs are refer-red to collectively herein as "Options."
Options granted under the 1998 Plan prior to the approval of the 1998 Plan by the Company's shareholders are conditioned upon approval of the 1998 Plan by such shareholders on or before June 29, 1998. If such approval is not obtained by such date, such Options shall become null and void, and the 1998 Plan shall terminate.
ELIGIBILITY FOR PAR TIC.TPA TION
The 1998 Plan provides that ISOs or ISOs in tandem with SARs may be granted to employees of the Company and its subsidiaries, including officers and Directors who are also employees and that NQSOs or NQSOs in tandem with SARs may be granted to employees of the Company and its subsidiaries, Directors, independent contractors, consultants and other individuals who are not employees of, but are involved in the continuing development and success of, the Company and its subsidiaries ("Participants").
ADMI]VISTR,4TION
The 1998 Plan is administered by the Board of Directors and/or a stock option committee of the Board of Directors (the "Committee"). The Board of Directors and/or the Committee will, among other things, select the optionees, determine the number of shares to be subject to each Option and determine the vesting period, option period and option price. In making such determinations, there will be taken into account the nature of the services rendered by Participants, their present and potential contributions to the success of the Company, and such other relevant factors as the Board and/or the Committee in its discretion shall deem relevant. |
