<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
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 Pursuant to sec. 240.14a-11(c) or sec. 240.14a-12
THE HOUSTON EXPLORATION COMPANY
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(l) 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.:
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(3) Filing Party:
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(4) Date Filed:
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<PAGE> 2
THE HOUSTON EXPLORATION COMPANY
1331 LAMAR, SUITE 1065
HOUSTON, TEXAS 77010
March 24 , 1997
TO OUR STOCKHOLDERS:
You are cordially invited to attend the 1997 Annual Meeting of
Stockholders of The Houston Exploration Company to be held on Thursday, April
24, 1997, at 10:00 a.m., local time, at the Four Seasons Hotel, 1300 Lamar
Street, Houston, Texas. A Notice of the Annual Meeting, Proxy Statement and
form of proxy are enclosed with this letter.
We encourage you to read the Notice of the Annual Meeting and Proxy
Statement so that you may be informed about the business to come before the
meeting. Your participation in the Company's business is important, regardless
of the number of shares that you hold. To ensure your representation at the
meeting, please promptly sign and return the accompanying proxy card in the
postage-paid envelope.
We look forward to seeing you on April 24th.
Sincerely,
James G. Floyd
President
<PAGE> 3
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD APRIL 24, 1997
To the Stockholders of The Houston Exploration Company:
The Annual Meeting of Stockholders (the "Annual Meeting") of The
Houston Exploration Company will be held on Thursday, April 24, 1997, at 10:00
a.m., local time, at the Four Seasons Hotel, 1300 Lamar Street Houston, Texas,
for the following purposes:
1. To amend the Company's Restated Certificate of
Incorporation to remove the classification of the Board of Directors;
2. To elect eight Directors of the Company, each to serve
until the Company's next annual meeting if proposal 1 above is
approved, or to elect three Directors each to serve for three year
terms and one Director to serve for a one year term if proposal 1
above is not approved;
3. To approve the existing 1996 Stock Option Plan so
that grants under such plan will remain exempt from a cap on
deductible compensation imposed by Section 162(m) of the Internal
Revenue Code of 1986, as amended;
4. To ratify and approve the appointment of Arthur
Andersen LLP as the Company's independent public accountants for its
fiscal year ending December 31, 1997; and
5. To act upon such other business as may properly come
before the meeting or any adjournments thereof.
Only stockholders of record at the close of business on March 10, 1997
will be entitled to notice of and to vote at the Annual Meeting.
It is important that your shares be represented at the Annual Meeting
regardless of whether you plan to attend. THEREFORE, PLEASE MARK, SIGN AND
DATE THE ENCLOSED PROXY AND RETURN IT IN THE ACCOMPANYING POSTPAID ENVELOPE AS
PROMPTLY AS POSSIBLE. If you are present at the Annual Meeting, and wish to do
so, you may revoke the proxy and vote in person.
By Order of the Board of Directors,
James F. Westmoreland
Secretary
Houston, Texas
March 24, 1997
<PAGE> 4
THE HOUSTON EXPLORATION COMPANY
1331 LAMAR, SUITE 1065
HOUSTON, TEXAS 77010
PROXY STATEMENT
FOR
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD APRIL 24, 1997
SOLICITATION AND REVOCABILITY OF PROXIES
The accompanying Proxy is solicited by the Board of Directors of The
Houston Exploration Company (the "Company"), to be voted at the Annual Meeting
of Stockholders of the Company to be held on Thursday, April 24, 1997 (the
"Annual Meeting"), at 10:00 a.m., local time, at the Four Seasons Hotel, 1300
Lamar Street, Houston, Texas, for the purposes set forth in the accompanying
Notice of Annual Meeting of Stockholders, and at any adjournment(s) of the
Annual Meeting. If the accompanying proxy is properly executed and returned,
the shares it represents will be voted at the Annual Meeting in accordance with
the directions noted thereon or, if no direction is indicated, it will be voted
in favor of the proposals described in this Proxy Statement. In addition, the
proxy confers discretionary authority to the persons named in the proxy
authorizing those persons to vote, in their discretion, on any other matters
properly presented at the Annual Meeting. The Board of Directors is not
currently aware of any such other matters.
Each stockholder of the Company has the unconditional right to revoke
his Proxy at any time prior to its exercise, either in person at the Annual
Meeting or by written notice to the Company addressed to Secretary, The Houston
Exploration Company, 1331 Lamar, Suite 1065, Houston, Texas 77010. No
revocation by written notice will be effective unless such notice has been
received by the Secretary of the Company prior to the day of the Annual Meeting
or by the inspector of election at the Annual Meeting.
The principal executive offices of the Company are located at 1331
Lamar, Suite 1065, Houston, Texas 77010. This Proxy Statement and the
accompanying Notice of Annual Meeting of Stockholders and Proxy are being
mailed to the Company's stockholders on or about March 25, 1997.
In addition to the solicitation of proxies by use of this Proxy
Statement, directors, officers and employees of the Company may solicit the
return of proxies by mail, personal interview, telephone or telegraph.
Officers and employees of the Company will not receive additional compensation
for their solicitation efforts, but they will be reimbursed for any
out-of-pocket expenses incurred. Brokerage houses and other custodians,
nominees and fiduciaries will be requested, in connection with the stock
registered in their names, to forward solicitation materials to the beneficial
owners of such stock.
All costs of preparing, printing, assembling and mailing the Notice of
Annual Meeting of Stockholders, this Proxy Statement, the enclosed form of
Proxy and any additional materials, as well as the cost of forwarding
solicitation materials to the beneficial owners of stock and all other costs of
solicitation, will be borne by the Company.
<PAGE> 5
PURPOSES OF THE MEETING
At the Annual Meeting, the Company's stockholders will be asked to
consider and act upon the following matters:
1. A proposal to amend the Company's Restated
Certificate of Incorporation to remove the classification of the Board
of Directors;
2. The election of eight Directors of the Company, each
to serve until the Company's next annual meeting if proposal 1 above is
approved, or the election of three Directors each to serve for three
year terms and one Director to serve for a one year term if proposal 1
above is not approved;
3. A proposal to approve the existing 1996 Stock Option
Plan so that grants under such plan will remain exempt from a cap on
deductible compensation imposed by Section 162(m) of the Internal
Revenue Code of 1986, as amended;
4. A proposal to ratify and approve the appointment of
Arthur Andersen LLP as the Company's independent public accountants
for its fiscal year ending December 31, 1997; and
5. Such other business as may properly come before the
meeting or any adjournments thereof.
QUORUM AND VOTING
The close of business on March 10, 1997 has been fixed as the record
date (the "Record Date") for the determination of the stockholders entitled to
vote at the Annual Meeting and any adjournment(s) thereof. As of the Record
Date, the Company had issued and outstanding 23,332,763 shares of common stock,
par value $.01 per share (the "Common Stock").
Each stockholder of record of Common Stock will be entitled to one
vote per share on each matter that is called to vote at the Annual Meeting.
Shares of Common Stock may not be voted cumulatively.
The presence, either in person or by proxy, of holders of a majority of
the outstanding shares of Common Stock is necessary to constitute a quorum at
the Annual Meeting. Abstentions and broker non-votes are counted for purposes
of determining whether a quorum is present. A two-thirds majority of the voting
power of all outstanding shares of Common Stock is required to approve Proposal
Number 1 to amend the Company's Restated Certificate of Incorporation.
Accordingly, abstentions and broker non-votes will have the same effect as a
negative vote with respect to Proposal Number 1. A plurality vote is required
for the election of Directors in Proposal Number 2. Accordingly, if a quorum is
present at the Annual Meeting, the eight persons, or the three persons nominated
for election as Class I Directors and one person nominated for election as a
Class II Director in the event that Proposal Number 1 is not approved, receiving
the greatest number of votes will be elected to serve as Directors. Withholding
authority to vote for a Director nominee and broker non-votes in the election of
Directors will not affect the outcome of the election of Directors. All other
matters to be voted on will be decided by the vote of the holders of a majority
of the shares present or represented at the Annual Meeting and entitled to vote
on such matter. On any such matter, an abstention will have the same effect as
a negative vote but, because shares held by brokers will not be considered
entitled to vote on matters as to which the brokers withhold authority, a broker
non-vote will have no effect on such vote.
All Proxies that are properly completed, signed and returned prior to
the Annual Meeting will be voted. Any Proxy given by a stockholder may be
revoked at any time before it is exercised by the stockholder (i) filing with
the Secretary of the Company an instrument revoking it, (ii) executing and
returning a Proxy bearing a later date or (iii) attending the Annual Meeting
and expressing a desire to vote his shares of Common Stock in person. Votes
will be counted by The Bank of New York, the Company's transfer agent and
registrar.
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<PAGE> 6
PROPOSAL NUMBER 1:
AMENDMENT TO THE RESTATED CERTIFICATE OF INCORPORATION
On March 14, 1997, the Board of Directors approved an amendment to the
Company's Restated Certificate of Incorporation (the "Certificate Amendment")
removing the classification of the Board of Directors and authorized the
submission of the Certificate Amendment to the Company's stockholders for their
consideration and approval.
Article V of the Restated Certificate of Incorporation currently
provides for classification of the Directors into three classes, each to be
elected to three year terms. The Certificate Amendment eliminates the
provisions of Article V relating to the election of Directors on a classified
basis. If the Certificate Amendment is approved, pursuant to the Company's
By-laws each Director will be elected for a one-year term that expires upon the
election and qualification of such Director's successor at the next succeeding
Annual Meeting of Stockholders.
The classification of the Board of Directors was initially adopted in
an attempt to provide for a certain continuity and stability in both the
composition of and long range policies formulated by the Board of Directors.
The existing classification of the Board of Directors may also permit the Board
of Directors to more effectively represent the interests of all shareholders,
including responding to circumstances created by demands or actions by a
minority shareholder or group. While the Board of Directors has not determined
those benefits are not valid, it does recognize there are varied views on the
efficacy of the classified board as a model of board structure. The Board of
Directors is aware that classified boards have been the subject of criticism by
many institutional stockholders. The Company believes that the classification
of the Board of Directors is not currently necessary and that approval of the
Certificate Amendment is in the best interests of the stockholders. A copy of
the Certificate Amendment is attached hereto as Appendix A.
If the Certificate Amendment is approved, the terms of all the current
Directors will expire or terminate upon the filing of the executed Certificate
Amendment with the Secretary of State of Delaware. The Company anticipates
executing and filing the Certificate Amendment during the Annual Meeting if
this Proposal Number 1 is approved.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR"
PROPOSAL NUMBER 1, AND PROXIES EXECUTED AND RETURNED WILL BE SO VOTED UNLESS
CONTRARY INSTRUCTIONS ARE INDICATED THEREON.
PROPOSAL NUMBER 2:
ELECTION OF DIRECTORS
In the event Proposal Number 1 above is approved by the stockholders
and the Certificate Amendment is effectively filed, the terms of all current
Directors will expire or terminate and each of the persons named below has been
nominated by the Board of Directors for election as a Director of the Company
until the 1998 Annual Meeting of Stockholders or until his successor has been
duly elected and qualified.
If Proposal Number 1 above is not approved by the stockholders or the
Certificate Amendment is not filed prior to the election of directors, only
Messrs. Gordy's, Matthews' and Smith's terms will expire; in which case the
Board of Directors has nominated Messrs. Gordy, Matthews and Smith for
re-election as Class I Directors and Mr. Vaughn for election as a Class II
Director.
The eight nominees for election as Directors, or the three Class I and
one Class II nominees if Proposal Number 1 is not approved, that receive the
most votes cast at the Annual Meeting will be elected as Directors. Each of
the nominees listed below except for Mr. Vaughn is a member of the Company's
present Board of Directors.
If, at the time of or prior to the Annual Meeting, any of the nominees
should be unable or decline to serve, the discretionary authority provided in
the Proxy may be used to vote for a substitute or substitutes designated by the
Board of Directors. The Board of Directors has no reason to believe that any
substitute nominee or nominees will be required.
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<PAGE> 7
NOMINEES FOR ELECTION AS DIRECTORs
The names of the nominees for election as Directors, and certain
additional information with respect to each of them, are set forth below.
Year First
<TABLE>
<CAPTION>
Name Age Position with the Company Became a Director
---- --- ------------------------- -----------------
<S> <C> <C> <C>
James G. Floyd . . . . . . . . 60 President and Chief Executive Officer 1986
and Director
Robert B. Catell . . . . . . . 60 Chairman of the Board of Directors 1986
Gordon F. Ahalt . . . . . . . . 69 Director 1996
Russell D. Gordy . . . . . . . 46 Director 1986
Craig G. Matthews . . . . . . . 54 Director 1993
James Q. Riordan . . . . . . . 69 Director 1996
Lester H. Smith . . . . . . . . 54 Director 1996
Donald C. Vaughn . . . . . . . 61 Nominee for Director N/A
</TABLE>
James G. Floyd has been President and Chief Executive Officer and a
Director of the Company since 1986. Mr. Floyd was President of Seagull E&P
Inc. ("Seagull") and a Director of Seagull Energy Corporation, Seagull's
parent, from 1981 to 1986. Mr. Floyd was general manager of the offshore
division of Houston Oil and Minerals from 1978 to 1981. Mr. Floyd joined
Houston Oil and Minerals Corporation ("Houston Oil and Minerals") in 1972 after
five years as an independent geologist. Mr. Floyd began his career with Amoco
Production Company in 1962. Mr. Floyd holds a B.S. and an M.S. in geology from
the University of Florida.
Robert B. Catell has been Chairman of the Board of Directors of the
Company since 1986. Mr. Catell has been Chairman of the Board and Chief
Executive Officer of The Brooklyn Union Gas Company ("Brooklyn Union") since
1996 and was Chief Executive Officer and President from 1991 to 1996. Mr.
Catell has been associated with Brooklyn Union since 1958 and has been an
officer of Brooklyn Union since 1974. He is also the Chairman of the Board of
Taylor Gas Liquids, Ltd., a publicly traded royalty trust based in Canada. Mr.
Catell received both his Bachelor's and Master's Degrees in Mechanical
Engineering from City College of New York. He holds a Professional Engineer's
License in New York State, and attended Columbia University's Executive
Development Program and Harvard Business School's Advanced Management Program.
Mr. Catell is Trustee of Brooklyn Law School, Independence Savings Bank and
Kingsborough Community College Foundation, Inc.; Chairman and Director of
Alberta Northeast Inc. and Boundary Gas, Inc.; Past Chairman of Energy
Association of New York State; Director and Past Chairman, American Gas
Association; Director of The Business Council of New York State, Inc., Gas
Research Institute, New York City Partnership and New York State Energy
Research and Development Authority.
Gordon F. Ahalt has been a Director of the Company since 1996. Mr.
Ahalt has been President of G.F.A. Inc., a petroleum industry financial and
management consulting firm, since 1982. Mr. Ahalt is a consultant to Brooklyn
Union and W.H. Reaves Co., Inc. Mr. Ahalt serves as a Director for the
Bancroft and Ellsworth Convertible Funds, the Harbinger Group and Cal Dive
International. Mr. Ahalt received a B.S. in Petroleum Engineering in 1951 from
the University of Pittsburgh, attended New York University's Business School
and is a graduate of Harvard Business School's Advanced Management Program. He
worked for Amoco Corporation from 1951 to 1955, Chase Manhattan Bank from 1955
to 1972, White Weld & Co., Inc. from 1972 to 1973, Chase Manhattan Bank from
1974 through 1976, served as President and Chief Executive Officer of
International Energy Bank London from 1977 to 1979 and as Chief Financial
Officer of Ashland Oil Inc. from 1980 to 1981.
Russell D. Gordy has been a Director of the Company since 1986. Mr.
Gordy has been Managing General Partner of S.G. Interests, a private firm
specializing in oil and gas investments, since 1992. Prior to forming S.G.
Interests, Mr. Gordy was Managing Partner of Northwind Exploration, a private
oil and gas firm formed in 1981 to specialize in exploration along the Texas
and Louisiana Gulf Coast. From 1974 to 1981 Mr. Gordy served in various
financial capacities for Houston Oil and Minerals Corporation. Mr. Gordy holds
a B.B.A. in accounting from Sam
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<PAGE> 8
Houston State University and is a C.P.A. Mr. Gordy is a member of the Board of
Directors, or equivalent directing body in the case of partnerships or limited
liability companies, of SG Interests I-IV, Gordy Oil Company, Gordy Gas
Corporation, San Juan Compression, L.L.C., SG Interests, Inc., SG Methane
Company, Inc., Gainee Gas Company L.L.C., Rock Creek Ranch, Inc. and Lone Star
Land & Cattle Company.
Craig G. Matthews has been a Director of the Company since 1993. Mr.
Matthews has been President and Chief Operating Officer of Brooklyn Union since
May 1996, was Executive Vice President of Brooklyn Union since 1994 to 1996,
and was Executive Vice President and Chief Financial Officer of Brooklyn Union
from 1991 to 1994. Mr. Matthews joined Brooklyn Union in 1965. He graduated
from Rutgers University in 1965 with a Bachelor's Degree in Civil Engineering,
and acquired an M.S. Degree in Industrial Management from Polytechnic
University. Mr. Matthews is a member of the Board of Directors for the
Brooklyn Philharmonic, the Public Utilities Reports, Inc., the Brooklyn Chamber
of Commerce, Neighborhood Housing Services, Greater Jamaica Development Corp.,
Regional Plan Association, Polytechnic University, Prospect Park Alliance, the
National and New York Advisory Board of the Salvation Army and Inform. Mr.
Matthews is the Treasurer of the Society of Gas Lighters.
James Q. Riordan has been a Director of the Company since 1996 and a
Director of Brooklyn Union since 1991. Mr. Riordan is the retired Vice
Chairman and Chief Financial Officer of Mobil Corp. He joined Mobil Corp. in
1957 as Tax Counsel and was named Director and Chief Financial Officer in 1969.
Mr. Riordan served as Vice Chairman of Mobil Corp. from 1986 until his
retirement in 1989. He joined Bekaert Corporation in 1989 and was elected its
President, and served as President until his retirement in 1992. Mr. Riordan
is a Director of Dow Jones & Co., Inc., Tri-Continental Corporation and the
Public Broadcasting Service; Director/Trustee of the mutual funds in the
Seligman Group of investment companies; Trustee for the Committee for Economic
Development and The Brooklyn Museum; and Member of the Policy Council of the
Tax Foundation.
Lester H. Smith has been a Director of the Company since 1996. Mr.
Smith is Chairman of the Board and President of Smith Energy Company, an
independent oil and gas exploration company, and Chairman of the Board of
Founders International, Ltd., an international downhole drilling tool company.
Mr. Smith has been active in the energy business as an independent since 1973.
He attended the University of Oklahoma where he majored in finance. Mr. Smith
is Chairman of the Board of SG Interests, Inc., SG Methane Company, National
Call Processing, Inc. and New Media Telecommunications, Inc., a member of the
Board of Directors of Utah Coal & Lumber Company and President and a member of
the Board of Directors of Invexco, Inc.
Donald C. Vaughn has been President, Chief Operating Officer and member
of the board of directors of Dresser Industries, Inc. ("Dresser") since 1996.
Prior to his appointment as President and Chief Operating Officer, Mr. Vaughn
served as Executive Vice President of Dresser, responsible for Dresser's
Petroleum Products and Services and Engineering Services Segment, from November
1995 to December 1996; Senior Vice President of Operations of Dresser from
January 1992 to November 1995; and Chairman, President and Chief Executive
Officer of The M.W. Kellogg Company from November 1983 to June 1996. Mr. Vaughn
joined M.W. Kellogg in 1958 and is a registered professional engineer in the
State of Texas. He has been recognized as a distinguished engineering alumnus
of Virginia Polytechnic Institute, from which he holds a B.S. degree in civil
engineering. Mr. Vaughn serves as a director on the boards of several Dresser
joint venture companies, including Dresser-Rand Company, Ingersoll-Dresser Pump
Company and Bredero-Shaw.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR" THE
ELECTION OF EACH OF THE ABOVE-NAMED NOMINEES. IN THE EVENT PROPOSAL NUMBER 1
ABOVE IS APPROVED BY THE STOCKHOLDERS, PROXIES SOLICITED HEREBY WILL BE VOTED
FOR ALL SIX NOMINEES UNLESS THE STOCKHOLDERS SPECIFY OTHERWISE IN THEIR
PROXIES. IN THE EVENT PROPOSAL NUMBER 1 ABOVE IS NOT APPROVED BY THE
STOCKHOLDERS, PROXIES SOLICITED HEREBY WILL BE VOTED FOR MESSRS. GORDY,
MATTHEWS, SMITH AND VAUGHN UNLESS THE STOCKHOLDERS SPECIFY OTHERWISE IN THEIR
PROXIES.
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<PAGE> 9
DIRECTORS' MEETINGS AND COMPENSATION
During 1996, the Board of Directors met three times and took certain
additional actions by unanimous written consents in lieu of meetings. During
1996, no Director of the Company attended fewer than 75 percent of the meetings
of the Board of Directors (during the period served).
Each outside Director of the Company receives a fee of $4,000 per
calendar quarter and $1,000 per board meeting attended. Members of committees
of the Board of Directors will receive an additional fee of $500 per committee
per calendar quarter.
Mr. Gordy was paid $28,750 in 1996 for services rendered pursuant to a
consulting contract with the Company. The consulting contract was terminated
December 31, 1996.
Upon completion of the Company's initial public offering of Common
Stock on September 19, 1996 (the "Offering"), Messrs. Catell and Matthews
received awards to be paid out over a three year period totaling $420,000 and
$294,000, respectively, from the Company in exchange for the termination of
certain options granted to them in 1994. See "Certain Transactions
- --Transactions between the Company and Brooklyn Union and Affiliates."
BOARD COMMITTEES
The Company's Board of Directors has an Executive Committee, an Audit
Committee and a Compensation Committee. The Board of Directors does not have a
Nominating Committee. The Executive Committee, during the intervals between
meetings of the Board of Directors, has and may exercise all of the powers of
the Board of Directors in the management or direction of the business and
affairs of the Company, except as reserved to the Board of Directors, delegated
to another committee or prohibited by the Company's bylaws or applicable law.
The Executive Committee currently consists of Messrs. Ahalt, Catell and Floyd.
The Audit Committee's functions include providing assistance to the Board of
Directors in fulfilling its responsibilities relating to corporate accounting
and reporting practices, maintaining a direct line of communication between the
Board of Directors and the Company's independent public accountants, and
performing such other functions as may be prescribed with respect to audit
committees under applicable rules, regulations and policies of the New York
Stock Exchange, Inc. The Audit Committee currently consists of Messrs. Ahalt,
Gordy and Riordan. The Compensation Committee administers the Company's 1996
Stock Option Plan, makes recommendations, determines and authorizes the amount,
terms and conditions of payment of any and all forms of compensation for the
Company's directors, officers, employees and agents, approves and administers
any loan to, guarantee or any obligation of, or other assistance to any officer
or other employee of the Company. The Compensation Committee currently
consists of Messrs. Ahalt, Catell and Riordan.
During 1996, the Executive Committee, the Audit Committee and the
Compensation Committee met one time each. During 1996, no Director of the
Company attended fewer than 75 percent of the number of meetings of committees
on which he served (during the period served).
PROPOSAL NUMBER 3:
APPROVAL AND ADOPTION OF THE 1996 STOCK OPTION PLAN
The Company uses stock-based awards as a part of its overall
compensation program in order to align the long- term interests of its
employees with those of its stockholders. Prior to the Offering, the Board of
Directors adopted and the Company's sole stockholder approved the Company's
1996 Stock Option Plan (the "1996 Plan"). Under the 1996 Plan, key employees,
consultants and advisors of the Company are eligible to receive grants of
Options, which are defined and described more fully below.
Now that the Company is publicly-traded, stockholder approval is
required for grants of Options under the 1996 Plan to remain exempt from a cap
on the tax deductibility of the grants of Options by the Company imposed by
Section
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<PAGE> 10
162(m) of the Internal Revenue Code of 1986, as amended (the "Code"). Section
162(m) of the Code, added by the Revenue Reconciliation Act of 1993, as
amended, places a $1 million cap on the deductible compensation that can be
paid to certain executives of publicly-traded corporations. Amounts that
qualify as "performance based" compensation under Section 162(m)(4)(c) of the
Code are exempt from the cap and do not count toward the $1 million limit.
The 1996 Plan will qualify for Section 162(m) purposes until the
Company's Annual Meeting of Stockholders in 1998 and grants of Options made
prior to the annual meeting date will remain Section 162(m) qualified.
However, grants of Options made after the 1998 Annual Meeting of Stockholders
will not qualify unless the stockholders approve the 1996 Plan.
The terms of the 1996 Plan are summarized below. In addition, the
full text of the 1996 Plan is set forth in Appendix B to this Proxy Statement.
The following summary is qualified in its entirety by reference to the text of
the 1996 Plan.
SUMMARY OF THE 1996 PLAN
Purpose. The 1996 Plan is for key employees, consultants and advisors
of the Company and is intended to advance the best interests of the Company and
its stockholders by providing those persons who have substantial responsibility
for the management and growth of the Company with additional incentives and an
opportunity to obtain or increase their proprietary interest in the Company,
thereby encouraging them to continue in the employ of the Company.
Effective Date of 1996 Plan. The 1996 Plan is effective as of May 9,
1996. No Option shall be granted pursuant to the 1996 Plan after May 8, 2006.
Eligibility. The individuals who shall be eligible to receive
Incentive Options and Nonqualified Options (together, the "Options") shall be
those key employees, consultants and advisors of the Company as the
Compensation Committee of the Board of Directors (the "Committee") shall
determine from time to time. "Incentive Option" means an Option granted under
the 1996 Plan which is designated as an "Incentive Option" and satisfies the
requirements of Section 422 of the Code. "Nonqualified Option" means an Option
granted under the 1996 Plan other than an Incentive Option.
Administration. To comply with Section 162(m) of the Code, the 1996
Plan shall be administered by the Committee, which shall be comprised solely of
two or more Directors who are "outside directors" within the meaning of the
Treasury Regulations promulgated under Section 162(m) of the Code. To comply
with the requirements of Rule 16b-3 of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), the 1996 Plan provides that the shares of Common
Stock issuable upon exercise of an Option may not be sold for six months from
its date of grant. All questions of interpretation and application of the 1996
Plan and Options shall be subject to the determination of the Committee. The
1996 Plan shall be administered in such a manner as to permit the Options
granted under it which are designated to be Incentive Options to qualify as
Incentive Options. The Committee has complete authority to construe, interpret
and administer provisions of the 1996 Plan, to determine which persons are to
be granted Options, the terms and conditions of Options, and to make all other
determinations necessary or deemed advisable in the administration of the 1996
Plan.
Reserved Shares. The total number of shares of Common Stock with
respect to which Options may be granted under the 1996 Plan shall be 10% of the
shares of Common Stock outstanding. The shares may be treasury shares or
authorized but unissued shares. The total number of shares of stock with
respect to which Incentive Options may be granted under the 1996 Plan shall be
1,125,000 shares. The maximum number of shares subject to Options which may be
issued to any person who is granted an Option under the 1996 Plan ("Optionee")
during any period of three consecutive years is 1,125,000 shares.
Options. The price at which Common Stock may be purchased under an
Option shall not be less than 100% of the fair market value. In the case of
any 10% holder of Common Stock, the price at which shares of Common Stock
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<PAGE> 11
may be purchased under an Incentive Option shall not be less than 110% of the
fair market value of the Common Stock on the date the Incentive Option is
granted. No Option shall be exercisable after the expiration of 10 years from
the date the Option is granted. In the case of a 10% holder of Common Stock,
no Incentive Option shall be exercisable after the expiration of five years
from the date the Incentive Option is granted. The number of Options that are
authorized to be granted is 2,333,276, of which 1,238,638 Options have been
granted and are outstanding. In 1996, the executive officers of the Company
were granted an aggregate of 38,700 Incentive Options and 736,283 Nonqualified
Options, respectively, exercisable in five equal annual installments beginning
on the anniversary date of the grant in 1997.
Amount Exercisable. Each Option may be exercised from time to time,
in whole or in part, in the manner and subject to the conditions the Committee,
in its sole discretion, may provide in the written option agreement, as long as
the Option is valid and outstanding; provided that no Option may be exercisable
within six months of the date of grant. The exercise price must be paid in
full in cash at the time an Option is exercised or, if permitted by the Board
of Directors or a committee of "non-employee directors" (as defined in Rule
16b-3), by means of a "cashless exercise" through a broker, by tendering Common
Stock already owned by the participant, or any combination of the foregoing.
The Committee will determine the period over which individual Options become
exercisable. To the extent that the aggregate fair market value (determined as
of the time an Incentive Option is granted) of the Common Stock with respect to
which Incentive Options first become exercisable by the Optionee during any
calendar year (under the 1996 Plan and any other incentive stock option plan(s)
of the Company or any affiliate) exceeds $100,000, the Incentive Options shall
be treated as Nonqualified Options. In making this determination, Incentive
Options shall be taken into account in the order in which they were granted.
Non-Transferability and No Rights as Stockholder. Options shall not
be transferable by the Optionee otherwise than by will or under the laws of
descent and distribution, and shall be exercisable, during the Optionee's
lifetime, only by him. No Optionee shall have any rights as a stockholder with
respect to Common Stock covered by his Option until the date a stock
certificate is issued for the Common Stock.
Changes in the Company's Capital Structure. In the event of any stock
dividend, recapitalization, reorganization, merger, consolidation or other
extraordinary event, the Committee may, to the extent deemed necessary to
preserve the benefits under the 1996 Plan, adjust the number and kind of shares
which thereafter may be made the subject of Options, the number and kind of
shares subject to outstanding Options, and the grant, exercise or conversion
price with respect to any of the foregoing and, if deemed appropriate, make
provision for cash payments to participants. Subject to certain limitations,
the Board of Directors is authorized to amend, suspend or terminate the 1996
Plan to meet any changes in legal requirements or for any other purpose
permitted by law.
Changes of Control. In the event of a change of control, the
Committee may, in its discretion, at the time an Option is granted or any time
thereafter: (i) provide for the acceleration of any time period relating to
the exercise of the Option, (ii) provide for the purchase of the Option upon
the Optionee's request for an amount of cash or other property that could have
been received upon the exercise of the Option had the Option been then
currently exercisable, (iii) adjust the terms of the Option in a manner
determined by the Committee to reflect the change of control, (iv) cause the
Option to be assumed, or new rights substituted therefore, by another entity,
or (v) make such other provisions as the Committee may consider equitable and
in the best interest of the Company.
Amendment or Termination of the 1996 Plan. The Board of Directors of
the Company may amend, terminate or suspend the 1996 Plan at any time, in its
sole and absolute discretion; provided, however, that to the extent required to
maintain the status of any Incentive Option under the Code, no amendment that
would (i) change the aggregate number of shares of Common Stock which may be
issued under Incentive Options, (ii) change the class of employees eligible to
receive Incentive Options, or (iii) decrease the exercise price for Incentive
Options below the fair market value of the Common Stock at the time it is
granted, shall be made without the approval of the Company's stockholders.
Tax Withholding. The Company shall be entitled to deduct from other
compensation payable to each Optionee any sums required by federal, state, or
local tax law to be withheld with respect to the grant or exercise of an
Option. In the alternative, the Company may require the Optionee (or other
person exercising the Option) to pay the sum directly
-8-
<PAGE> 12
to the employer corporation. If the Optionee (or other person exercising the
Option) is required to pay the sum directly, payment in cash or by check of
such sums for taxes shall be delivered within ten days after the date of
exercise or lapse of restrictions. The Company shall have no obligation upon
exercise of any Option until payment has been received, unless withholding (or
offset against a cash payment) as of or prior to the date of exercise is
sufficient to cover all sums due with respect to that exercise. The Company
shall not be obligated to advise an Optionee of the existence of the tax or the
amount which the employer corporation will be required to withhold.
Tax Treatment of the Optionee. The Optionee will recognize no income
upon the grant of an Incentive Option and will generally incur no tax on its
exercise. If the Optionee holds the stock acquired upon exercise of an
Incentive Option (the "Incentive Option Shares") for more than one year after
the date the option was exercised and for more than two years after the date
the option was granted, the Optionee generally will realize long-term capital
gain or loss (rather than ordinary income or loss) upon disposition of the
Incentive Option Shares. This gain or loss will be equal to the difference
between the amount realized upon such disposition and the amount paid for the
shares.
The Optionee will not recognize any taxable income at the time a
Nonqualified Option is granted. However, upon exercise of a Nonqualified
Option, the Optionee will include in income as compensation an amount equal to
the difference between the fair market value of the shares on the date of
exercise and the amount paid for that stock upon exercise of the Nonqualified
Option. The included amount will be treated as ordinary income by the Optionee
and will be subject to income tax withholding by the Company (either by payment
in cash by the Optionee or withholding from the Optionee's salary). Upon
resale of the shares by the Optionee, any subsequent appreciation or
depreciation in the value of the shares will be treated as capital gain or
loss.
Tax Treatment of the Company. The Company will be entitled to a
deduction in connection with the exercise of a Nonqualified Option by a
domestic Optionee to the extent that the Optionee recognizes ordinary income.
The Company will be entitled to a deduction in connection with the disposition
of Incentive Option Shares only to the extent that the Optionee recognizes
ordinary income on a disqualifying disposition of the Incentive Option Shares.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR"
PROPOSAL NUMBER 3, AND PROXIES EXECUTED AND RETURNED WILL BE SO VOTED UNLESS
CONTRARY INSTRUCTIONS ARE INDICATED THEREON.
PROPOSAL NUMBER 4:
RATIFICATION AND APPROVAL OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors has appointed the firm of Arthur Andersen LLP
as the Company's independent public accountants to make an examination of the
accounts of the Company for the fiscal year ending December 31, 1997, subject
to ratification by the Company's stockholders. Representatives of Arthur
Andersen LLP will be present at the Annual Meeting and will have an opportunity
to make a statement, if they desire to do so. They will also be available to
respond to appropriate questions from the stockholders attending the Annual
Meeting.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR"
PROPOSAL NUMBER 4, AND PROXIES EXECUTED AND RETURNED WILL BE SO VOTED UNLESS
CONTRARY INSTRUCTIONS ARE INDICATED THEREON.
-9-
<PAGE> 13
EXECUTIVE COMPENSATION
EXECUTIVE OFFICERS
Set forth below is certain information concerning the executive
officers of the Company, including the business experience of each during the
past five years.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- ---- --------
<S> <C> <C>
James G. Floyd . . . . . 60 President and Chief Executive Officer and Director
Randall J. Fleming . . . 55 Senior Vice President -- Exploration and Production
Thomas W. Powers . . . . 52 Senior Vice President -- Business Development and Finance and
Treasurer
Charles W. Adcock . . . . 43 Vice President--Project Development
Sammye L. Dees . . . . . 61 Vice President -- Land
James F. Westmoreland . . 41 Vice President, Chief Accounting Officer, Comptroller and Secretary
</TABLE>
Information regarding the business experience of James G. Floyd is set
forth above under the heading "Proposal Number 2: Election of Directors."
Randall J. Fleming has been Senior Vice President--Exploration and
Production of the Company since October 1995 and was Vice President --
Exploration of the Company from 1986 to 1995. Mr. Fleming was Vice
President--Geology of Seagull from 1981 to 1986 and was an exploration
geologist at Houston Oil and Minerals from 1976 to 1981. Prior to such time,
Mr. Fleming was an exploration geologist for Superior Oil Company and Sinclair
Oil Company. Mr. Fleming holds a B.A. and M.S. in geology from the University
of Alabama.
Thomas W. Powers has been Senior Vice President--Business Development
and Finance of the Company since October 1995 and Treasurer since May 1996.
Mr. Powers was General Manager of Diversification for Brooklyn Union from 1991
to 1995 and Executive Vice President and Chief Operating Officer of Fuel
Resources Inc. ("FRI"), a Brooklyn Union subsidiary, from 1986 to 1991. Prior
to joining Brooklyn Union, Mr. Powers was Manager of Corporate Development for
Anglo Energy. He holds a B.S. in Economics from Bowling Green University and
an M.B.A. from Long Island University. Mr. Powers is a member of the Board of
Directors of Honeoye Storage Corporation.
Charles W. Adcock has been Vice President--Project Development of the
Company since 1996. Mr. Adcock held the same position with FRI, the Brooklyn
Union subsidiary that previously owned the Company's onshore properties, from
1993 to 1996. Prior to joining FRI, Mr. Adcock worked at NERCO Oil & Gas as
Reservoir Engineering Specialist. Prior to NERCO, he held various engineering
positions with Apache, ANR Production and Aminoil U.S.A. Mr. Adcock is a
Registered Professional Engineer in the State of Texas, and received his B.S.
in Civil Engineering from Texas A&M University and an M.B.A. from the
University of St. Thomas.
Sammye L. Dees has been Vice President--Land of the Company since
1986. Ms. Dees was Vice President of Land of Seagull from 1981 to 1986, and
was Land Manager, Offshore Division, of Houston Oil and Minerals from 1974 to
1981. Prior to joining Houston Oil and Minerals, Ms. Dees worked for Allied
Chemical Corporation. Ms. Dees is a Certified Petroleum Landman and attended
Stephen F. Austin University.
James F. Westmoreland has been Vice President, Chief Accounting
Officer, Comptroller and Secretary of the Company since October 1995 and was
Vice President and Comptroller of the Company from 1986 to 1995. Mr.
Westmoreland was supervisor of natural gas and oil accounting at Seagull from
1983 to 1986. Mr. Westmoreland holds a B.B.A. in accounting from the
University of Houston.
-10-
<PAGE> 14
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
The Compensation Committee (the "Committee") of the Board of Directors
of the Company currently consists of Gordon F. Ahalt, Robert B. Catell and
James Q. Riordan, none of whom are officers or employees of the Company. The
Committee is responsible for (i) evaluating the performance of management, (ii)
determining the compensation for the directors, officers, employees and agents
of the Company, (iii) administering the Company's 1996 Plan under which grants
may be made to employees of the Company and (iv) approving and administering
any loan to, guarantee of any obligation of, or other assistance to any
employee of the Company. The Committee has furnished the following report on
executive compensation for 1996:
Under the supervision of the Committee, the Company has developed a
compensation policy which is designated to attract and retain key executives
responsible for the success of the Company and motivate management to enhance
long- term stockholder value. The annual compensation package for executive
officers primarily consists of (i) a cash salary which reflects the
responsibilities relating to the position and individual performance, (ii)
long-term stock-based incentive awards which strengthen the mutuality of
interests between the executive officers and the Company's stockholders and
(iii) variable performance awards payable in cash or stock and tied to the
individual's or the Company's achievement of certain goals or milestones.
In determining the level and composition of compensation of each of
the Company's executive officers, the Committee takes into account various
qualitative and quantitative indicators of corporate and individual
performance. The Committee generally seeks to set salaries competitive with
those of peer group companies. In setting such salaries, the Committee
considers its peer group to be certain independent oil and gas exploration and
production companies with offshore operations in the Gulf of Mexico. Such peer
group includes the same companies comprising the Peer Group reflected in the
performance graph in this Proxy Statement.
Base compensation is established through negotiation between the
Company and the executive officer at the time the executive is hired, and then
subsequently adjusted when such officer's base compensation is subject to
review or reconsideration. While the Company has entered into employment
agreements with certain of its executive officers, such agreements provide that
base salaries may be increased at the Committee's discretion pursuant to annual
reviews. When establishing or reviewing base compensation levels for each
executive officer, the Committee, in accordance with its general compensation
policy, considers numerous factors, including the responsibilities relating to
the position, the qualifications of the executive and the relevant experience
the individual brings to the Company, strategic goals for which the executive
has responsibility, and compensation levels of Peer Group companies. No
pre-determined weights are given to any one of such factors. The base salaries
for the executive officers for fiscal 1996 were competitive with the Company's
Peer Group.
In addition to each executive officer's base compensation, the
Committee may award cash bonuses, grants under the Company's 1996 Plan and
variable performance awards to chosen executive officers depending on the
extent to which certain defined personal and common performance goals are
achieved. Such corporate performance goals are the same as discussed above.
Stock based performance awards, such as the grants of Options under the 1996
Plan and the Phantom Stock Rights awarded to executive officers in 1996, are
consistent with the Committee's emphasis on trading-off annual incentive
compensation for enhanced long-term incentives linked to shareholder value
creation.
All employees of the Company, including its executive officers, are
eligible to receive long-term stock-based incentive awards under the Company's
1996 Plan as a means of providing such individuals with a continuing
proprietary interest in the Company. Such grants further the mutuality of
interest between the Company's employees and its stockholders by providing
significant incentives for such employees to achieve and maintain high levels
of performance. The Company's 1996 Plan enhances the Company's ability to
attract and retain the services of qualified individuals. Factors considered
in determining whether such awards are granted to an executive officer of the
Company include the executive's position in the Company, his or her performance
and responsibilities, the amount of Options, if any, currently held by the
officer, the vesting schedules of any such options and the executive officer's
other compensation.
-11-
<PAGE> 15
While the Committee does not adhere to any firmly established formulas or
schedules for the issuance of awards such as Options or restricted stock, the
Committee will generally tailor the terms of any such grant to achieve its goal
as a long-term incentive award by providing for a vesting schedule encompassing
several years or tying the vesting dates to particular corporate or personal
milestones.
The annual base salary of James G. Floyd, the Chief Executive Officer
and President of the Company, was set at $340,000 pursuant to his employment
agreement with the Company, effective September 19, 1996. Mr. Floyd actually
received $309,000 in base salary in 1996 as well as a cash bonus of $330,000 in
conjunction with the cash bonuses granted to all other executive officers of
the Company. Additionally, Mr. Floyd was granted Options pursuant to the 1996
Plan to purchase 335,992 shares of Common Stock and Phantom Stock Rights
representing the right to receive a cash payment equal to the average closing
price of a share of Common Stock on the five trading days preceding the payment
date multiplied by 46,800. The Options and Phantom Stock Rights become
exercisable and payable, respectively, in five equal annual installments from
the date of grant. The Options and Phantom Stock Rights were granted in
recognition of Mr. Floyd's continuing contributions to the Company and are
consistent with the Committee's emphasis on trading-off annual incentive
compensation for enhanced long-term incentives linked to shareholder value
creation.
Section 162(m) of the Code, added by the Revenue Reconciliation Act of
1993, places a $1 million per executive cap on the deductible compensation that
can be paid to certain executives of publicly-traded corporations. Amounts
that qualify as "performance based" compensation under Section 162(m)(4)(c) of
the Code are exempt from the cap and do not count toward the $1 million limit.
Generally, stock options will qualify as performance based compensation. The
Committee has discussed and considered and will continue to evaluate the
potential impact of Section 162(m) on the Company in making compensation
determinations, but has not established a set policy with respect to future
compensation determinations.
The foregoing report is given by the following members of the
Compensation Committee: Gordon F. Ahalt, Robert B. Catell and James Q. Riordan.
The report of the Compensation Committee shall not be deemed
incorporated by reference by any general statement incorporating by reference
this Proxy Statement into any filing under the Securities Act of 1933, as
amended (the "Securities Act"), or under the Exchange Act, except to the extent
that the Company specifically incorporates this information by reference, and
shall not otherwise be deemed filed under such Acts.
-12-
<PAGE> 16
COMPENSATION OF EXECUTIVE OFFICERS
Summary Compensation Table
The following table sets forth certain summary information concerning
the compensation provided by the Company in 1996 to its Chief Executive Officer
and each other person serving as an executive officer during 1996 who earned
$100,000 or more in combined salary and bonus during such year (collectively,
the "Named Executive Officers"):
<TABLE>
<CAPTION>
Long-Term
Compensation
Name Annual --------------
and Compensation (1) Securities
Principal ------------------- Underlying All Other
Position Salary Bonus Options (2) Compensation
-------- ------ ----- -------------- ---------------
<S> <C> <C> <C> <C>
James G. Floyd
President and Chief Executive Officer . $ 309,000 $ 330,000 335,992 $ 314,000(3)
Randall J. Fleming
Senior Vice President--Exploration and
Production . . . . . . . . . . . . . . $ 204,000 $ 175,000 174,996 $ 300,000(3)
Thomas W. Powers(5)
Senior Vice President--Business
Development and Finance and Treasurer . $ 35,000 $ 104,000 104,997 --
James F. Westmoreland
Vice President, Chief Accounting
Officer, Comptroller and Secretary . . $ 121,000 $ 87,000 83,998 $ 30,000(3)
Charles W. Adcock
Vice President--Project Development . . $ 125,000 $ 67,000 60,000 $ 1,211,000(4)
Sammye L. Dees
Vice President--Land . . . . . . . . . $ 111,000 $ 27,000 15,000 $ 261,000(3)
</TABLE>
(1) Amounts exclude perquisites and other personal benefits because such
compensation did not exceed the lesser of $50,000 or 10% of the total
annual salary and bonus reported for each executive officer.
(2) The Company has not issued any stock appreciation rights to the Named
Executive Officers.
(3) Consists of distributions attributable to overriding royalty interests
and net profits interests in properties of the Company. See "Certain
Transactions -- Transactions Between the Company and Management."
(4) Consists of distributions received in exchange for the termination of Mr.
Adcock's rights under the long-term incentive program of FRI. See "Certain
Transactions--Transaction Between the Company and Management."
(5) Prior to September 31, 1996 Mr. Powers was an employee of Brooklyn Union.
-13-
<PAGE> 17
Options Granted in 1996
The following table provides certain information with respect to
Options granted to the Chief Executive Officer and to each of the Named
Executive Officers during 1996 under the Company's 1996 Plan:
<TABLE>
<CAPTION>
Individual Grants(1)
---------------------------------------------- Potential
Percent of Realizable Value at
Total Assumed Annual
Number of Options Rates of Stock Price
Securities Granted to Appreciation for
Underlying Employees Exercise Option Term(2)
Options in Fiscal Price Expiration ------------------------
Name Granted Year ($/Sh) Date 5% 10%
-------------------------- ------------ ----------- ------------ -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
James G. Floyd . . . . . 335,992 26.7% $15.50 09/20/06 $3,275,250 $8,300,010
Randall J. Fleming . . . 174,996 14.1% $15.50 09/20/06 $1,705,861 $4,322,926
Thomas W. Powers . . . . 104,997 8.5% $15.50 09/20/06 $1,023,510 $2,593,741
James F. Westmoreland . . 83,998 6.8% $15.50 09/20/06 $ 818,813 $2,075,003
Charles W. Adcock . . . . 60,000 4.8% $15.875 10/17/06 $ 599,040 $1,518,600
Sammye L. Dees . . . . . 15,000 1.2% $15.50 09/20/06 $ 146,220 $ 370,545
</TABLE>
________________________
(1) The Company has not issued any stock appreciation rights to the Named
Executive Officers.
(2) The Securities and Exchange Commission requires disclosure of the
potential realizable value or present value of each grant. The
disclosure assumes the Options will be held for the full ten-year term
prior to exercise. Such Options may be exercised prior to the end of
such ten-year term. The actual value, if any, an executive officer may
realize will depend upon the excess of the stock price over the exercise
price on the date the Option is exercised. There can be no assurance
that the stock price will appreciate at the rates shown in the table.
Phantom Stock Rights Granted in 1996
The following table provides information concerning grants made in 1996
to the Named Executive Officers of Phantom Stock Rights ("PSRs"). As indicated
in each of the letter agreements with the Named Executive Officers, each PSR
represents the right to receive a cash payment determined by reference to the
average of the closing price of one share of Common Stock for the five trading
days preceding the payout date, multiplied by the number of PSRs payable on the
payout date. The PSRs were granted effective December 16, 1996 and 20% of the
PSRs shall become payable on December 16th of each of the years 1997 through
2001.
<TABLE>
<CAPTION>
NUMBER OF PERFORMANCE OR OTHER
SHARES, UNITS OR PERIOD UNTIL MATURATION
NAME OTHER RIGHTS OR PAYOUT
---- ------------ ---------
<S> <C> <C>
James G. Floyd . . . . . . . . 46,800 (1)
Randall J. Fleming . . . . . . 24,353 (1)
Thomas W. Powers . . . . . . . 14,612 (1)
James F. Westmoreland . . . . . 11,753 (1)
Charles W. Adcock . . . . . . . 8,365 (1)
Sammye L. Dees . . . . . . . . 2,682 (1)
</TABLE>
________________________
(1) 20% of the Phantom Stock Rights shall become payable on December 16th of
each of the years 1997 through 2001.
-14-
<PAGE> 18
PERFORMANCE GRAPH
The following performance graph compares the performance of the
Company's Common Stock to the S&P 500 Index and to a Peer Group. The "Peer
Group" is composed of other independent oil and gas exploration and production
companies with offshore operations in the Gulf of Mexico (Apache Corporation,
Forcenergy Inc, Louisiana Land & Exploration, Newfield Exploration Company,
Noble Affiliates, Inc., Nuevo Energy Company, Pogo Producing Co., Seagull
Energy Corporation, United Meridian Corporation and Vastar Resources, Inc.).
The index of Peer Group companies is weighted according to the respective
market capitalization of its component companies as of December 31, 1995. The
graph covers the period from September 20, 1996, the date on which the Common
Stock of the Company began publicly trading, to December 31, 1996. The graph
assumes that the value of the investment in the Company's Common Stock and each
index was $100 at September 20, 1996 and that all dividends were reinvested.
COMPARISON OF CUMULATIVE RETURN
AMONG THE HOUSTON EXPLORATION COMPANY,
PEER GROUP INDEX AND
STANDARD & POOR'S 500 INDEX
[CHART]
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
9/20/96 12/31/96
- --------------------------------------------------------------------------------
<S> <C> <C>
The Houston Exploration Company 100 102.34
- --------------------------------------------------------------------------------
Peer Group Index 100 117.87
- --------------------------------------------------------------------------------
Standard & Poor's 500 Index 100 108.34
- --------------------------------------------------------------------------------
</TABLE>
The foregoing stock price performance comparisons shall not be deemed
incorporated by reference by any general statement incorporating by reference
this Proxy Statement into any filing under the Securities Act or under the
Exchange Act, except to the extent that the Company specifically incorporates
this graph by reference, and shall not otherwise be deemed filed under such
Acts.
-15-
<PAGE> 19
There can be no assurance that the Company's stock performance will
continue into the future with the same or similar trends depicted in the graph
above. The Company will not make or endorse any predictions as to future stock
performance.
EMPLOYMENT AGREEMENTS
Messrs. Floyd, Fleming, Powers, Westmoreland and Adcock entered into
employment agreements with the Company effective as of September 19, 1996,
pursuant to which they serve as executive officers of the Company.
Such employment agreements provide for Messrs. Floyd, Fleming, Powers,
Westmoreland and Adcock to receive annual base salaries of $340,000, $220,000,
$140,000, $130,000 and $125,000, respectively. Under such agreements, Messrs.
Floyd, Fleming, Powers, Westmoreland and Adcock are entitled to annual
incentive bonuses of 60%, 50%, 45%, 45% and 45%, respectively, of base salary
if the Company meets financial targets established by the Board of Directors.
In addition, Messrs. Floyd, Fleming, Powers, Westmoreland and Adcock are
entitled to participate in such incentive compensation and other programs as
are adopted by the Company's Board of Directors, including the Company's 1996
Plan. The initial term of each employment agreement extends to the third
anniversary of the effective date of such agreement; provided, however, that
the term of each agreement is automatically extended one year on each
anniversary unless notice that the agreement will not be extended is given by
either party at least 60 days prior to such anniversary.
Each of the employment agreements is subject to early termination by
the Company for cause or upon the death or disability of the employee and is
subject to early termination by the employee for any reason. If an employment
agreement is terminated without cause by the Company or with good reason
(including certain changes in control of the Company) by the employee, the
Company is obligated to pay such employee a lump-sum severance payment of 2.99
times the employee's then current annual rate of total compensation. Based
upon their current annual rate of compensation, Messrs. Floyd, Fleming, Powers,
Westmoreland and Adcock would be entitled to lump sum severance payments of
$1,017,000, $658,000, $419,000, $389,000 and $374,000 , respectively, if
terminated without cause or by the employee for good reason.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
Effective immediately prior to the Offering, the Company adopted an
unfunded, nonqualified Supplemental Executive Retirement Plan (the "SERP") for
the benefit of Mr. Floyd. The SERP provides that, if the executive remains
with the Company until age 65, upon his retirement on or after age 65, the
executive will be paid $100,000 per year for life. If, after retirement, the
executive predeceases his spouse, 50% of the executive's SERP benefit will
continue to be paid to the executive's surviving spouse for her life.
401(K) PLAN
The Company maintains a 401(k) Profit Sharing Plan (the "401(k) Plan")
for its employees. Under the 401(k) Plan, eligible employees may elect to have
the Company contribute on their behalf up to 10% of their base compensation
(subject to certain limitations imposed under the Code) on a before tax basis.
The Company makes a matching contribution of $0.50 for each $1.00 of employee
deferral, not to exceed 5% of an employee's base compensation, subject to
limitations imposed by the Code. The amounts contributed under the 401(k) Plan
are held in a trust and invested among various investment funds in accordance
with the directions of each participant. An employee's salary deferral
contributions under the 401(k) Plan are 100% vested. The Company's matching
contributions vest at the rate of 20% per year of service. Participants are
entitled to payment of their vested account balances upon termination of
employment.
-16-
<PAGE> 20
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
Robert B. Catell, a member of the Compensation Committee, is Chairman
of the Board and Chief Executive Officer of Brooklyn Union. As a result of the
termination of certain options to purchase Common Stock held by Mr. Catell, the
Company awarded $420,000 to Mr. Catell to be paid over a three year period
beginning September 19, 1996. See "Certain Transactions--Transactions Between
the Company and Brooklyn Union and Affiliates."
CERTAIN TRANSACTIONS
TRANSACTIONS BETWEEN THE COMPANY AND BROOKLYN UNION AND AFFILIATES
The Company was incorporated in December 1985 to conduct certain of
the natural gas and oil exploration and development activities of Brooklyn
Union. The Company has focused since its inception primarily on the
exploration and development of high potential prospects in the Gulf of Mexico.
Effective February 29,1996, Brooklyn Union implemented a reorganization of its
exploration and production assets by transferring to The Company certain
onshore producing properties and developed and undeveloped acreage not
previously owned by the Company. Brooklyn Union has advised the Company that
it does not currently intend to engage in the domestic exploration for or
production of natural gas and oil except through ownership of Common Stock of
the Company.
In 1996 Brooklyn Union made capital contributions to the Company of
$6.3 million and received shares of Common Stock in consideration of such
capital contributions.
Prior to October 1996, the Company agreed, subject to certain
conditions, to sell substantially all of its subsequently developed or acquired
gas production, to an affiliate of Brooklyn Union, PennUnion Energy Services,
L.L.C. ("PennUnion"). The gas sales agreement with PennUnion was terminated
in October 1996 when Brooklyn Union sold its interest in PennUnion; however,
PennUnion still remains a purchaser of the Company's natural gas production.
The gas production sold to PennUnion is sold at market prices, based upon an
index price adjusted to reflect the point of delivery of such production.
In July 1994, the Company granted options to purchase an aggregate of
247,000 shares of Common Stock to three officers of Brooklyn Union, including
Messrs. Catell and Matthews, with an exercise price of $11.22 per share. Upon
completion of the Offering, such options were terminated in exchange for
payment by the Company of an aggregate of $840,000 to be paid over a three year
period beginning September 19, 1996. As a result of the termination of their
options, Messrs. Catell and Matthews received awards of $420,000 and $294,000,
respectively. Theodore Spar, who is an officer of Brooklyn Union but not an
officer or director of the Company, received an award of $126,000.
The Company was included in the consolidated federal income tax
returns filed by Brooklyn Union during all periods in which it was a
wholly-owned subsidiary of Brooklyn Union ("Affiliation Years"). The Company
and Brooklyn Union are parties to an agreement (the "Tax Sharing Agreement")
providing for the manner of determining payments with respect to federal income
tax liabilities and benefits arising in Affiliation Years. Under the Tax
Sharing Agreement, the Company paid to or received from Brooklyn Union an
amount equal to the Company's share of Brooklyn Union's consolidated federal
income tax liability, generally determined on a separate return basis, for the
years ended and the portion of 1996 preceding consummation of the Offering, and
Brooklyn Union paid the Company for any reduction in Brooklyn Union's
consolidated federal income tax liability resulting from utilization or deemed
utilization of deductions, losses, and credits arising in such periods which
are attributable to the Company, in each case net of any amounts theretofore
paid or credited by Brooklyn Union or the Company to the other with respect
thereto. In the event that Brooklyn Union's consolidated federal income tax
liability for any Affiliation Year is adjusted upon audit or otherwise, the
Company will bear any additional liability or receive any refund which is
attributable to adjustments of items of income, deduction, gain, loss or credit
of the Company. Brooklyn Union shall permit the Company to participate in any
audits or litigation with respect to Affiliation Years, but Brooklyn Union will
otherwise have exclusive and sole responsibility and control over any such
proceedings. As of September 1996, the Company
-17-
<PAGE> 21
ceased to be included in the consolidated federal income tax returns filed by
Brooklyn Union, and will file on a separate basis, with respect to periods
after consummation of the Offering.
Under a Registration Rights Agreement (the "Brooklyn Union
Registration Rights Agreement") entered into between the Company and Brooklyn
Union, the Company will file, upon the request of Brooklyn Union, a
registration statement under the Securities Act for the purpose of enabling
Brooklyn Union to offer and sell any securities of the Company which Brooklyn
Union may hold. Brooklyn Union may exercise these rights at any time after the
expiration of 180 days following the completion of the Offering. The Company
will bear the costs of any registered offering, except that Brooklyn Union will
pay any underwriting commissions relating to any such offering, any transfer
taxes and any costs of complying with foreign securities laws at Brooklyn
Union's request, and each will pay for its counsel and accountants. The
Company has the right to require Brooklyn Union to delay any exercise by
Brooklyn Union of its rights to require registration and other actions for a
period of up to 180 days if, in the judgment of the Company, the Company or any
offering by the Company then being conducted or about to be conducted would be
adversely affected. The Company has also granted Brooklyn Union the right to
include its securities in certain registration statements covering offerings by
the Company, and the Company will pay all costs of such offerings other than
underwriting commissions and transfer taxes attributable to the securities sold
on behalf of Brooklyn Union. The Company has agreed to indemnify Brooklyn
Union, its officers, directors, agents, any underwriter, and each person
controlling any of the foregoing, against certain liabilities under the
Securities Act or the securities laws of any state or country in which
securities of the Company are sold pursuant to the Brooklyn Union Registration
Rights Agreement.
In connection with the February 1996 reorganization, the Company and
FRI, the subsidiary of Brooklyn Union that previously owned the onshore
properties, entered into an agreement whereby the Company assumed FRI's bank
debt and the liabilities of FRI directly related to the transferred properties
and acreage. FRI agreed to indemnify the Company against all of FRI's other
liabilities, including any liabilities associated with the suit filed by
certain of FRI's former employees. In addition, the Company entered into an
agreement with THEC Holdings Corp., a wholly-owned subsidiary of Brooklyn Union
("Holdings"), whereby Holdings agreed to indemnify the Company against any
liabilities associated with such remuneration and suit, and agreed to pledge
all of its holdings of Common Stock to the Company to secure such
indemnification obligation. The suit was settled in October 1996 without
liability to the Company.
TRANSACTIONS BETWEEN THE COMPANY AND MANAGEMENT
The Company entered into employment agreements with Messrs. Floyd,
Fleming, Powers, Westmoreland and Adcock effective as of September 19, 1996.
These employment agreements replaced the Company's previous employment
agreements with such officers. See "Executive Compensation--Employment
Agreements" for a description of such employment agreements.
The Company's previous employment agreement with Mr. Floyd, its
President and Chief Executive Officer, provided Mr. Floyd with the option to
obtain up to a 5% working interest in certain exploration prospects of the
Company, exercisable prior to the commencement of drilling of the initial well
on any such prospect. From 1993 to 1995, affiliates of Mr. Floyd obtained a 5%
working interest in 12 wells operated by the Company pursuant to such
agreement. In 1996, Mr. Floyd exercised his right to purchase a 5% working
interest in the properties acquired by the Company from TransTexas Gas
Corporation and TransTexas Transmission Corporation (the "TransTexas
Acquisition") on the same terms as such properties were acquired by the Company
for a purchase price of $3.1 million. The termination of the Company's
previous employment agreement with Mr. Floyd, including the rights described
above, does not affect working interests in properties of the Company acquired
by Mr. Floyd or his affiliates prior to the date of termination.
The Company agreed to loan Mr. Floyd the $3.1 million purchase price
for his purchase of a 5% working interest in the properties purchased by the
Company in the TransTexas Acquisition. In addition, the Company agreed to loan
Mr. Floyd, on a revolving basis, the amounts required to fund the expenses
attributable to Mr. Floyd's working interest. Mr. Floyd is required to repay
amounts owed under the loan in the amount of 65% of all distributions received
by Mr. Floyd in respect of such working interest, as distributions are
received. Amounts outstanding under such loan
-18-
<PAGE> 22
bear interest at an interest rate equal to the Company's cost of borrowing
under the Company's credit facility with a syndicate of lenders led by Texas
Commerce Bank National Association. Mr. Floyd's obligations under the
agreement are secured by a pledge of his working interest in, and production
from, such properties. The outstanding balance owed by Mr. Floyd under the
agreement will mature on July 2, 2006.
The Company's previous employment agreement with Mr. Floyd also
provided for the assignment to Mr. Floyd of a 2% net profits interest in all
exploration prospects of the Company at the time such properties were acquired
by the Company. From 1993 to 1995, the Company assigned a 2% net profits
interest to Mr. Floyd in all such properties acquired by the Company during
such period pursuant to such agreement. The termination of the Company's
previous employment agreement with Mr. Floyd, including the rights described
above, does not affect net profits interests in properties of the Company
assigned to Mr. Floyd prior to the date of termination.
The Company's previous employment agreement with Mr. Floyd also
provided for the assignment to certain key employees designated by Mr. Floyd of
overriding royalty interests in certain properties of the Company at the time
such properties were acquired by the Company. From 1993 to 1995, the Company
assigned overriding royalty interests to Mr. Fleming, Mr. Westmoreland and Ms.
Dees in all properties acquired by the Company during such period pursuant to
such agreement. The termination of the Company's previous employment agreement
with Mr. Floyd, including the rights described above, does not affect
overriding royalty interests in properties of the Company assigned to key
employees prior to the date of termination.
On September 19, 1996, Mr. Floyd exchanged certain of his after
program-payout working interests assigned to Mr. Floyd under his employment
agreement with the Company for 145,161 shares of Common Stock with a value of
approximately $2.3 million.
In accordance with the change of control provisions in the long-term
incentive program of FRI, Charles W. Adcock received an aggregate amount of
approximately $1.2 million in exchange for the termination of his rights under
such program from FRI due to its merger with Holdings. The payments of the
$1.2 million were received in 1996 but were reported as expenses for the year
ended December 31, 1995 in the audited financial statements of the Company.
SOXCO ACQUISITION
On September 25, 1996, the Company acquired substantially all of the
natural gas and oil properties and related assets (the "Soxco Acquisition") of
Smith Offshore Exploration Company ("Soxco"). Under an agreement with Soxco,
Lester H. Smith had received a 1.25% net profits interest, proportionately
reduced for Soxco's interest, in all properties in which Soxco had
participated. Upon the sale by Soxco of its properties, Mr. Smith exercised
his right to sell all such net profits interests on the same economic terms to
be received by Soxco in the transaction. Mr. Smith received approximately
$90,000 in cash, 13,553 initial shares of Common Stock and the right to receive
additional shares of Common Stock with a value between $100,000 and $200,000
(relating to the deferred purchase price of the Soxco Acquisition). In
connection with the sale by Soxco of its properties, the Company granted three
demand and certain piggyback registration rights with respect to the shares of
Common Stock issued in connection with the transaction. Such registration
rights are subject to certain conditions and become exercisable 180 days after
the Offering.
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<PAGE> 23
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table presents certain information regarding the
beneficial ownership of the Company's Common Stock as of March 10, 1997 by (i)
each person who is known by the Company to own beneficially more than five
percent of the outstanding shares of Common Stock, (ii) each Director of the
Company, (iii) the Company's chief executive officer and each of the other
Named Executive Officers and (iv) all Directors and executive officers as a
group. Except as described below, each of the persons listed in the table has
sole voting and investment power with respect to the shares listed.
BENEFICIAL OWNERSHIP OF COMMON STOCK
------------------------------------
<TABLE>
<CAPTION>
Name of Beneficial Owner Shares Percent of Class
------------------------ ------ ----------------
<S> <C> <C>
The Brooklyn Union Gas Company . . . . . . . . . . . . . . . 15,295,215 66%
One Metrotech Center
Brooklyn, New York 11201-3850
James G. Floyd . . . . . . . . . . . . . . . . . . . . . . . 145,761(1) *
Lester H. Smith . . . . . . . . . . . . . . . . . . . . . . . 13,553 *
Russell D. Gordy . . . . . . . . . . . . . . . . . . . . . . 10,000 *
Robert B. Catell . . . . . . . . . . . . . . . . . . . . . . 3,000 *
Randall J. Fleming . . . . . . . . . . . . . . . . . . . . . 2,100(1) *
Charles W. Adcock . . . . . . . . . . . . . . . . . . . . . . 1,500(1) *
Thomas W. Powers . . . . . . . . . . . . . . . . . . . . . . 1,100(1) *
Craig G. Matthews . . . . . . . . . . . . . . . . . . . . . . 1,000 *
Gordon F. Ahalt . . . . . . . . . . . . . . . . . . . . . . . 1,000 *
James Q. Riordan . . . . . . . . . . . . . . . . . . . . . . 500 *
Sammye L. Dees . . . . . . . . . . . . . . . . . . . . . . . 200 *
James F. Westmoreland . . . . . . . . . . . . . . . . . . . . 200(1) *
All Directors and officers as a group
(12 persons) . . . . . . . . . . . . . . . . . . . . . . 179,914(1) *
</TABLE>
- ---------------
* Less than 1%.
(1) Does not include outstanding options to purchase shares of Common
Stock because such outstanding options do not confer the right to
acquire beneficial ownership within 60 days of the date of this Proxy
Statement.
COMPLIANCE WITH SECTION 16(A)
Section 16(a) of the Exchange Act requires the Company's directors and
officers, and persons who own more than 10% of the Common Stock, to file
initial reports of ownership and reports of changes in ownership (Forms 3, 4,
and 5) of Common Stock with the Securities and Exchange Commission (the "SEC")
and the New York Stock Exchange. Officers, directors and greater than 10%
stockholders are required by SEC regulation to furnish the Company with copies
of all such forms that they file.
To the Company's knowledge, based solely on the Company's review of the
copies of such reports received by the Company and on written representations
by certain reporting persons that no reports on Form 5 were required, the
Company believes that during the fiscal year ended December 31, 1996, all
Section 16(a) filing requirements applicable to its officers, directors and 10%
stockholders were complied with in a timely manner.
-20-
<PAGE> 24
PROPOSAL OF STOCKHOLDERS
Any proposal of a stockholder intended to be presented at the next annual
meeting must be received at the Company's principal executive offices no later
than November 24, 1997, if the proposal is to be considered for inclusion in
the Company's Proxy Statement relating to such meeting.
FINANCIAL INFORMATION
A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K, INCLUDING ANY FINANCIAL
STATEMENTS AND SCHEDULES AND EXHIBITS THERETO, MAY BE OBTAINED WITHOUT CHARGE
BY WRITTEN REQUEST TO JAMES F. WESTMORELAND, VICE PRESIDENT, CHIEF ACCOUNTING
OFFICER, COMPTROLLER AND SECRETARY, THE HOUSTON EXPLORATION COMPANY, 1331
LAMAR, SUITE 1065, HOUSTON, TEXAS 77010.
By Order of the Board of Directors
James F. Westmoreland
Secretary
March 24, 1997
Houston, Texas
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<PAGE> 25
APPENDIX A
CERTIFICATE OF AMENDMENT
OF THE
RESTATED CERTIFICATE OF INCORPORATION
OF
THE HOUSTON EXPLORATION COMPANY
THE HOUSTON EXPLORATION COMPANY (the "Corporation"), a
corporation organized and existing under and by virtue of the General
Corporation Law of the State of Delaware ("DGCL"), hereby certifies:
FIRST: That in lieu of a meeting and vote of directors, the
Board of Directors of the Corporation, by unanimous written consent filed with
the minutes of proceedings of the Board of Directors of the Corporation in
accordance with the provisions of Section 141(f) of the DGCL, adopted
resolutions approving and declaring advisable the following amendment to the
Certificate of Incorporation of the Corporation:
NOW, THEREFORE, BE IT RESOLVED, that Article V of the Restated
Certificate of Incorporation of the Corporation be amended to read in its
entirety as follows:
"ARTICLE V
Directors
Section 5.01. Number. The number of directors of the
Corporation shall from time to time be fixed exclusively by the Board of
Directors in accordance with, and subject to the limitations set forth in, the
bylaws of the Corporation (the "Bylaws"); provided, however, that the Board of
Directors shall at all times consist of a minimum of three and a maximum of
fifteen members, subject, however, to increases above fifteen members as may be
required in order to permit the holders of any series of Preferred Stock to
exercise their right (if any) to elect additional directors under specified
circumstances.
Section 5.02. Term. All of the directors of the Corporation
shall be elected to serve for the term set forth in the Bylaws and, anything in
this Certificate of Incorporation or the Bylaws to the contrary
notwithstanding, each director shall hold office until his successor is elected
and qualified or until his earlier death, resignation or removal. Any director
elected or appointed to fill a vacancy shall hold office for the remaining
term. No decrease in the number of directors constituting the Corporation's
Board of Directors shall shorten the term of any incumbent director.
Section 5.03. Nomination and Election. (a) Nominations of
persons for election or reelection to the Board of Directors may be made by or
at the direction of the Board of Directors. The Bylaws may set forth
procedures for the nomination of persons for election or reelection to the
Board of Directors and only persons who are nominated in accordance with such
procedures (if any) shall be eligible for election or reelection as directors
of the Corporation; provided, however, that such procedures shall not infringe
upon (i) the right of the Board of Directors to nominate persons for election
or reelection to the Board of Directors or (ii) the rights of the holders of
any class or series of Preferred Stock, voting separately by class or series,
to elect additional directors under specified circumstances.
(b) Each director shall be elected in accordance with
this Certificate of Incorporation, the Bylaws and applicable law. Election of
directors by the Corporation's stockholders need not be by written ballot
unless the Bylaws so provide.
Section 5.04. Removal. No director of any class may be
removed before the expiration of his term of office except for cause and then
only by the affirmative vote of the holders of not less than a majority in
voting power of all the outstanding shares of capital stock of the Corporation
entitled to vote generally in an election of directors,
A-1
<PAGE> 26
voting together as a single class. The Board of Directors may not remove any
director, and no recommendation by the Board of Directors that a director be
removed may be made to the Corporation's stockholders unless such
recommendation is set forth in a resolution adopted by the affirmative vote of
not less than two-thirds of the whole Board of Directors.
Section 5.05. Vacancies. (a) In case any vacancy shall
occur on the Board of Directors because of death, resignation or removal, such
vacancy may be filled only by a majority (or such higher percentage as may be
specified in the Bylaws) of the directors remaining in office (though less than
a quorum), and the director so appointed shall serve for the unexpired term of
his predecessor or until his successor is elected and qualified or until his
earlier death, resignation or removal. If there are no directors then in
office, an election of directors may be held in the manner provided by
applicable law.
(b) Any newly-created directorship resulting from any
increase in the number of directors may be filled only by a majority (or such
higher percentage as may be specified in the Bylaws) of the directors then in
office (though less than a quorum). Each director so appointed shall hold
office for the remainder of the term or until his successor is elected and
qualified or until his earlier death, resignation or removal.
(c) Except as expressly provided in this Certificate of
Incorporation or as otherwise provided by applicable law, stockholders of the
Corporation shall not have the right to fill vacancies on the Board of
Directors, including newly-created directorships.
Section 5.06. Subject to Rights of Holders of Preferred
Stock. Notwithstanding the foregoing provisions of this Article V, if the
Preferred Stock Designation creating any series of Preferred Stock entitles the
holders of such Preferred Stock, voting separately by class or series, to elect
additional directors under specified circumstances, then all provisions of such
Preferred Stock Designation relating to the nomination, election, term of
office, removal, filling of vacancies and other features of such directorships
shall, as to such directorships, govern and control over any conflicting
provisions of this Article V.
Section 5.07. Limitation of Personal Liability. (a) No
person who is or was a director of the Corporation shall be personally liable
to the Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to the Corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or
a knowing violation of law, (iii) under Section 174 of the DGCL or (iv) for any
transaction from which the director derived an improper personal benefit.
(b) If the DGCL is hereafter amended to authorize
corporate action further limiting or eliminating the personal liability of
directors, then the personal liability of the directors to the Corporation or
its stockholders shall be limited or eliminated to the full extent permitted by
the DGCL, as so amended from time to time."
SECOND: That at the annual meeting of stockholders of the
Corporation on April 24, 1997, a two-thirds majority of the voting power of all
outstanding capital stock of the Corporation entitled to vote generally at an
election of directors voted in favor of such amendment, in accordance with the
provisions of Article X of the Company's Restated Certificate of Incorporation
and Section 242 of the DGCL.
THIRD: That said amendment was duly adopted in accordance
with the provisions of Sections 141 and 242 of the DGCL.
A-2
<PAGE> 27
IN WITNESS WHEREOF, the Corporation has caused this
certificate to be signed by James G. Floyd, its President, this ____ day of
___________, 1997.
THE HOUSTON EXPLORATION COMPANY
By:
--------------------------------
Name: James G. Floyd
Title: President
A-3
<PAGE> 28
APPENDIX B
THE HOUSTON EXPLORATION COMPANY
1996 STOCK OPTION PLAN
ARTICLE I
PLAN
1.1 PURPOSE. This Plan is a plan for employees, consultants and
advisors of the Company and its Affiliates and is intended to advance the best
interests of the Company, its Affiliates, and its stockholders by providing
those persons who have substantial responsibility for the management and growth
of the Company and its Affiliates with additional incentives and an opportunity
to obtain or increase their proprietary interest in the Company, thereby
encouraging them to continue in the employ of the Company or any of its
Affiliates.
1.2 EFFECTIVE DATE OF PLAN. This Plan is effective May 9, 1996,
if within one year of that date it shall have been approved by at least a
majority vote of stockholders voting in person or by proxy at a duly held
stockholders' meeting, or if the provisions of the corporate charter, by-laws
or applicable state law prescribes a greater degree of stockholder approval for
this action, the approval by the holders of that percentage, at a duly held
meeting of stockholders. No Option shall be granted pursuant to this Plan
after May 8, 2006.
ARTICLE II
DEFINITIONS
The words and phrases defined in this Article shall have the meaning
set out in these definitions throughout this Plan, unless the context in which
any such word or phrase appears reasonably requires a broader, narrower, or
different meaning.
2.1 "AFFILIATE" means any parent corporation and any subsidiary
corporation. The term "parent corporation" means any corporation (other than
the Company) in an unbroken chain of corporations ending with the Company if,
at the time of the action or transaction, each of the corporations other than
the Company owns stock possessing 50% or more of the total combined voting
power of all classes of stock in one of the other corporations in the chain.
The term "subsidiary corporation" means any corporation (other than the
Company) in an unbroken chain of corporations beginning with the Company if, at
the time of the action or transaction, each of the corporations other than the
last corporation in the unbroken chain owns stock possessing 50% or more of the
total combined voting power of all classes of stock in one of the other
corporations in the chain.
2.2 "BOARD OF DIRECTORS" means the board of directors of the
Company.
2.3 "CHANGE OF CONTROL" means:
(i) the acquisition after the closing date of the sale of
any or all of the shares of Stock registered under the Securities Act of
1933, as amended, pursuant to a Registration Statement on Form S-1 (Reg.
No. 333-4437) (the "Effective Date") by any individual, entity or group
(within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities
Exchange Act of 1934, as amended) (a "Person") of beneficial ownership of
20 percent or more of either (i) the then outstanding shares of common
stock of the Company (the "Outstanding Common Stock") or (ii) the combined
voting power of the then outstanding voting securities of the Company
entitled to vote generally in the election of directors (the "Outstanding
Voting Securities"), provided that for purposes of this subsection (i),
the following acquisitions shall not constitute a Change of Control: (A)
any acquisition directly from the Company, (B) any acquisition by the
Company, (C) any acquisition by any employee benefit plan (or
B-1
<PAGE> 29
related trust) sponsored or maintained by the Company or any corporation
controlled by the Company, or (D) any acquisition by any corporation
pursuant to a transaction which complies with clauses (A), (B) and (C) of
subsection (iii) hereof; or
(ii) individuals, who, as of the Effective Date,
constitute the Board (the "Incumbent Board") cease for any reason to
constitute at least a majority of the Board provided that any individual
becoming a director subsequent to the Effective Date whose election, or
nomination for election by the Company's stockholders, was approved by a
vote of at least a majority of the directors then comprising the Incumbent
Board shall be considered as though such individual was a member of the
Incumbent Board, but excluding, for this purpose, any such individual
whose initial assumption of office occurs as a result of an actual or
threatened election contest with respect to the election or removal of
directors or other actual or threatened solicitation of proxies or
consents by or on behalf of a Person other than the Board; or
(iii) consummation after the Effective Date of a
reorganization, merger or consolidation or sale or other disposition of
all or substantially all of the assets of the Company (a "Corporate
Transaction") unless, in each case, following such Corporate Transaction,
(A) (I) all or substantially all of the persons who were the beneficial
owners of the Outstanding Common Stock immediately prior to such Corporate
Transaction beneficially own, directly or indirectly, more than 60 percent
of the then outstanding shares of common stock of the corporation
resulting from such Corporate Transaction, and (2) all or substantially
all of the persons who were the beneficial owners of the Outstanding
Voting Securities immediately prior to such Corporate Transaction
beneficially own directly or indirectly, more than 60 percent of the
combined voting power of the then outstanding voting securities entitled
to vote generally in the election of directors of the corporation
resulting from such Corporate Transaction (including, without limitation,
a corporation which as a result of such transaction owns the Company or
all or substantially all of the Company's assets either directly or
through one or more subsidiaries) in substantially the same proportions as
their ownership of the Outstanding Common Stock and the outstanding Voting
Securities immediately prior to such Corporate Transaction, as the case
may be, (B) no Person (excluding (1) any corporation resulting from such
Corporate Transaction or any employee benefit plan (or related trust) of
the Company or such corporation resulting from such Corporate Transaction
and (2) any Person approved by the Incumbent Board) beneficially owns,
directly or indirectly, 20 percent or more of the then outstanding shares
of common stock of the corporation resulting from such Corporate
Transaction or the combined voting power of the then outstanding voting
securities of such corporation except to the extent that such ownership
existed prior to such Corporate Transaction and (C) at least a majority of
the members of the board of directors of the corporation resulting from
such Corporate Transaction were members of the Incumbent Board at the time
of the execution of the initial agreement or of the action of the Board
providing for such Corporate Transaction.
2.4 "CODE" means the internal Revenue Code of 1986, as amended.
2.5 "COMMITTEE" means the Compensation Committee of the Board of
Directors or such other committee designated by the Board of Directors. The
Committee shall be comprised solely of at least two members who are outside
Directors.
2.6 "COMPANY" means The Houston Exploration Company, a Delaware
corporation.
2.7 "DISABILITY" means a physical or mental infirmity which, in
the opinion of a physician selected by the Committee, shall prevent the
Employee from earning a reasonable livelihood with the Company or any Affiliate
and which can be expected to result in death or which has lasted or can be
expected to last for a continuous period of not less than 12 months and which:
(a) was not contracted, suffered or incurred while the Employee was engaged in,
or did not result from having engaged in, a felonious criminal enterprise; (b)
did not result from alcoholism or addiction to narcotics; and (c) did not
result from an injury incurred while a member of the Armed Forces of the United
States for which the Employee receives a military pension.
B-2
<PAGE> 30
2.8 "EMPLOYEE" means a person employed by the Company or any
Affiliate to whom an Option is granted.
2.9 "FAIR MARKET VALUE" of the Stock as of any date means (a) the
average of the high and low sale prices of the Stock on that date (or, if there
was no sale on such date, the next preceding date on which there was such a
sale) on the principal securities exchange on which the Stock is listed; or (b)
if the Stock is not listed on a securities exchange, the average of the high
and low sale prices of the Stock on that date (or, if there was no sale on such
date, the next preceding date on which there was such a sale) as reported on
the Nasdaq National Market; or (c) if the Stock is not listed on the Nasdaq
National Market, the average of the high and low bid quotations for the Stock
on that date as reported by the National Quotation Bureau Incorporated; or (d)
if none of the foregoing is applicable, an amount at the election of the
Committee equal to (x) the average between the closing bid and ask prices per
share of Stock on the last preceding date on which those prices were reported
or (y) an amount as determined by the Committee in its sole discretion.
2.10 "INCENTIVE OPTION" means an Option granted under this Plan
which is designated as an "Incentive Option" and satisfies the requirements of
Section 422 of the Code.
2.11 "NON-EMPLOYEE DIRECTOR" means a "non-employee director" as
that term is defined in Rule 16b-3 of the Securities Exchange Act of 1934.
2.12 "NONQUALIFIED OPTION" means an Option granted under this Plan
other than an Incentive Option.
2.13 "OPTION" means either an Incentive Option or a Nonqualified
Option granted under this Plan to purchase shares of Stock.
2.14 "OPTION AGREEMENT" means the written agreement which sets out
the terms of an Option.
2.15 "OPTIONEE" means a person who is granted an Option under this
Plan.
2.16 "OUTSIDE DIRECTOR" means a member of the Board of Directors
serving on the Committee who satisfies the criteria of Section 162(m) of the
Code.
2.17 "PLAN" means The Houston Exploration Company 1996 Stock Option
Plan, as set out in this document and as it may be amended from time to time.
2.18 "STOCK" means the common stock of the Company, $.01 par value
or, in the event that the outstanding shares of common stock are later changed
into or exchanged for a different class of stock or securities of the Company
or another corporation, that other stock or security.
2.19 "10% STOCKHOLDER" means an individual who, at the time the
Option is granted, owns stock possessing more than 10% of the total combined
voting power of all classes of stock of the Company or of any Affiliate. An
individual shall be considered as owning the stock owned, directly or
indirectly, by or for his brothers and sisters (whether by the whole or half
blood), spouse, ancestors, and lineal descendants; and stock owned, directly or
indirectly, by or for a corporation, partnership, estate, or trust, shall be
considered as being owned proportionately by or for its stockholders, partners
or beneficiaries.
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ARTICLE III
ELIGIBILITY
The individuals who shall be eligible to receive Incentive Options
shall be those key employees of the Company or any of its Affiliates as the
Committee shall determine from time to time. The individuals who shall be
eligible to receive Nonqualified Options shall be those key employees,
consultants and advisors of the Company or any of its Affiliates as the
Committee shall determine from time to time. However, no member of the
Committee shall be eligible to receive any Option or to receive stock, stock
options, or stock appreciation rights under any other plan of the Company or
any of its Affiliates, if to do so would cause the individual not to be an
Outside Director. The Board of Directors may designate one or more individuals
who shall not be eligible to receive any Option under this Plan or under other
similar plans of the Company.
ARTICLE IV
GENERAL PROVISIONS RELATING TO OPTIONS
4.1 AUTHORITY TO GRANT OPTIONS. The Committee may grant to those
individuals, as it shall from time to time determine, Options under the terms
and conditions of this Plan. Subject only to any applicable limitations set
out in this Plan, the number of shares of Stock to be covered by any Option to
be granted to an Employee of the Company or any of its Affiliates shall be as
determined by the Committee.
4.2 DEDICATED SHARES. The total number of shares of Stock with
respect to which Options may be granted under the Plan shall be ten percent of
the shares of Stock outstanding from time to time. The shares may be treasury
shares or authorized but unissued shares. The total number of shares of stock
with respect to which Incentive Options may be granted under the Plan shall be
1,125,000 shares. The maximum number of shares subject to Options which may be
issued to any Optionee under the Plan during any period of three consecutive
years is 1,125,000 shares. The number of shares stated in this Section 4.2
shall be subject to adjustment in accordance with the provisions of Section
4.5.
In the event that any outstanding Option shall expire or terminate for
any reason or any Option is surrendered, the shares of Stock allocable to the
unexercised portion of that Option may again be subject to an Option under the
Plan.
4.3 NON-TRANSFERABILITY. Options shall not be transferable by the
Optionee otherwise than by will or under the laws of descent and distribution,
and shall be exercisable, during the Optionee's lifetime, only by him.
4.4 REQUIREMENTS OF LAW. The Company shall not be required to
sell or issue any Stock under any Option if issuing that Stock would constitute
or result in a violation by the Optionee or the Company of any provision of any
law, statute, or regulation of any governmental authority. Specifically, in
connection with any applicable statute or regulation relating to the
registration of securities, upon exercise of any Option, the Company shall not
be required to issue any Stock unless the Committee has received evidence
satisfactory to it to the effect that the holder of that Option will not
transfer the Stock except in accordance with applicable law, including receipt
of an opinion of counsel satisfactory to the Company to the effect that any
proposed transfer complies with applicable law. The determination by the
Committee on this matter shall be final, binding and conclusive. The Company
may, but shall in no event be obligated to, register any Stock covered by this
Plan pursuant to applicable securities laws of any country or any political
subdivision. In the event the Stock issuable on exercise of an Option is not
registered, the Company may imprint on the certificate evidencing the Stock any
legend that counsel for the Company considers necessary or advisable to comply
with applicable law. The Company shall not be obligated to take any other
affirmative action in order to cause the exercise of an Option and the issuance
of shares thereunder, to comply with any law or regulation of any governmental
authority.
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4.5 CHANGES IN THE COMPANY'S CAPITAL STRUCTURE. The existence of
outstanding Options shall not affect in any way the right or power of the
Company or its stockholders to make or authorize any adjustments,
recapitalizations, reorganizations or other changes in the Company's capital
structure or its business, or any merger or consolidation of the Company, or
any issue of bonds, debentures, preferred or prior preference stock ahead of or
affecting the Stock or its rights, or the dissolution or liquidation of the
Company, or any sale or transfer of all or any part of its assets or business,
or any other corporate act or proceeding, whether of a similar character or
otherwise.
If the Company shall effect a subdivision or consolidation of shares
or other capital readjustment, the payment of a stock dividend, or other
increase or reduction of the number of shares of the Stock outstanding, without
receiving compensation for it in money, services or property then (a) the
number, class, and per share price of shares of Stock subject to outstanding
Options under this Plan shall be appropriately adjusted in such a manner as to
entitle an Optionee to receive upon exercise of an Option, for the same
aggregate cash consideration, the equivalent total number and class of shares
he would have received had he exercised his Option in full immediately prior to
the event requiring the adjustment; and (b) the number and class of shares of
Stock then reserved to be issued under the Plan shall be adjusted by
substituting for the total number and class of shares of Stock then reserved,
that number and class of shares of Stock that would have been received by the
owner of an equal number of outstanding shares of such class of Stock as the
result of the event requiring the adjustment.
If the Company is merged or consolidated with another corporation and
the Company is not the surviving corporation, or if the Company is liquidated
or sells or otherwise disposes of substantially all its assets while
unexercised Options remain outstanding under this Plan, (a) subject to the
provisions of clause (c) below, after the effective date of the merger,
consolidation, liquidation, sale or other disposition, as the case may be, each
holder of an outstanding Option shall be entitled, upon exercise of the Option,
to receive, in lieu of shares of Stock, the number and class or classes of
shares of stock or other securities or property to which the holder would have
been entitled if, immediately prior to the merger, consolidation, liquidation,
sale or other disposition, the holder had been the holder of record of a number
of shares of Stock equal to the number of shares as to which the Option shall
be so exercised; (b) the Committee shall waive any limitations set out in or
imposed under this Plan so that all Options, from and after a date prior to the
effective date of the merger, consolidation, liquidation, sale or other
disposition, as the case may be, specified by the Committee, shall be
exercisable in full; and (c) all outstanding Options may be canceled by the
Committee as of the effective date of any merger, consolidation, liquidation,
sale or other disposition, if (i) notice Of cancellation shall be given to each
holder of an Option and (ii) each holder of an Option shall have the right to
exercise that Option in full (without regard to any limitations set out in or
imposed under this Plan or the Option Agreement granting that Option) during a
period set by the Committee preceding the effective date of the merger,
consolidation, liquidation, sale or other disposition and, if in the event all
outstanding Options may not be exercised in full under applicable securities
laws without registration of the shares of Stock issuable on exercise of the
Options, the Committee may limit the exercise of the Options to the number of
shares of Stock, if any, as may be issued without registration. The method of
choosing which Options may be exercised, and the number of shares of Stock for
which Options may be exercised, shall be solely within the discretion of the
committee.
The issue by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, for cash or property,
or for labor or services either upon direct sale or upon the exercise of rights
or warrants to subscribe for them, or upon conversion of shares or obligations
of the Company convertible into shares or other securities, shall not affect,
and no adjustment by reason of such issuance shall be made with respect to, the
number, class, or price of shares of Stock then subject to outstanding Options.
4.6 CHANGES OF CONTROL. In the event of a Change of Control, the
Committee may, in its discretion, at the time an Option is granted or any time
thereafter: (i) provide for the acceleration of any time period relating to
the exercise of the Option, (ii) provide for the purchase of the Option upon
the Optionee's request for an amount of cash or other property that could have
been received upon the exercise of the Option had the Option been then
currently exercisable, (iii) adjust the terms of the Option in a manner
determined by the Committee to reflect the Change of Control, (iv) cause the
Option to be assumed, or new rights substituted therefore, by another entity,
or (v) make such other provisions as the Committee may consider equitable and
in the best interest of the Company. Any
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transaction described in this Section that is approved by the Committee will be
effective only if a committee of the Board of Directors that is composed solely
of two or more Non-Employee Directors approves of the transaction, unless the
transaction would not otherwise subject the Optionee to potential liability
under Section 16(b) of the Securities Exchange of 1934, as amended.
ARTICLE V
OPTIONS
5.1 TYPE OF OPTION. The Committee shall specify whether a given
Option shall constitute an Incentive Option or a Nonqualified Option.
5.2 OPTION PRICE. The price at which Stock may be purchased under
an Option shall not be less than the greater of: (a) 100% of the Fair Market
Value of the shares of Stock on the date the Option is granted or (b) the
aggregate par value of the shares of Stock on the date the Option is granted.
In the case of any 10% Stockholder, the price at which shares of Stock may be
purchased under an Incentive Option shall not be less than 110% of the Fair
Market Value of the Stock on the date the Incentive Option is granted.
5.3 DURATION OF OPTIONS. No Option shall be exercisable after the
expiration of 10 years from the date the Option is granted. In the case of a
10% Stockholder, no Incentive Option shall be exercisable after the expiration
of five years from the date the Incentive Option is granted.
5.4 AMOUNT EXERCISABLE. Each Option may be exercised from time to
time, in whole or in part, in the manner and subject to the conditions the
Committee, in its sole discretion, may provide in the Option Agreement, as long
as the Option is valid and outstanding provided that no Option may be
exercisable within six (6) months of the date of grant. To the extent that the
aggregate Fair Market Value (determined as of the time an Incentive Option is
granted) of the Stock with respect to which Incentive Options first become
exercisable by the Optionee during any calendar year (under this Plan and any
other incentive stock option plan(s) of the Company or any Affiliate) exceeds
$100,000, the Incentive Options shall be treated as Nonqualified Options. In
making this determination, Incentive Options shall be taken into account in the
order in which they were granted.
5.5 EXERCISE OF OPTIONS. Each Option shall be exercised by the
delivery of written notice to the Committee setting forth the number of shares
of Stock with respect to which the Option is to be exercised, together with:
(a) cash, certified check, bank draft, or postal or express money order payable
to the order of the Company for an amount equal to the option price of the
shares, or (b) if approved by a committee of the Board of Directors that is
composed solely of two or more Non-Employee Directors, Stock at its Fair Market
Value on the date of exercise, and/or any other form of payment which is
acceptable to such committee, and specifying the address to which the
certificates for the shares are to be mailed. Subject to Section 8.8, as
promptly as practicable after receipt of written notification and payment, the
Company shall deliver to the Optionee certificates for the number of shares
with respect to which the Option has been exercised, issued in the Optionee's
name. If shares of Stock are used in payment of the exercise price, the
aggregate Fair Market Value of the shares of Stock tendered must be equal to or
less than the aggregate exercise price of the shares being purchased upon
exercise of the Option, and any difference must be paid by cash, certified
check, bank draft, or postal or express money order payable to the Company.
Delivery of the shares shall be deemed effected for all purposes when a stock
transfer agent of the Company shall have deposited the certificates in the
United States mail, addressed to the Optionee, at the address specified by the
Optionee.
Whenever an Option is exercised by exchanging shares of Stock owned by
the Optionee, the Optionee shall deliver to the Company certificates registered
in the name of the Optionee representing a number of shares of Stock legally
and beneficially owned by the Optionee, free of all liens, claims, and
encumbrances of every kind, accompanied by stock powers duly endorsed in blank
by the record holder of the shares represented by the certificates, (with
signature guaranteed by a commercial bank or trust company or by a brokerage
firm having a membership on a
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<PAGE> 34
registered national stock exchange). The delivery of certificates upon the
exercise of Options is subject to the condition that the person exercising the
Option provide the Company with the information the Company might reasonably
request pertaining to exercise, sale or other disposition of an Option.
5.6 SUBSTITUTION OPTIONS. Options may be granted under this Plan
from time to time in substitution for stock options held by employees of other
corporations who are about to become employees of or affiliated with the
Company or any Affiliate as the result of a merger or consolidation of the
employing corporation with the Company or any Affiliate, or the acquisition by
the Company or any Affiliate of the assets of the employing corporation, or the
acquisition by the Company or any Affiliate of stock of the employing
corporation as the result of which it becomes an Affiliate of the Company. The
terms and conditions of the substitute Options granted may vary from the terms
and conditions set out in this Plan to the extent the Committee, at the time of
grant, may deem appropriate to conform, in whole or in part, to the provisions
of the stock options in substitution for which they are granted.
5.7 NO RIGHTS AS STOCKHOLDER. No Optionee shall have any rights
as a stockholder with respect to Stock covered by his Option until the date a
stock certificate is issued for the Stock.
ARTICLE VI
ADMINISTRATION
This Plan shall be administered by the Committee. All questions of
interpretation and application of this Plan and Options shall be subject to the
determination of the Committee. A majority of the members of the Committee
shall constitute a quorum. All determinations of the Committee shall be made
by a majority of its members. Any decision or determination reduced to writing
and signed by a majority of the members shall be as effective as if it had been
made by a majority vote at a meeting properly called and held. This Plan shall
be administered in such a manner as to permit the Options granted under it
which are designated to be Incentive Options to qualify as Incentive Options.
In carrying out its authority under this Plan, the Committee shall have full
and final authority and discretion, including but not limited to the following
rights, powers and authorities, to:
(a) determine the persons to whom and the time or times
at which Options will be made,
(b) determine the number of shares and the purchase price
of Stock covered in each Option, subject to the terms of the Plan,
(c) determine the terms, provisions and conditions of
each Option, which need not be identical,
(d) accelerate the time at which any outstanding Option
may be exercised,
(e) define the effect, if any, on an Option of the death,
disability, retirement, or termination of employment of the Optionee,
(f) prescribe, amend and rescind rules and regulations
relating to administration of this Plan, and
(g) make all other determinations and take all other
actions deemed necessary, appropriate, or advisable for the proper
administration of this Plan.
The actions of the Committee in exercising all of the rights, powers, and
authorities set out in this Article and all other Articles of this Plan, when
performed in good faith and in its sole judgment, shall be final, conclusive
and binding on all parties.
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<PAGE> 35
ARTICLE VII
AMENDMENT OR TERMINATION OF PLAN
The Board of Directors of the Company may amend, terminate or suspend
this Plan at any time, in its sole and absolute discretion; provided, however,
that to the extent required to maintain the status of any Incentive Option
under the Code, no amendment that would (a) change the aggregate number of
shares of Stock which may be issued under Incentive Options, (b) change the
class of employees eligible to receive Incentive Options, or (c) decrease the
exercise price for Incentive Options below the Fair Market Value of the Stock
at the time it is granted, shall be made without the approval of the Company's
stockholders. Subject to the preceding sentence, the Board shall have the
power to make any changes in this Plan and in the regulations and
administrative provisions under it or in any outstanding Incentive Option as in
the opinion of counsel for the Company may be necessary or appropriate from
time to time to enable any Incentive Option granted under this Plan to continue
to qualify as an incentive stock option or such other stock option as may be
defined under the Code so as to receive preferential Federal income tax
treatment.
ARTICLE VIII
MISCELLANEOUS
8.1 NO ESTABLISHMENT OF A TRUST FUND. No property shall be set
aside nor shall a trust fund of any kind be established to secure the rights of
any Optionee under this Plan. All Optionees shall at all times rely solely
upon the general credit of the Company for the payment of any benefit which
becomes payable under this Plan.
8.2 NO EMPLOYMENT OBLIGATION. The granting of any Option shall
not constitute an employment contract, express or implied, nor impose upon the
Company or any Affiliate any obligation to employ or continue to employ any
Optionee. The right of the Company or any Affiliate to terminate the
employment of any person shall not be diminished or affected by reason of the
fact that an Option has been granted to him.
8.3 TAX WITHHOLDING. The Company or any Affiliate shall be
entitled to deduct from other compensation payable to each Optionee any sums
required by federal, state, or local tax law to be withheld with respect to the
grant or exercise of an Option. In the alternative, the Company may require
the Optionee (or other person exercising the Option) to pay the sum directly to
the employer corporation. If the Optionee (or other person exercising the
Option) is required to pay the sum directly, payment in cash or by check of
such sums for taxes shall be delivered within ten days after the date of
exercise or lapse of restrictions. The Company shall have no obligation upon
exercise of any Option until payment has been received, unless withholding (or
offset against a cash payment) as of or prior to the date of exercise is
sufficient to cover all sums due with respect to that exercise. The Company
and its Affiliates shall not be obligated to advise an Optionee of the
existence of the tax or the amount which the employer corporation will be
required to withhold.
8.4 WRITTEN AGREEMENT. Each Option shall be embodied in a written
Option Agreement which shall be subject to the terms and conditions of this
Plan and shall be signed by the Optionee and by a member of the Committee and
an officer of the Company on behalf of the Committee and the Company. The
Option Agreement may contain any other provisions that the Committee in its
discretion shall deem advisable which are not inconsistent with the terms of
this Plan.
8.5 INDEMNIFICATION OF THE COMMITTEE AND THE BOARD OF DIRECTORS.
With respect to administration of this Plan, the Company shall indemnify each
present and future member of the Committee and the Board of Directors against,
and each member of the Committee and the Board of Directors shall be entitled
without further action his part to indemnity from the Company for, all expenses
(including attorneys' fees, the amount of judgments and the amount of approved
settlements made with a view to the curtailment of costs of litigation, other
than
B-8
<PAGE> 36
amounts paid to the Company itself) reasonably incurred by him in connection
with or arising out of any action, suit, or proceeding in which he may be
involved by reason of his being or having been a member of the Committee and/or
the Board of Directors, whether or not he continues to be a member of the
Committee and/or the Board of Directors at the time of incurring the
expenses--including, without limitation, matters as to which he shall be
finally adjudged in any action, suit or proceeding to have been found to have
been negligent in the performance of his duty as a member of the Committee or
of the Board of Directors. However, this indemnity shall not include any
expenses incurred by any member of the Committee and/or the Board of Directors
in respect of matters as to which he shall be finally adjudged in any action,
suit or proceeding to have been guilty of gross negligence or willful
misconduct in the performance of his duty as a member of the Committee or the
Board of Directors. In addition, no right of indemnification under this Plan
shall be available to or enforceable by any member of the Committee or the
Board of Directors unless, within 60 days after institution of any action, suit
or proceeding, he shall have offered the Company, in writing, the opportunity
to handle and defend same at its own expense. This right of indemnification
shall inure to the benefit of the heirs, executors or administrators of each
member of the Committee and the Board of Directors and shall be in addition to
all other rights to which a member of the Committee and the Board of Directors
may be entitled as a matter of law, contract, or otherwise.
8.6 GENDER. If the context requires, words of one gender when
used in this Plan shall include the others and words used in the singular or
plural shall include the other.
8.7 HEADINGS. Headings of Articles and Sections are included for
convenience of reference only and do not constitute part of this Plan and shall
not be used in construing the terms of this Plan.
8.8 OTHER COMPENSATION PLANS. The adoption of this Plan shall not
affect any other stock option, incentive or other compensation or benefit plans
in effect for the Company or any Affiliate, nor shall this Plan preclude the
Company from establishing any other forms of incentive or other compensation
for employees of the Company or any Affiliate.
8.9 OTHER OPTIONS. The grant of an Option shall not confer upon
an Optionee the right to receive any future or other Options under this Plan,
whether or not Options may be granted to similarly situated Optionees, or the
right to receive future Options upon the same terms or conditions as previously
granted.
8.10 ARBITRATION OF DISPUTES. Any controversy arising out of or
relating to the Plan or an Option Agreement shall be resolved by arbitration
conducted pursuant to the arbitration rules of the American Arbitration
Association. The arbitration shall be final and binding on the parties.
8.11 GOVERNING LAW. The provisions of this Plan shall be
construed, administered, and governed under the laws of the State of Texas.
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<PAGE> 37
PROXY
THE HOUSTON EXPLORATION COMPANY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF THE COMPANY
ANNUAL MEETING APRIL 24, 1997
The undersigned having received the notice and accompanying Proxy
Statement for said meeting hereby constitutes and appoints JAMES G. FLOYD and
JAMES F. WESTMORELAND (the "Proxy Committee"), and each of them, his true and
lawful agents and proxies with power of substitution in each, to represent and
vote at the Annual Meeting to be held at 10:00 a.m. on April 24, 1997 at the
Four Seasons Hotel, 1300 Lamar Street, Houston, Texas, or, at any adjournment
thereof on all matters coming before said meeting, all shares of THE HOUSTON
EXPLORATION COMPANY which the undersigned may be entitled to vote. The above
proxies are hereby instructed to vote as shown on the reverse side of this
card.
(CONTINUED ON REVERSE SIDE)
<PAGE> 38
[X] PLEASE MARK YOUR VOTES
AS IN THIS EXAMPLE.
1. Approval of Certificate Amendment FOR AGAINST ABSTAIN
to remove the classification [ ] [ ] [ ]
of the Board of Directors
2. Election of Directors; Nominees: James FOR WITHHOLD
G. Floyd, Robert B. Catell, Gordon F. (except as AUTHORITY
Ahalt, Russell D. Gordy, James Q. marked to vote for all
Riordan, Lester H. Smith below) nominees
[ ] [ ]
For, except vote withheld from the
following nominee(s):
------------------
3. Approval of 1996 Stock Option Plan FOR AGAINST ABSTAIN
[ ] [ ] [ ]
4. Ratification and approval of Arthur FOR AGAINST ABSTAIN
Andersen LLP as the Company's [ ] [ ] [ ]
independent public accountants for the
fiscal year ending December 31, 1997
5. In the discretion of the Proxy Committee, FOR AGAINST ABSTAIN
upon other matters as may properly come [ ] [ ] [ ]
before the meeting
This proxy, when properly executed, You are encouraged to specify your
will be voted in the manner directed choices by marking the appropriate
by the undersigned stockholder. If no boxes above, but you need not mark any
direction is made, this proxy will be boxes if you wish to vote in accordance
voted FOR proposals (1), (2), (3) and with the Board of Directors'
(4). The Proxy Committee is authorized recommendations. The Proxy Committee
to vote in their discretion on any cannot vote your shares unless you
other matters that may properly come sign and return this card.
before the meeting.
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
Date
SIGNATURE(S)
----------------------------------------- ----------------------
NOTE: Executors, administrators, trustees, etc., please give full title as
such. If a corporation, please sign full corporate name by duly
authorized officer. Joint owners should each sign personally.
