<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[ X ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
THE HOUSTON EXPLORATION COMPANY
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(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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(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)(4) and
0-11.
1) Title of each class of securities to which transaction
applies:
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2) Aggregate number of securities to which transaction applies:
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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):
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4) Proposed maximum aggregate value of transaction:
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5) Total fee paid:
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[ ] 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:
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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
1100 LOUISIANA, SUITE 2000
HOUSTON, TEXAS 77002
March 19, 1998
TO OUR STOCKHOLDERS:
You are cordially invited to attend the 1998 Annual Meeting of
Stockholders of The Houston Exploration Company to be held on Thursday, April
23, 1998, at 10:00 a.m., local time, at the DoubleTree Hotel--Allen Center, 400
Dallas 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 23rd.
Sincerely,
James G. Floyd
President
<PAGE> 3
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD APRIL 23, 1998
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 23, 1998, at 10:00
a.m., local time, at the DoubleTree Hotel--Allen Center, 400 Dallas Street,
Houston, Texas, for the following purposes:
1. To elect eight Directors of the Company.
2. To approve an amendment to the Company's 1996 Stock
Option Plan providing for the grant of options to non-employee
directors of the Company;
3. To ratify and approve the appointment of Arthur
Andersen LLP as the Company's independent public accountants for its
fiscal year ending December 31, 1998; and
4. 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 February 27,
1998 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 19, 1998
<PAGE> 4
THE HOUSTON EXPLORATION COMPANY
1100 LOUISIANA, SUITE 2000
HOUSTON, TEXAS 77002
PROXY STATEMENT
FOR
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD APRIL 23, 1998
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 23, 1998 (the
"Annual Meeting"), at 10:00 a.m., local time, at the DoubleTree Hotel--Allen
Center, 400 Dallas 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, 1100 Louisiana, Suite 2000, Houston, Texas 77002. 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 1100
Louisiana, Suite 2000, Houston, Texas 77002. 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 19, 1998.
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. The election of eight Directors of the Company;
2. A proposal to approve an amendment to the Company's
1996 Stock Option Plan providing for the grant of options to
non-employee directors of the Company;
3. 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, 1998; and
4. Such other business as may properly come before the
meeting or any adjournments thereof.
QUORUM AND VOTING
The close of business on February 27, 1998 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 23,360,903 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 plurality vote is
required for the election of Directors in Proposal Number 1. Accordingly, if a
quorum is present at the Annual Meeting, the eight persons 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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PROPOSAL NUMBER 1:
ELECTION OF DIRECTORS
Each of the persons named below has been nominated by the Board of
Directors for election as a Director of the Company until the 1999 Annual
Meeting of Stockholders or until his successor has been duly elected and
qualified. The eight nominees for election as Directors that receive the most
votes cast at the Annual Meeting will be elected as Directors. Each of the
nominees listed below 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.
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.
<TABLE>
<CAPTION>
YEAR FIRST
NAME AGE POSITION WITH THE COMPANY BECAME A DIRECTOR
---- --- ------------------------- -----------------
<S> <C> <C> <C>
James G. Floyd . . . . . . . . 61 President and Chief Executive Officer 1986
and Director
Robert B. Catell . . . . . . . 61 Chairman of the Board of Directors 1986
Gordon F. Ahalt . . . . . . . . 70 Director 1996
Russell D. Gordy . . . . . . . 47 Director 1986
Craig G. Matthews . . . . . . . 55 Director 1993
James Q. Riordan . . . . . . . 70 Director 1996
Lester H. Smith . . . . . . . . 55 Director 1996
Donald C. Vaughn . . . . . . . 62 Director 1997
</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 Chairman of the Board, President and Chief Executive Officer of
KeySpan Energy Corporation ("KeySpan") since 1997. Brooklyn Union became a
wholly-owned subsidiary of KeySpan in September 1997. Mr. Catell was Chief
Executive Officer and President of Brooklyn Union 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 and Independence Savings Bank;
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 and Vice Chairman of The Business Council of
New York State, Inc. and Gas Research Institute; and Director of New York City
Partnership and New York State Energy Research and Development Authority.
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<PAGE> 7
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 through 1979 and as Chief Financial
Officer of Ashland Oil Inc. from 1980 through 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 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., Gurnee 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 and Executive Vice President - Utility Division of KeySpan since
September 1997, 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 Vice President 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, and Utah
Coal and Lumber Company, and a member of the Board of Directors, or equivalent
governing body in the case of partnerships or limited liability companies, of
SG Interests I-V, SG Gathering, Inc. and Gurnee Gas Company, L.L.C.
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
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<PAGE> 8
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. PROXIES SOLICITED HEREBY WILL BE
VOTED FOR ALL EIGHT NOMINEES UNLESS THE STOCKHOLDERS SPECIFY OTHERWISE IN THEIR
PROXIES.
DIRECTORS' MEETINGS AND COMPENSATION
During 1997, the Board of Directors met six times and took certain
additional actions by unanimous written consents in lieu of meetings. During
1997, 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 $5,000 per
calendar quarter and $1,000 per board meeting and $1,000 per committee meeting
attended. Chairman of committees of the Board of Directors receive an
additional fee of $500 per committee meeting. Such fees are payable in cash
or, at the option of the Director, may be deferred in an unfunded phantom stock
or interest-bearing account, pursuant to the Company's Deferred Compensation
Plan for Non- Employee Directors.
If Proposal Number 2 is approved by the Company's stockholders at the
Annual Meeting, "non-employee directors" (as such term is defined in Rule 16b-3
under the Securities Exchange Act of 1934, as amended, "Non-Employee
Directors") will be entitled to receive grants of options under the Amended
1996 Plan (as hereinafter defined). Under the Amended 1996 Plan, (i) each
individual who served as a Non-Employee Director at the time the Amended 1996
Plan was adopted by the Board of Directors is entitled to receive an option to
purchase 5,000 shares of Common Stock on such date, (ii) each individual who
thereafter becomes a Non-Employee Director upon his or her first election to
the Board of Directors is entitled to receive an option to purchase 5,000
shares of Common Stock on the date of his or her election as a Non- Employee
Director, and (iii) each Non-Employee Director in office on September 20 of
each year the Amended 1996 Plan is in effect will receive an option to purchase
2,000 shares of Common Stock effective on such date. Each Non-Employee
Director in office on September 20, 1997 received (i) an option to purchase
5,000 shares of Common Stock on September 22, 1997 (in respect of his initial
grant) and (ii) an option to purchase 2,000 shares of Common Stock on September
22, 1997 (in respect of his annual grant), subject to the approval of the
Amended 1996 Plan by the Company's stockholders. See "Proposal Number 2:
Approval of Amendment to the 1996 Stock Option Plan."
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, who serves as Chairman. 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
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<PAGE> 9
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 1997, the Executive Committee met one time, the Audit Committe
met three times and the Compensation Committe met twice. During 1997, 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 2:
APPROVAL OF AMENDMENT TO 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 Company's initial
public offering, the Board of Directors adopted and the Company's sole
stockholder approved the Company's 1996 Stock Option Plan (the "1996 Plan").
The 1996 Plan was subsequently approved by the Company's stockholders at the
Company's 1997 Annual Meeting of Stockholders. 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.
On September 8, 1997, the Compensation Committee approved the
amendment and restatement of the 1996 Plan to provide for the grant of options
to Non-Employee Directors (as so amended and restated, the "Amended 1996
Plan"). The Amended 1996 Plan was subsequently ratified by the Board of
Directors on October 23, 1997, subject to approval by the Company's
stockholders. The purpose of the amendment and restatement of the 1996 Plan is
to promote the interests of the Company by aiding the Company in attracting and
retaining qualified Non-Employee Directors and to further align the interests
of such Directors with those of stockholders through stock options.
If Proposal Number 2 is approved by the Company's stockholders at the
Annual Meeting, Non-Employee Directors will be entitled to receive grants of
options under the Amended 1996 Plan. Under the Amended 1996 Plan, (i) each
individual who served as a Non-Employee Director at the time the Amended 1996
Plan was adopted by the Board of Directors is entitled to receive an option to
purchase 5,000 shares of Common Stock on such date, (ii) each individual who
thereafter becomes a Non-Employee Director upon his or her first election to
the Board of Directors is entitled to receive an option to purchase 5,000
shares of Common Stock on the date of his or her election as a Non-Employee
Director, and (iii) each Non-Employee Director in office on September 20 of
each year the Amended 1996 Plan is in effect will receive an option to purchase
2,000 shares of Common Stock effective on such date. Each Non-Employee
Director in office on September 20, 1997 received (i) an option to purchase
5,000 shares of Common Stock on September 22, 1997, (in respect of his initial
grant) and (ii) an option to purchase 2,000 shares of Common Stock on September
22, 1997 (in respect of his annual grant), subject in each case to the approval
of the Amended 1996 Plan by the Company's stockholders. See "Proposal Number
2: Approval of Amendment to the 1996 Stock Option Plan."
The terms of the Amended 1996 Plan are summarized below. In addition,
the full text of the Amended 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 Amended 1996 Plan.
SUMMARY OF THE AMENDED 1996 PLAN
Purpose. The Amended 1996 Plan is for Non-Employee Directors,
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
as Directors or in the employ of the Company.
Effective Dates of 1996 Plan and Amended 1996 Plan. The 1996 Plan
became effective as of May 9, 1996. The Amended 1996 Plan became effective as
of September 22, 1997, subject to stockholder approval at the Annual Meeting.
No Option shall be granted pursuant to the Amended 1996 Plan after May 8, 2006.
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<PAGE> 10
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 and those individuals who are Non-Employee
Directors; provided that Non-Employee Directors shall be eligible only to
receive Nonqualified Options on the terms described below under "-- Options
Granted to Non-Employee Directors." "Incentive Option" means an Option granted
under the Amended 1996 Plan which is designated as an "Incentive Option" and
satisfies the requirements of Section 422 of the Internal Revenue Code of 1986,
as amended (the "Code"). "Nonqualified Option" means an Option granted under
the Amended 1996 Plan other than an Incentive Option.
Options. The price at which Common Stock may be purchased under an
Option shall not be less than 100% of the fair market value of the Common Stock
on the date of grant; provided that the price at which Common Stock may be
purchased under a Nonqualified Option granted to a Non-Employee Director shall
be equal to 100% of the fair market value of the Common Stock on the date of
grant. In the case of any 10% holder of Common Stock, the price at which
shares of Common Stock 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
1,697,238 Options have been granted and 1,640,098 are outstanding.
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 Amended 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.
Options Granted to Non-Employee Directors. Subject to stockholders
approval of the Amended 1996 Plan at the Annual Meeting, (i) each individual
who was a Non-Employee Director on September 20, 1997 automatically received a
Nonqualified Option for 5,000 shares of Stock on September 22, 1997, (ii) each
individual who becomes a Non-Employee Director upon his or her first election
to the Board of Directors after September 20, 1997 shall automatically receive
a Non-Qualified Option for 5,000 shares of Stock on the date of his or her
election as a Non-Employee Director, and (iii) on September 20 of each year
that the Amended 1996 Plan is in effect (commencing with September 20, 1997),
each individual who is a Non-Employee Director on such date shall automatically
receive a Nonqualified Option for 2,000 shares of Stock on such date. Each
Nonqualified Option granted to a Non-Employee Director shall be fully vested
and exercisable on the later of its date of grant or the date of the approval
of the Amended 1996 Plan and shall have a term of 10 years from the date the
Option is granted; provided, however, that if the Non-Employee Director ceases
to serve as a director of the Company for any reason, including death, each
such Option shall terminate on the earlier to occur of (i) the first
anniversary of the date on which such Non-Employee Director ceased to serve as
a director of the Company and the (ii) 10th anniversary of the date of grant of
such Option.
Administration. To comply with Section 162(m) of the Code, the
Amended 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 Amended 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 Amended 1996 Plan and Options shall be subject
-7-
<PAGE> 11
to the determination of the Committee. The Amended 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 Amended 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
Amended 1996 Plan. The Committee may not, however, modify any of the terms of
the Nonqualified Options granted to Non-Employee Directors.
Reserved Shares. The total number of shares of Common Stock with
respect to which Options may be granted under the Amended 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 Amended 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
Amended 1996 Plan ("Optionee") during any period of three consecutive years is
1,125,000 shares.
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 Amended 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 Amended 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 Amended 1996 Plan. The Board of
Directors of the Company may amend, terminate or suspend the Amended 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 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.
-8-
<PAGE> 12
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 2, AND PROXIES EXECUTED AND RETURNED WILL BE SO VOTED UNLESS
CONTRARY INSTRUCTIONS ARE INDICATED THEREON.
PROPOSAL NUMBER 3:
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, 1998, 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 3, 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 . . . . . 61 President and Chief Executive Officer and Director
Randall J. Fleming . . . 56 Senior Vice President -- Exploration and Production
Thomas W. Powers . . . . 53 Senior Vice President -- Business Development and Finance and
Treasurer
Charles W. Adcock . . . . 44 Vice President--Project Development
Sammye L. Dees . . . . . 62 Vice President -- Land
James F. Westmoreland . . 42 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.
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 Amended 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 1997:
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 1997 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 Amended 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 Amended
1996 Plan awarded to executive officers in 1997, are consistent with the
Committee's emphasis on trading-off annual incentive compensation for enhanced
long-term incentives linked to stockholder 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
Amended 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 Amended 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. While the Committee does not adhere to
any firmly established formulas or schedules for the
-11-
<PAGE> 15
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, and increased to
$390,000, effective October 1, 1997. Mr. Floyd actually received $354,000 in
base salary in 1997 as well as a cash bonus of $295,000 in conjunction with the
cash bonuses granted to all other executive officers of the Company. The
Board of Directors sets annual financial targets for the Company under the
categories of return on stockholder value (measured against a peer group of
companies), earnings per share, and net asset value change (the "Annual
Financial Targets"). Mr. Floyd was eligible to receive up to 60% of his base
salary as a bonus under the Company's incentive compensation plan during 1997,
and the Company achieved an average of 126% of its 1997 Annual Financial
Targets. The Company used Mr. Floyd's year-end base salary rate of $390,000 in
calculating his 1997 bonus award, and accordingly, Mr. Floyd received $295,000
as a cash bonus for 1997. Mr. Floyd also received a payment of $200,000 in
1997 under the terms of certain Phantom Stock Rights awarded in 1996.
Additionally, Mr. Floyd was granted Options pursuant to the Amended 1996 Plan
to purchase 10,000 shares of Common Stock. The Options become exercisable and
payable, respectively, in five equal annual installments from the date of
grant. The Options 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 stockholder 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 and 1997 to its Chief
Executive Officer and each other person serving as an executive officer during
1997 who earned $100,000 or more in combined salary and bonus during such year
(collectively, the "Named Executive Officers"):
<TABLE>
<CAPTION>
Long-Term
Compensation
-----------------------
Annual Compensation (1) Securities
Name and ---------------------- Underlying Phantom All Other
Principal Position Year Salary Bonus Options(2) Payouts(3) Compensation
---------------------------------------- ---- ------ ----- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
James G. Floyd . . . . . . . . . . . . 1997 $ 354,000 $ 295,000 10,000 $ 200,000 $ 91,000(4)
President and Chief Executive Officer 1996 309,000 330,000 335,992 -- 314,000(4)
Randall J. Fleming . . . . . . . . . . 1997 228,000 158,000 10,000 104,000 394,000(4)
Senior Vice President--Exploration 1996 204,000 175,000 174,996 -- 300,000(4)
and Production
Thomas W. Powers(6) . . . . . . . . . . 1997 146,000 91,000 10,000 63,000 --
Senior Vice President--Business 1996 35,000 104,000 104,997 -- --
Development and Finance and Treasurer
James F. Westmoreland . . . . . . . . . 1997 136,000 85,000 10,000 50,000 44,000(4)
Vice President, Chief Accounting 1996 121,000 87,000 83,998 -- 30,000(4)
Officer, Comptroller and Secretary
Charles W. Adcock . . . . . . . . . . . 1997 129,000 79,000 10,000 36,000 --
Vice President--Project Development 1996 125,000 67,000 60,000 -- 1,211,000(5)
Sammye L. Dees . . . . . . . . . . . . 1997 115,000 37,000 5,000 11,000 327,000(4)
Vice President--Land 1996 111,000 27,000 15,000 -- 261,000(4)
</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) Phantom Stock Rights ("PSRs") granted effective December 16, 1996
and, of which, 20% are payable on December 16th of each of the years
1997 through 2001. 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 ($21.4125 in 1997), multiplied by the number of PSRs
payable on payout date.
(4) Consists of distributions attributable to overriding royalty interests
and net profits interests in properties of the Company. See "Certain
Transactions -- Transactions Between the Company and Management."
(5) Consists of distributions received in exchange for the termination of
Mr. Adcock's rights under the long-term incentive program of FRI. See
"Certain Transactions--Transaction Between the Company and
Management."
(6) Prior to September 30, 1996, Mr. Powers was an employee of Brooklyn
Union.
-13-
<PAGE> 17
Options Granted in 1997
The following table provides certain information with respect to
Options granted to the Chief Executive Officer and to each of the Named
Executive Officers during 1997 under the Company's Amended 1996 Plan:
<TABLE>
<CAPTION>
Individual Grants(1)
-------------------------------------------------
Percent of
Total Potential Realizable Value
Number of Options at Assumed Annual
Securities Granted to Rates of Stock Price
Underlying Employees Exercise Appreciation for Option Term(2)
Options in Fiscal Price Expiration ------------------------------
Name Granted Year ($/Sh) Date 5% 10%
- - -------------------------- ------------ ----------- ------------ ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
James G. Floyd . . . . . 10,000 3.4% $ 20.813 9/22/07 $ 130,889 $ 331,698
Randall J. Fleming . . . 10,000 3.4% 20.813 9/22/07 130,889 331,698
Thomas W. Powers . . . . 10,000 3.4% 20.813 9/22/07 130,889 331,698
James F. Westmoreland . . 10,000 3.4% 20.813 9/22/07 130,889 331,698
Charles W. Adcock . . . . 10,000 3.4% 20.813 9/22/07 130,889 331,698
Sammye L. Dees . . . . . 5,000 1.7% 20.813 9/22/07 65,444 165,849
</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.
Aggregated Option Exercises in 1997 and Fiscal Year End Option Values
The following table provides certain information regarding (i) stock
options exercised by the Named Executive Officers during the fiscal year ended
December 31, 1997; (ii) the number of shares of Common Stock underlying
unexercised options held by each Named Executive Officer on December 31, 1997;
and (iii) the value, at December 31, 1997, of exercisable and unexercisable
"in-the-money" stock options held by each of the Named Executive Officers:
<TABLE>
<CAPTION>
Number of Value of Unexercised
Unexercised In-the-Money
Options at Options at
Year End Year End (2)
---------------------------- ----------------- --------
Shares
Acquired on Value
Name Exercise Realized (1) Exercisable Unexercisable Exercisable Unexercisable
------------------------- ------------- ---------- -------------- ------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
James G. Floyd . . . . . -- -- 67,198 278,794 $ 193,195 $ 777,782
Randall J. Flemming . . . -- -- 34,999 149,997 100,623 402,491
Thomas W. Powers . . . . -- -- 20,999 93,998 60,373 241,493
James R. Westmoreland . . 16,800 $ 166,950 -- 77,198 -- 193,194
Charles W. Adcock . . . . -- -- 12,000 58,000 30,000 120,000
Sammye L. Dees . . . . . -- -- 3,000 17,000 8,625 34,500
</TABLE>
- - ------------------------
(1) The value realized upon the exercise of a stock option is equal to the
difference between the market price on the date of exercise and
exercise price of the stock option.
(2) The value of each unexercised in-the-money stock option is equal to
the difference between the closing price of the Company's common stock
on the NYSE on December 31, 1997 of $18.375 per share and the exercise
price of the stock option.
-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, Newfield Exploration Company, Noble Affiliates, Inc., Nuevo
Energy Company, Pogo Producing Co., Seagull Energy Corporation, United Meridian
Corporation and Vastar Resources, Inc.). The Peer Group was revised for the
year ended 1997 to exclude Louisiana Land & Exploration which was acquired by
Burlington Resources Inc. during 1997. The index of Peer Group companies is
weighted according to the respective market capitalization of its component
companies as of December 31, 1997. 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, 1997. 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
[GRAPH - line graph]
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------------------------
9/20/96 12/31/96 12/31/97
- - -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
The Houston Exploration Company 100 112.90 118.55
- - -------------------------------------------------------------------------------------------------------------
Peer Group Index 100 119.94 99.55
- - -------------------------------------------------------------------------------------------------------------
Standard & Poor's 500 Index 100 108.38 144.54
- - -------------------------------------------------------------------------------------------------------------
</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 current annual base salaries of $390,000,
$250,000, $160,000, $150,000, and $140,000, respectively. Under such
agreements, Messrs. Floyd, Fleming, Powers, Westmoreland and Adcock are
entitled to annual incentive bonuses of 70%, 60%, 55%, 55% and 55%,
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 Amended 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 base rate of compensation, Messrs. Floyd, Fleming,
Powers, Westmoreland and Adcock would be entitled to lump sum severance
payments of $1,166,100, $747,500, $478,400, $448,500, and $418,600,
respectively, if terminated without cause or by the employee for good reason.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
Effective immediately prior to the Company's initial public 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.
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 KeySpan. As a result of the
termination of certain options to purchase Common Stock held by Mr. Catell,
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<PAGE> 20
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 ANDAFFILIATES
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.
Effective January 1, 1997, the Company entered into an agreement to
sell to a subsidiary of Brooklyn Union certain interests in onshore producing
wells of the Company that produce from formations that qualify for tax credits
under Section 29 of the Internal Revenue Code ("Section 29"). Section 29
provides for a tax credit from non- conventional fuel sources such as oil
produced from shale and tar sands and natural gas produced from geopressured
brine, Devonian shale, coal seams and tight sands formations. Brooklyn Union
acquired an economic interest in wells that are qualified for the tax credits
and in exchange, the Company (i) retained a volumetric production payment and a
net profits interest of 100% in the properties (ii) received a cash down
payment of $1.4 million and (iii) receives a quarterly payment of $0.75 for
every dollar of tax credit utilized. The Company manages and administers the
daily operations of the properties in exchange for an annual management fee of
$100,000. At December 31, 1997, the balance sheet effect of this transaction
was a $1.4 million reduction to the full cost pool for the down payment. The
income statement effect for the year ended December 31, 1997 was a reduction to
income tax expense of $1.2 million representing benefits received from the
Section 29 tax credits.
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 Company's
initial public 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 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 Company's initial public 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 Company's initial public
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
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<PAGE> 21
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.
The Company reimburses Brooklyn Union for certain general and
administrative costs. During the years ended December 31, 1995, 1996 and 1997,
the Company paid Brooklyn Union $0.7 million, $0.6 million and $0.1 million,
respectively, in general and administrative reimbursements.
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. During 1995 and 1996, affiliates of Mr. Floyd obtained a
5% working interest in 144 wells (including 142 wells in the Charco field)
operated by the Company pursuant to such agreement. During 1995, 1996 and
1997, affiliates of the Company's President and Chief Executive Officer paid
$0.7 million, $1.4 million and $3.3 million, respectively, in expenses
attributable to working interests owned in properties operated by the Company,
and received $0.9 million, $1.6 million and $3.9 million, respectively, in
distribution attributable to such working interests. The termination of the
Company's previous employment agreement with Mr. Floyd in September 1996
terminated Mr. Floyd's right to obtain working interests on any further
properties, but did not affect working interests in properties of the Company
acquired by Mr. Floyd or his affiliates prior to the date of termination.
The Company loaned 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 has 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 bear interest at an interest
rate equal to the Company's cost of borrowing under the Credit Facility. Mr.
Floyd's obligations under the agreement are secured by a pledge of his working
interest in, and the production from, such properties. As of December 31,
1997, the outstanding balance owed by Mr. Floyd under the agreement was $3.7
million and the loan 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. The Company assigned a 2% net profits interest to Mr. Floyd in
two properties acquired by the Company in 1995. No assignments were made in
1996 or 1997. The termination of the Company's previous employment agreement
with Mr. Floyd in September 1996 terminated Mr. Floyd's right to receive any
further assignments but did 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 equivalent to a four percent net revenue interest
in certain properties of the Company at the time such properties were acquired
by the Company. The Company assigned
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<PAGE> 22
overriding royalty interests to Mr. Fleming, Ms. Dees and Mr. Westmoreland in
two properties acquired by the Company in 1995. No assignments were made in
1996 or 1997. The termination of the Company's previous employment agreement
with Mr. Floyd in September 1996 terminated all rights to any further
assignments but did not affect overriding royalty interests in properties of
the Company assigned to key employees prior to the date of termination.
The Company's previous employment agreement with Mr. Floyd also
provided for the assignment of a 6.75% after program-payout working interest in
the leases upon which the Company began drilling an exploratory well (whether
or not successful) during a calendar year. As of the date of this Proxy
Statement, Mr. Floyd had not received any distributions under this arrangement.
The termination of the Company's previous employment agreement with Mr. Floyd
in September 1996 terminated Mr. Floyd's right to receive any further
assignments but did not affect after program-payout working interests on
properties of the Company assigned to Mr. Floyd prior to the date of
termination. On September 19, 1996, Mr. Floyd exchanged certain after
program-payout working interests received under his previous employment
agreement for 145,161 shares of Common Stock with a value of approximately $2.3
million.
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.
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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 February 27, 1998 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.
<TABLE>
<CAPTION>
Common Stock Percent
and of
Common Stock Common Common Stock Common
Name of Beneficial Owner Equivalents Stock(1) Equivalents(2) Stock
------------------------ ----------- ----- ----------- -----
<S> <C> <C> <C> <C>
The Brooklyn Union Gas Company . . 15,295,215 15,295,215 -- 65%
One Metrotech Center
Brooklyn, New York 11201-3850
James G. Floyd . . . . . . . . . . 183,201 145,761 37,440 *
Randall J. Fleming . . . . . . . . 21,582 2,100 19,482 *
Lester H. Smith . . . . . . . . . . 14,194 13,553 641 *
Thomas W. Powers . . . . . . . . . 12,790 1,100 11,690 *
Russell D. Gordy . . . . . . . . . 10,745 10,000 745 *
James F. Westmoreland . . . . . . . 9,758 356 9,402 *
Charles W. Adcock . . . . . . . . . 8,706 2,014 6,692 *
Robert B. Catell . . . . . . . . . 4,000 4,000 -- *
Sammye L. Dees . . . . . . . . . . 2,440 294 2,146 *
James Q. Riordan . . . . . . . . . 2,154 500 1,654 *
Gordon F. Ahalt . . . . . . . . . . 2,000 2,000 -- *
Craig G. Matthews . . . . . . . . . 1,000 1,000 -- *
Donald C. Vaughn . . . . . . . . . 641 -- 641 *
All Directors and officers as a
group
(13 persons) . . . . . . . . . 273,211 182,678 90,533 *
</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.
(2) Includes Phantom Stock Rights granted to each of the Named Executive
Officers in 1996 and includes phantom stock accumlated by
Non-Employee Directors pursuant to the Company's Deferred Compensation
Plan for Non- Employee Directors.
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,
1997, all Section 16(a) filing requirements applicable to its officers,
directors and 10% stockholders were complied with in a timely manner.
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<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 19, 1998, 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, 1100 LOUISIANA, SUITE 2000, HOUSTON, TEXAS 77002.
By Order of the Board of Directors
James F. Westmoreland
Secretary
March 19, 1998
Houston, Texas
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<PAGE> 25
APPENDIX A
THE HOUSTON EXPLORATION COMPANY
1996 STOCK OPTION PLAN
(AS AMENDED AND RESTATED)
ARTICLE I
PLAN
1.1 PURPOSE. This Plan is a plan for non-employee directors of
the Company and 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
as directors or in the employ of the Company or any of its Affiliates.
1.2 EFFECTIVE DATE OF PLAN. This Plan became effective May 9,
1996. This amendment and restatement of the Plan shall be effective September
22, 1997, 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
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<PAGE> 26
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 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.
A-2
<PAGE> 27
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 Stock Market; or (c) if the Stock is not listed on the Nasdaq Stock
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;
provided that for purposes of Article III, Section 4.1, Article V and the
related provisions of this Plan "Non-Employee Director" means a member of the
Board of Directors who is not an employee, consultant or advisor of the Company
or its subsidiaries.
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.
A-3
<PAGE> 28
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, and those individuals who are
Non-Employee Directors; provided, however, that Non-Employee Directors shall be
eligible only to receive Nonqualified Options pursuant to Section 5.8.
Further, 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 (other than Non-Employee Directors), 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, consultant or
advisor of the Company or any of its Affiliates shall be as determined by the
Committee. Non-Employee Directors shall automatically receive grants of
Nonqualified Options as provided in Section 5.8.
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
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<PAGE> 29
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.
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
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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 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; provided,
however, that the Options granted to Non-Employee Directors pursuant to Section
5.8 shall be Nonqualified Options.
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;
provided, however, the price at which Stock may be purchased under a
Nonqualified Option granted to a Non-Employee Director pursuant to Section 5.8
shall be equal to the greater of (a) or (b) above 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. Except as provided in Section 5.8 below,
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.
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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 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.
5.8 DIRECTOR OPTIONS.
(a) Each individual who is a Non-Employee Director on
September 20, 1997 shall automatically receive a Nonqualified Option
for 5,000 shares of Stock on September 22, 1997.
(b) Each individual who becomes a Non-Employee Director
upon his or her first election to the Board of Directors after
September 20, 1997 shall automatically receive a Non-Qualified Option
for 5,000 shares of Stock on the date of his or her election as a
Non-Employee Director.
(c) On September 20 of each year that this Plan is in
effect (commencing with September 20, 1997), each individual who is a
Non-Employee Director on such date shall automatically receive a
Nonqualified Option for 2,000 shares of Stock on such date; provided,
however, that if September 20 of any year in which such Options are to
be granted falls on a day which is not a business day, such Options
shall be granted on the next following business day.
(d) Each Nonqualified Option granted to a Non-Employee
Director pursuant to this Section 5.8 will be subject to the following
provisions:
(i) Each such Option shall be fully vested and
exercisable on the later of its date of grant or the date this
amendment is approved as provided in Section 1.2.; and
(ii) Each such Option shall have a term of 10 years from
the date the Option is granted; provided, however, that if the
Non-Employee Director ceases to serve as a director of the Company for
any reason, including death, each such Option shall terminate on the
earlier to occur of (A) the first anniversary of the date on which
such Non-Employee Director ceased to serve as a director of the
Company and the (B) 10th anniversary of the date of grant of such
Option.
(e) In the event that the number of shares of Stock
available for grant under this Plan is insufficient to make all
automatic grants provided for in this Section 5.8 on the applicable
date, then each Non-Employee Director shall receive a Nonqualified
Option for his or her pro rata share of the total number of
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shares of Stock then available for grant under this Plan and shall
have no right to receive a grant with respect to the deficiencies in
the number of available shares, and all future grants under this
Section 5.8 shall terminate.
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.
Notwithstanding the foregoing, the Committee shall not have the authority or
discretion to modify any of the terms of the Nonqualified Options automatically
granted to Non-Employee Directors pursuant to Section 5.8. 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.
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
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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 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
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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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