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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NO. 001-11899
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THE HOUSTON EXPLORATION COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 22-2674487
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
1100 LOUISIANA STREET, SUITE 2000
HOUSTON, TEXAS 77002-5219
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
(713) 830-6800
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
-------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
As of August 11, 1998, 23,896,340 shares of Common Stock, par value
$.01 per share, were outstanding.
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THE HOUSTON EXPLORATION COMPANY
TABLE OF CONTENTS
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Page
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FACTORS AFFECTING FORWARD LOOKING STATEMENTS.............................................................. 3
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets -- June 30, 1998 and December 31, 1997.......................... 4
Consolidated Statements of Operations -- Three-Month and Six Month Periods Ended
June 30, 1998 and 1997.................................................................. 5
Consolidated Statements of Cash Flows -- Six Month Periods Ended
June 30, 1998 and 1997.................................................................. 6
Notes to Consolidated Financial Statements.................................................. 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................................. 12
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K........................................................... 20
SIGNATURES............................................................................................... 21
</TABLE>
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FACTORS AFFECTING FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains certain "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1993, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The
words "anticipate," "believe," "expect," "estimate," "project" and similar
expressions are intended to identify forward-looking statements. Without
limiting the foregoing, all statements under the caption "Item 2--Management's
Discussion and Analysis of Financial Condition and Results of Operations"
relating to the Company's anticipated capital expenditures, future cash flows
and borrowings, pursuit of potential future acquisition opportunities and
sources of funding for exploration and development are forward-looking
statements. Such statements are subject to certain risks and uncertainties, such
as the volatility of natural gas and oil prices, uncertainty of reserve
information and future net revenue estimates, reserve replacement risks,
drilling risks, operating risks of natural gas and oil operations, acquisition
risks, substantial capital requirements, government regulation, environmental
matters and competition. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from those anticipated, believed, expected, estimated or
projected. For additional discussion of such risks, uncertainties and
assumptions, see "Items 1 and 2. Business and Properties" and "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in the Company's Annual Report on Form 10-K filed under the
Securities Act of 1934, as amended.
Unless otherwise indicated, references to "Houston Exploration" or the
"Company" refer to The Houston Exploration Company and its subsidiaries on a
combined basis.
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PART I. FINANCIAL INFORMATION
ITEMS 1. FINANCIAL STATEMENTS
THE HOUSTON EXPLORATION COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
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(UNAUDITED)
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ASSETS:
Cash and cash equivalents.................................................... $ 4,063 $ 4,745
Accounts receivable.......................................................... 25,581 37,898
Accounts receivable-- Brooklyn Union......................................... 357 1,303
Inventories.................................................................. 1,423 1,265
Prepayments and other........................................................ 1,226 645
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Total current assets............................................... 32,650 45,856
Natural gas and oil properties, full cost method
Unevaluated properties..................................................... 121,449 104,075
Properties subject to amortization......................................... 679,420 566,868
Other property and equipment................................................. 9,296 9,341
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810,165 680,284
Less: Accumulated depreciation, depletion and amortization................... (275,986) (236,546)
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534,179 443,738
Other assets................................................................. 3,414 1,797
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TOTAL ASSETS....................................................... $ 570,243 $ 491,391
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LIABILITIES:
Accounts payable and accrued expenses........................................ $ 31,052 $ 42,432
Deferred stock obligation.................................................... -- 8,825
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Total current liabilities.......................................... 31,052 51,257
Long-term debt............................................................... 188,000 113,000
Deferred federal income taxes................................................ 75,865 70,741
Other deferred liabilities................................................... 151 206
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TOTAL LIABILITIES.................................................. 295,068 235,204
COMMITMENTS AND CONTINGENCIES (SEE NOTE 4)
STOCKHOLDERS' EQUITY:
Common Stock, $.01 par value, 50,000 shares authorized and 23,893 shares
issued and outstanding at June 30, 1998 and 23,361 shares issued and
outstanding at
December 31, 1997..........................................................
239 234
Additional paid-in capital................................................. 230,861 221,907
Retained earnings.......................................................... 44,075 34,046
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TOTAL STOCKHOLDERS' EQUITY......................................... 275,175 256,187
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......................... $ 570,243 $ 491,391
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</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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THE HOUSTON EXPLORATION COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
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THREE MONTHS ENDED, SIX MONTHS ENDED,
JUNE 30, JUNE 30,
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1998 1997 1998 1997
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(UNAUDITED)
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REVENUES:
Natural gas and oil revenues......................... $ 35,141 $ 22,050 $ 68,025 $ 47,064
Other................................................ 370 170 570 484
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Total revenues............................... 35,511 22,220 68,595 47,548
OPERATING COSTS AND EXPENSES:
Lease operating...................................... 3,563 3,134 7,432 6,277
Severance tax........................................ 1,350 630 2,468 1,736
Depreciation, depletion and amortization............. 20,191 12,573 39,505 23,955
General and administrative, net...................... 1,707 1,546 3,282 2,956
-------------- ------------- -------------- -------------
Total operating expenses..................... 26,811 17,883 52,687 34,924
Income from operations................................. 8,700 4,337 15,908 12,624
Interest expense, net.................................. 950 286 1,250 429
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Net income before income taxes......................... 7,750 4,051 14,658 12,195
Provision for federal income taxes..................... 2,444 609 4,629 3,060
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NET INCOME ............................................ $ 5,306 $ 3,442 $ 10,029 $ 9,135
============== ============= ============== =============
Net income per share................................... $ 0.22 $ 0.15 $ 0.42 $ 0.39
============== ============= ============== =============
Net income per share-- assuming dilution............... $ 0.22 $ 0.14 $ 0.42 $ 0.38
============== ============= ============== =============
Weighted average shares outstanding.................... 23,890 23,333 23,639 23,333
Weighted average shares outstanding-- assuming
dilution...........................................
24,288 23,901 23,927 23,953
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
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THE HOUSTON EXPLORATION COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
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SIX MONTHS ENDED JUNE 30,
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1998 1997
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(UNAUDITED)
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OPERATING ACTIVITIES:
Net income ....................................................... $ 10,029 $ 9,135
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization ....................... 39,505 23,955
Deferred income tax expense .................................... 5,124 5,305
Changes in operating assets and liabilities:
Decrease in accounts receivable ............................. 13,263 239
Increase in inventories ..................................... (158) (464)
Decrease (increase) in prepayments .......................... (581) 461
Decrease (increase) in other assets and liabilities ......... (1,672) 833
Decrease in accounts payable and accrued expenses ........... (11,380) (6,790)
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Net cash provided by operating activities ........................ 54,130 32,674
INVESTING ACTIVITIES:
Investment in property and equipment ............................. (129,949) (55,767)
Dispositions and other ........................................... -- 1,360
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Net cash used in investing activities ............................ (129,949) (54,407)
FINANCING ACTIVITIES:
Proceeds from long term borrowings ............................... 175,000 35,500
Repayments of long term borrowings ............................... (100,000) (14,000)
Proceeds from issuance of common stock, net of offering costs .... 137 (141)
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Net cash provided by financing activities ........................ 75,137 21,359
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Decrease in cash and cash equivalents ............................ (682) (374)
Cash and cash equivalents, beginning of period ................... 4,745 2,851
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Cash and cash equivalents, end of period ......................... $ 4,063 $ 2,477
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Cash paid for interest ........................................... $ 3,210 $ 2,487
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Cash paid for taxes .............................................. $ -- $ --
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
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THE HOUSTON EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- SUMMARY OF ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization
The Houston Exploration Company ("Houston Exploration" or the
"Company"), a Delaware corporation, was incorporated in December 1985 and began
operations in January 1986 for the purpose of conducting certain natural gas and
oil exploration and development activities for The Brooklyn Union Gas Company
("Brooklyn Union"). Brooklyn Union became an indirect wholly-owned subsidiary of
MarketSpan Corporation on May 29, 1998 through the combination of Brooklyn
Union's former parent company, KeySpan Energy Corporation, and Long Island
Lighting Company. Effective February 29, 1996, Brooklyn Union implemented a
reorganization of its exploration and production assets by transferring to
Houston Exploration certain onshore producing properties and developed and
undeveloped acreage. On July 2, 1996, the Company acquired certain natural gas
and oil properties and associated pipelines located in Zapata County, Texas (the
"TransTexas Acquisition") from TransTexas Gas Corporation and TransTexas
Transmission Corporation (together, "TransTexas"). In September 1996, the
Company completed its initial public offering ("IPO") of 7,130,000 shares of its
Common Stock at $15.50 per share, resulting in net cash proceeds of
approximately $101.0 million. Concurrently with the completion of the IPO, the
Company completed the acquisition (the "Soxco Acquisition") of substantially all
of the natural gas and oil properties and related assets of Smith Offshore
Exploration Company ("Soxco"). As of June 30, 1998, THEC Holdings Corp., a
wholly-owned subsidiary of Brooklyn Union, holds approximately 64% of the
outstanding shares of the Company's common stock. The Company's operations focus
on the exploration, development and acquisition of domestic natural gas and oil
properties offshore in the Gulf of Mexico and onshore in South Texas, the Arkoma
Basin, East Texas, West Virginia and South Louisiana.
Principles of Consolidation
The consolidated financial statements include the accounts of The
Houston Exploration Company and its wholly-owned subsidiary, Seneca Upshur
Petroleum Company (collectively the "Company"). All significant intercompany
balances and transactions have been eliminated.
Interim Financial Statements
The balance sheet of the Company at June 30, 1998 and the statements of
operations and cash flows for the periods indicated herein have been prepared by
the Company without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted, although the
Company believes that the disclosures contained herein are adequate to make the
information presented not misleading. The balance sheet at December 31, 1997 is
derived from the December 31, 1997 audited financial statements, but does not
include all disclosures required by generally accepted accounting principles.
The Interim Financial Statements should be read in conjunction with the
Consolidated Financial Statements and Notes thereto included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1997.
In the opinion of management, all adjustments, consisting of normal
recurring accruals, necessary to present fairly the information in the
accompanying financial statements have been included. The results of operations
for such interim periods are not necessarily indicative of the results for the
full year.
Reclassifications and Use of Estimates
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and
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expenses during the reporting periods. The Company's most significant financial
estimates are based on remaining proved natural gas and oil reserves. Because
there are numerous uncertainties inherent in the estimation process, actual
results could differ from the estimates. Certain reclassifications for prior
years have been made to conform with current year presentation.
Net Income Per Share
Basic earnings per share ("EPS") is calculated by dividing net income
by the weighted average number of shares of common stock outstanding during the
period. No dilution for any potentially dilutive securities is included. Diluted
EPS assumes the conversion of all potentially dilutive securities and is
calculated by dividing net income by the weighted average number of shares
common stock outstanding plus all potentially dilutive securities.
Under the requirements of Statement of Financial Accounting Standards
("SFAS") No. 128, the Company's EPS are as follows:
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THREE MONTHS ENDED, SIX MONTHS ENDED,
JUNE 30, JUNE 30,
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1998 1997 1998 1997
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(IN THOUSANDS, EXCEPT PER SHARE DATA)
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Net income ............................................... $ 5,306 $ 3,442 $ 10,029 $ 9,135
============= ============= ============= =============
Denominator:
Weighted average shares outstanding....................... 23,890 23,333 23,639 23,333
Add: dilutive securities
Options............................................. 398 1 288 --
Contingent shares................................... -- 567 -- 620
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Total weighted average shares outstanding and dilutive
securities............................................... 24,288 23,901 23,927 23,953
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Net income per share......................................
Net income per share-- assuming dilution.................. $ 0.22 $ 0.15 $ 0.42 $ 0.39
============= ============= ============= =============
$ 0.22 $ 0.14 $ 0.42 $ 0.38
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</TABLE>
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."
This statement broadens the definition of a derivative instrument and
establishes accounting and reporting standards requiring that every derivative
instrument, including certain derivative instruments embedded in other
contracts, be recorded in the balance sheet as either an asset or liability
measured at its fair market value. The statement requires that changes in the
derivative instrument's fair value be recognized currently in earnings unless
specific hedge accounting criteria are met. Special accounting for qualifying
hedges allows a derivative instrument's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
must formally document, designate and assess the effectiveness of transactions
that receive hedge accounting. The statement cannot be applied retroactively and
must be applied to (i) derivative instruments and (ii) certain derivative
instruments embedded in hybrid contracts that were issued, acquired or
substantively modified after December 31, 1997. The Company plans to adopt SFAS
No. 133 effective January 1, 2000 and is currently evaluating the impact of the
statement.
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NOTE 2 -- LONG-TERM DEBT
As of June 30, 1998, long-term debt consisted of the following:
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JUNE 30, DECEMBER 31,
1998 1997
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(IN THOUSANDS)
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SENIOR DEBT:
Bank revolving credit facility .................. $ 88,000 $ 113,000
8 5/8% Senior Subordinated Notes, due 2008....... 100,000 --
-------- ------------
Total long-term debt......................... $188,000 $ 113,000
======== ============
</TABLE>
Credit Facility
The Company has entered into a revolving credit facility ("Credit
Facility") with a syndicate of lenders led by Chase Bank of Texas, National
Association ("Chase"), which provides a maximum commitment of $150 million,
subject to borrowing base limitations. The Credit Facility was amended in March
1998 in connection with the Company's private placement of $100 million of
senior subordinated notes and as of June 30, 1998, the available borrowing base
was $135 million. In addition, up to $5 million of the Credit Facility is
available for the issuance of letters of credit to support performance
guarantees. The Credit Facility matures on July 1, 2000 and is unsecured. At
June 30, 1998, $88 million was outstanding under the Credit Facility and $0.4
million was outstanding in letter of credit obligations.
Interest is payable on borrowings under the Credit Facility, at the
Company's option, at (i) a fluctuating rate ("Base Rate") equal to the greater
of the Federal Funds rate plus 0.5% or Chase's prime rate, or (ii) a fixed rate
("Fixed Rate") equal to a quoted LIBOR rate plus a margin of 0.375% to 1.125%,
depending on the amount outstanding under the Credit Facility. Interest is
payable at calendar quarters for Base Rate loans and at the earlier of maturity
or three months from the date of the loan for Fixed Rate loans. In addition, the
Credit Facility requires a commitment fee of: (i) between 0.20% and 0.375% per
annum on the unused portion of the Designated Borrowing Base, and (ii) 33% of
the fee in (i) above on the difference between the lower of the Facility Amount
or the Borrowing Base and the Designated Borrowing Base.
The Credit Facility, as amended, contains covenants of the Company,
including certain restrictions on liens and financial covenants which require
the Company to, among other things, maintain (i) an interest coverage ratio of
2.5 to 1.0 of earnings before interest, taxes and depreciation ("EBITDA") to
cash interest and (ii) a total debt to capitalization ratio of less than 60%. In
addition to maintenance of certain financial ratios, cash dividends and/or
purchase or redemption of the Company's stock is restricted as well as the
encumbering of the Company's gas and oil assets or the pledging of the assets as
collateral. As of June 30, 1998, the Company was in compliance with all such
covenants.
Senior Subordinated Notes
On March 2, 1998, the Company issued $100 million of 8 5/8% Senior
Subordinated Notes (the "Notes") due January 1, 2008 in a private placement to
qualified institutional buyers. The Notes bear interest at a rate of 8 5/8% per
annum with interest payable semi-annually on January 1 and July 1, commencing
July 1, 1998. The Notes are redeemable at the option of the Company, in whole or
in part, at any time on or after January 1, 2003 at a price equal to 100% of the
principal amount plus accrued and unpaid interest, if any, plus a specified
premium if the Notes are redeemed prior to January 1, 2006. Notwithstanding the
foregoing, any time prior to January 1, 2001, the Company may redeem up to 35%
of the original aggregate principal amount of the Notes with the net proceeds of
any equity offering, provided that at least 65% of the original aggregate
principal amount of the Notes remains outstanding immediately after the
occurrence of such redemption. Upon the occurrence of a change of control (as
defined), the Company will be required to offer to purchase the Notes at a
purchase price equal to 101% of the aggregate principal amount thereof, plus
accrued and unpaid interest, if any. The Notes are general unsecured obligations
of the Company
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and rank subordinate in right of payment to all existing and future senior debt,
including the Credit Facility, and will rank senior or pari passu in right of
payment to all existing and future subordinated indebtedness.
NOTE 3 -- STOCKHOLDERS' EQUITY
Soxco Deferred Purchase Price
On September 25, 1996, the Company completed the Soxco Acquisition
and acquired substantially all of the natural gas and oil properties and related
assets of Soxco. The natural gas and oil properties acquired in the Soxco
Acquisition consisted solely of working interests in properties located in the
Gulf of Mexico that are operated by the Company or in which the Company also has
a working interest. Pursuant to the Soxco Acquisition, the Company paid Soxco
cash in the aggregate amount of $20.3 million (net of $3.4 million for certain
purchase price adjustments), and issued to Soxco 762,387 shares of common stock
with an aggregate value (determined by reference to the IPO price) of $11.8
million. The cash portion of the purchase price was funded with the proceeds of
the IPO. In addition to the foregoing, on June 27, 1998, the Company issued
520,777 shares of common stock with an aggregate value (determined by reference
to the average price of the Company's common stock over a specified period of 20
trading days) of $8.8 million to Soxco in payment of the deferred purchase
price.
NOTE 4 -- COMMITMENTS AND CONTINGENCIES
The Company is involved from time to time in various claims and
lawsuits incidental to its business. In the opinion of management, the ultimate
liability thereunder, if any, will not have a material adverse effect on the
financial position or results of operations of the Company.
NOTE 5 -- RELATED PARTY TRANSACTIONS
Sale of Section 29 Tax Credits
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 will manage and administer 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 three months ended June 30, 1998 and 1997 was a
reduction to income tax expense of $0.3 million and $0.5 million, respectively,
and $0.5 million and $0.9 million, respectively, for the six months ended June
30, 1998 and 1997, representing benefits received from the Section 29 tax
credits.
NOTE 6 -- ACQUISITION
South Louisiana Acquisition
On April 29, 1998, the Company completed the acquisition of certain
natural gas and oil properties and associated gathering pipelines and equipment,
together with developed and undeveloped acreage, located in South Louisiana (the
"South Louisiana Acquisition"). The properties and acreage acquired are located
primarily in the South Lake Arthur and Lake Pagie Fields, located primarily in
Vermilion Parish and Terrebonne Parish, respectively. The properties purchased
represented approximately 41 Bcfe of net proved reserves as of November 1, 1997,
and currently contain approximately 64 producing wells. The average net
production in June 1998 attributable to such properties was approximately 14
MMcfe per day, net to the interest acquired by the Company. The purchase price
of $53.9 million
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will be adjusted for production revenues and operating expenses related to the
acquired properties between November 1, 1997 and the April 29, 1998 effective
date of the South Louisiana Acquisition. The purchase price of the South
Louisiana Acquisition was paid in cash, financed with borrowings under the
Credit Facility.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion is intended to assist in an understanding of
the Company's historical financial position and results of operations for the
three months and the six months ended June 30, 1997 and 1998. The Company's
consolidated financial statements and notes thereto included elsewhere in this
report contain detailed information that should be referred to in conjunction
with the following discussion.
GENERAL
The Houston Exploration Company ("Houston Exploration" or the
"Company") was incorporated in December 1985 to conduct certain of the natural
gas and oil exploration and development activities of The Brooklyn Union Gas
Company ("Brooklyn Union"). Brooklyn Union became an indirect wholly-owned
subsidiary of MarketSpan Corporation on May 29, 1998 through the combination of
Brooklyn Union's former parent company, KeySpan Energy Corporation, and Long
Island Lighting Company. The Company initially focused 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 Houston Exploration certain
onshore producing properties and developed and undeveloped acreage. Subsequent
to the reorganization, the Company has expanded its focus to include lower risk
exploitation and development drilling on the onshore properties transferred or
acquired, in addition to seeking opportunistic acquisitions both onshore and
offshore. On July 2, 1996, the Company acquired certain natural gas and oil
properties and associated pipelines located in Zapata County, Texas (the
"TransTexas Acquisition") from TransTexas Gas Corporation and TransTexas
Transmission Corporation (together, "TransTexas"). In September 1996, the
Company completed its initial public offering ("IPO") of 7,130,000 shares of its
Common Stock at $15.50 per share, resulting in net cash proceeds of
approximately $101.0 million. Concurrently with the completion of the IPO, the
Company completed the acquisition (the "Soxco Acquisition") of substantially all
of the natural gas and oil properties and related assets of Smith Offshore
Exploration Company ("Soxco"). On April 29, 1998, the Company completed the
acquisition (the "South Louisiana Acquisition") of certain natural gas and oil
properties and associated gathering pipelines and equipment, together with
developed and undeveloped acreage located in the South Lake Arthur and Lake
Pagie Fields in South Louisiana. As of June 30, 1998, THEC Holdings Corp., a
wholly owned subsidiary of Brooklyn Union, owned approximately 64% of the
outstanding shares of the Company's common stock. At December 31, 1997, the
Company had net proved reserves of 337 Bcfe, 98% of which were natural gas and
78% of which were classified as proved developed.
The Company's revenue, profitability and future rate of growth are
substantially dependent upon prevailing prices for natural gas, oil and
condensate, which are dependent upon numerous factors beyond the Company's
control, such as economic, political and regulatory developments and competition
from other sources of energy. The energy markets have historically been highly
volatile, and future decreases in natural gas and oil prices could have a
material adverse effect on the Company's financial position, results of
operations, quantities of natural gas and oil reserves that may be economically
produced, and access to capital.
The Company uses the full cost method of accounting for its investment
in natural gas and oil properties. Under the full cost method of accounting, all
costs of acquisition, exploration and development of natural gas and oil
reserves are capitalized into a "full cost pool" as incurred, and properties in
the pool are depleted and charged to operations using the unit-of-production
method based on the ratio of current production to total proved natural gas and
oil reserves. To the extent that such capitalized costs (net of accumulated
depreciation, depletion and amortization and related deferred taxes) exceed the
present value (using a 10% discount rate) of estimated future net after tax cash
flows from proved natural gas and oil reserves and the lower of cost or fair
value of unproved properties, such excess costs are charged to operations. If a
write-down is required, it would result in a charge to earnings but would not
have an impact on cash flows from operating activities. Once incurred, a
write-down of oil and gas properties is not reversible at a later date even if
oil and gas prices increase.
As of June 30, 1998, the Company estimates, using prices in effect as
of such date, that the ceiling limitation imposed under full cost accounting
rules on total capitalized natural gas and oil property costs exceeded actual
capitalized costs. Natural gas prices have declined substantially since June 30,
1998. The Company may be required
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to write down the carrying value of its natural gas and oil properties at the
end of the third quarter of 1998, depending upon natural gas prices and the
results of the Company's drilling programs.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."
This statement broadens the definition of a derivative instrument and
establishes accounting and reporting standards requiring that every derivative
instrument, including certain derivative instruments embedded in other
contracts, be recorded in the balance sheet as either an asset or liability
measured at its fair market value. The statement requires that changes in the
derivative instrument's fair value be recognized currently in earnings unless
specific hedge accounting criteria are met. Special accounting for qualifying
hedges allows a derivative instrument's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
must formally document, designate and assess the effectiveness of transactions
that receive hedge accounting. The statement cannot be applied retroactively and
must be applied to (i) derivative instruments and (ii) certain derivative
instruments embedded in hybrid contracts that were issued, acquired or
substantively modified after December 31, 1997. The Company plans to adopt SFAS
No. 133 effective January 1, 2000 and is currently evaluating the impact of the
statement.
Year 2000 issues result from the inability of computer programs or
computerized equipment to accurately calculate, store or use a date subsequent
to December 31, 1999. The erroneous date can be interpreted in a number of
different ways; typically the year 2000 is represented as the year 1900. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices or engage in similar normal business.
The Company is in the process of assessing all financial and
operational systems and equipment to ensure year 2000 compliance and plans to
complete the assessment by December 31, 1998. Based on reviews to date and
preliminary information, the Company does not anticipate that it will incur any
significant costs relating to the assessment and remediation of year 2000
issues. The Company believes that the potential impact, if any, of its systems
not being year 2000 compliant should not affect the Company's ability to
continue exploration, drilling, production and sales activities. However, there
can be no guarantee that the Company, its business partners, vendors or
customers will successfully be able to identify and remedy all potential year
2000 problems and that a resulting system failure would not have a material
adverse effect on the Company.
-13-
<PAGE> 14
RESULTS OF OPERATIONS
The following table sets forth the Company's historical natural gas and
oil production data during the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED, SIX MONTHS ENDED,
JUNE 30, JUNE 30,
------------------- ------------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
PRODUCTION:
Natural gas (MMcf)......................... 15,861 11,246 30,996 21,817
Oil (MBbls)................................ 57 39 104 72
Total (MMcfe).............................. 16,203 11,480 31,620 22,249
AVERAGE SALES PRICES:
Natural gas (per Mcf) realized(1) ......... $ 2.17 $ 1.90 $ 2.15 $ 2.09
Natural gas (per Mcf) unhedged............. 2.13 1.96 2.09 2.36
Oil (per Bbl).............................. 13.14 17.62 13.61 19.21
EXPENSES (PER MCFE):
Lease operating............................ $ 0.22 $ 0.27 $ 0.24 $ 0.28
Severance tax.............................. 0.08 0.06 0.08 0.08
Depreciation, depletion and amortization... 1.25 1.10 1.25 1.08
General and administrative, net............ 0.11 0.13 0.10 0.13
</TABLE>
- ---------------------------
(1) Reflects the effects of hedging.
RECENT FINANCIAL AND OPERATING RESULTS
COMPARISON OF THREE MONTHS ENDED JUNE 30, 1997 AND 1998
Production. Houston Exploration's production increased 41% from 11,480
MMcfe for the three months ended June 30, 1997 to 16,203 MMcfe for the three
months ended June 30, 1998. The increase in production was primarily
attributable to the Company's continued successful development drilling program
in the Charco Field. The Charco Field in South Texas was acquired in July of
1996. Since the beginning of 1997, the Company has successfully completed and
brought on-line 31 new wells in the Charco Field, 25 of these since June 30,
1997. Production in the Charco Field has increased 97% from 3,821 MMcfe, or 42
MMcfe per day, in the second quarter of 1997 to 7,535 MMcfe, or 83 MMcfe per
day, in the second quarter of 1998. Adding to the significant increase in
production from the Charco Field is new production from offshore wells brought
on-line since June 1997 and wells acquired in the South Louisiana Acquisition,
which was completed on April 29, 1998.
Natural Gas and Oil Revenues. Natural gas and oil revenues increased
59% from $22.1 million for the three months ended June 30, 1997 to $35.1 million
for the three months ended June 30, 1998 as a result of the 41% increase in
production combined with a 14% increase in average realized natural gas prices,
from $1.90 per Mcf for the three months ended June 30, 1997 to $2.17 per Mcf for
the three months ended June 30, 1998.
As a result of hedging activities, the Company realized an average gas
price of $2.17 per Mcf for the three months ended June 30, 1998, which was 102%
of the unhedged natural gas price of $2.13 per Mcf that otherwise would have
been received, resulting in a $0.7 million increase in natural gas revenues for
the three months ended June 30, 1998. For the corresponding three month period
of 1997, the average realized gas price was $1.90 per Mcf, which was 97% of the
unhedged average gas price of $1.96 per Mcf, resulting in a decrease in natural
gas revenues of $0.7 million for the three months ended June 30, 1997.
-14-
<PAGE> 15
Lease Operating Expenses and Severance Tax. Lease operating expenses
increased 16% from $3.1 million for the three months ended June 30, 1997 to $3.6
million for the three months ended June 30, 1998. On an Mcfe basis, lease
operating expenses decreased from $0.27 for the three months ended June 30, 1997
to $0.22 for the three months ended June 30, 1998. The increase in lease
operating expenses during the second quarter of 1998 is attributable to the
significant expansion of operations in the Charco Field, combined with new
offshore producing properties and the addition of the South Louisiana properties
acquired in April 1998. The decrease in the lease operating expenses per Mcfe
resulted from the substantial increase in production during the three months
ended June 30, 1998 as compared to the corresponding period of 1997. Severance
tax, which is a function of volume and revenues generated from onshore
production, increased from $0.6 million for the three months ended June 30, 1997
to $1.4 million for the three months ended June 30, 1998. On an Mcfe basis,
severance tax increased from $0.06 per Mcfe, for the three months of 1997 to
$0.08 per Mcfe, for the first three months of 1998. The increase in both the
severance tax expense and the rate per Mcfe is due to higher natural gas prices
received during the second quarter of 1998 as compared to prices received during
the second quarter of 1997, combined with the addition of the onshore South
Louisiana properties acquired in April 1998.
Depreciation, Depletion and Amortization. Depreciation, depletion and
amortization expense increased 60% from $12.6 million for the three months ended
June 30, 1997 to $20.2 million for the three months ended June 30, 1998.
Depreciation, depletion and amortization expense per Mcfe increased 14% from
$1.10 for the three months ended June 30, 1997 to $1.25 for the corresponding
three months in 1998. The increase in depreciation, depletion and amortization
expense was a result of the increased production from newly-developed properties
combined with an increased depletion rate. The increase in the depletion rate is
attributable a combination of higher drilling and development costs and an over
all higher level of capital spending during 1998 as compared to 1997.
General and Administrative Expenses. General and administrative
expenses, net of overhead reimbursements received from other working interest
owners of $0.2 million for both the three month periods ended June 30, 1997 and
1998, increased 13% from $1.5 million for the three months ended June 30, 1997
to $1.7 million for the three months ended June 30, 1998. The increase in
general and administrative expenses reflects the continued growth and expansion
of the Company and its operations. As the Company continues to grow and expand
its workforce, the Company expects aggregate general and administrative expenses
to increase. The Company capitalized general and administrative expenses
directly related to oil and gas exploration and development activities of $1.6
million and $1.9 million, respectively, for the three months ended June 30, 1997
and 1998. The increase in capitalized general and administrative expenses
directly corresponds with the growth of the Company's technical workforce and
the Company's incentive compensation plan. On an Mcfe basis, general and
administrative expenses decreased 15% from $0.13 for the three months ended June
30, 1997 to $0.11 for the three months ended June 30, 1998. The lower rate per
Mcfe during the second quarter of 1998 reflects the increase in the Company's
production.
Interest Expense, Net. Interest expense, net of capitalized interest,
increased from $0.3 million for the three months ended June 30, 1997 to $1.0
million for the three ended June 30, 1998. Capitalized interest increased from
$1.2 million for three months ended June 30, 1997 to $2.5 million for the three
months ended June 30, 1998. The increase in aggregate interest expense was
attributable to higher average debt levels during the second quarter of 1998.
With the issuance of $100 million of senior subordinated indebtedness in March
1998, the Company expects its 1998 average debt levels to exceed those in 1997
and, accordingly, expects an increase in net interest expense.
Income Tax Provision. The provision for income taxes increased 300%
from an expense of $0.6 for the first three months of 1997 to an expense of $2.4
million for the first three months of 1998. The increase in income tax expense
for the three months ended June 30, 1998 as compared to the corresponding period
of 1997 is due to the 90% increase in pretax income for the three months ended
June 30, 1998.
Operating Income and Net Income. As a result of the significant
increase in natural gas production and the increase in natural gas prices,
operating income increased 102% from $4.3 million for the three months ended
June 30, 1997 to $8.7 million for the three months ended June 30, 1998. Net
income increased 56% from $3.4 million for the three months ended June 30, 1997
to $5.3 million for the three months ended June 30, 1998.
-15-
<PAGE> 16
Comparison of Six Months Ended June 30, 1997 and 1998
Production. Houston Exploration's production increased 42% from 22,249
MMcfe for the six months ended June 30, 1997 to 31,620 MMcfe for the six months
ended June 30, 1998. The increase in production was primarily attributable to
significant newly-developed production in the Charco Field, combined with new
offshore production brought on-line since June 1997 and added production from
wells acquired in the South Louisiana Acquisition, which was completed in April
1998.
Natural Gas and Oil Revenues. Natural gas and oil revenues increased
44% from $47.1 million for the six months ended June 30, 1997 to $68.0 million
for the six months ended June 30, 1998 as a result of the 42% increase in
production combined with a slight 3% increase in average realized natural gas
prices, from $2.09 per Mcf in the six months ended June 30, 1997 to $2.15 per
Mcf in the six months ended June 30, 1998.
As a result of hedging activities, the Company realized an average gas
price of $2.15 per Mcf for the six months ended June 30, 1998, which was 103% of
the unhedged natural gas price of $2.09 per Mcf that otherwise would have been
received, resulting in a $1.8 million increase in natural gas revenues for the
six month period. For the six months ended June 30, 1997, the average realized
gas price was $2.09 per Mcf, which was 89% of the unhedged average gas price of
$2.36, resulting in a decrease to natural gas revenues of $5.7 million for the
six month period.
Lease Operating Expenses and Severance Tax. Lease operating expenses
increased 17% from $6.3 million for the six months ended June 30, 1997 to $7.4
million for the six months ended June 30, 1998. On an Mcfe basis, lease
operating expenses decreased from $0.28 for the six first months of 1997 to
$0.24 for the first six months of 1998. The increase in lease operating expenses
during the first half of 1998 is attributable to the significant expansion of
operations in the Charco Field, combined with new offshore producing properties
and the addition of the South Louisiana properties acquired in April 1998. The
decrease in the lease operating expenses per Mcfe resulted from the substantial
increase in production during the first six months of 1998 as compared to the
corresponding period of 1997. Severance tax, which is a function of volume and
revenues generated from onshore production, increased from $1.7 million for the
six months ended June 30, 1997 to $2.5 million for the six months ended June 30,
1998. On an Mcfe basis, severance tax remained unchanged at $0.08 per Mcfe for
the six month periods ended June 30, 1998 and 1997. The increase in severance
tax expense reflects the added onshore production both at Charco and in South
Louisiana and the flat rate per Mcfe reflects comparatively flat natural gas
prices the first half of 1998 as compared to the corresponding period of 1997.
Depreciation, Depletion and Amortization. Depreciation, depletion and
amortization expense increased 65% from $23.9 million for the six months ended
June 30, 1997 to $39.5 million for the six months ended June 30, 1998.
Depreciation, depletion and amortization expense per Mcfe increased 16% from
$1.08 for the six months ended June 30, 1997 to $1.25 for the six months ended
June 30, 1998. The increase in expense was a result of the increased production
from acquired as well as newly-developed properties combined with an increased
depletion rate. The increase in the depletion rate is attributable to higher
drilling and development costs and an overall higher level of capital spending
during 1998 as compared to 1997.
General and Administrative Expenses. General and administrative
expenses, net of overhead reimbursements received from other working interest
owners of $0.5 million for both the six month periods ended June 30, 1997 and
1998, increased 14% from $2.9 million for the six months ended June 30, 1997 to
$3.3 million for the six months ended June 30, 1998. The Company capitalized
general and administrative expenses directly related to oil and gas exploration
and development activities of $3.4 million and $3.9 million, respectively, for
the six months ended June 30, 1997 and 1998. The increase in aggregate general
and administrative expense reflects the overall growth and expansion of the
Company's operations. As the Company continues to grow and expand its workforce,
aggregate general and administrative expenses are expected to increase. On an
Mcfe basis, general and administrative expenses decreased 23% from $0.13 for the
six months ended June 30, 1997 to $0.10 for the six months ended June 30, 1998.
The lower rate per Mcfe during the first half of 1998 reflects the increase in
the Company's production.
-16-
<PAGE> 17
Interest Expense, Net. Interest expense, net of capitalized interest,
increased from $0.4 million for the six months ended June 30, 1997 to $1.3
million for the six ended June 30, 1998. Capitalized interest increased from
$2.4 million for six months ended June 30, 1997 to $4.5 million for the six
months ended June 30, 1998. The increase in aggregate interest expense was
attributable to higher average debt levels during the first half of 1998. With
the issuance of $100 million of senior subordinated indebtedness in March 1998,
the Company expects its 1998 average debt levels to exceed those in 1997 and,
accordingly, expects an increase in net interest expense.
Income Tax Provision. The provision for income taxes increased 48% from
an expense of $3.1 million for the first six months of 1997 to an expense of
$4.6 million for the first six months of 1998 due to the increase in pretax
income, offset in part by a decrease in the benefit received from Section 29 tax
credits.
Operating Income and Net Income. As a result of the significant
increase in natural gas production, combined with the slight increase in natural
gas prices offset by the increase in operating costs, operating income increased
26% from $12.6 million for the six months ended June 30, 1997 to $15.9 million
for the six months ended June 30, 1998. Net income increased 10% from $9.1
million for the six months ended June 30, 1997 to $10.0 million for the six
months ended June 30, 1998 and reflects higher interest expense and taxes during
the first six months of 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically funded its operations, acquisitions,
capital expenditures and working capital requirements from cash flows from
operations, bank borrowings and, prior to the IPO, capital contributions from
Brooklyn Union. On March 2, 1998, the Company issued $100 million of senior
subordinated indebtedness in a private placement to qualified institutional
buyers. Net proceeds of approximately $97 million were used to repay a portion
of the outstanding indebtedness under the Company's revolving bank credit
facility (the "Credit Facility").
As of June 30, 1998, the Company had a working capital of $1.6 million
and $46.6 million of available borrowing base under the Credit Facility. Net
cash provided by operating activities for the six months ended June 30, 1998 was
$54.1 million compared to $32.7 million for the six months ended June 30, 1997.
The increase in net cash flows from operations is due to higher net income
caused by increases in production and natural gas prices, and changes in
operating assets and liabilities. The Company's cash position was increased
during the six months ended June 30, 1998 by a net increase in long-term debt of
$75 million. The net increase in long-term debt resulted from the Company's
issuance of $100 million of senior subordinated notes, offset in part by a net
decrease of $25 million in borrowings under the Credit Facility. Funds used in
investing activities consisted of $129.9 million for investments in property and
equipment, including the $53.9 million purchase price of the South Louisiana
Acquisition. As a result of these activities, cash and cash equivalents
decreased $0.7 million from $4.7 million at December 31, 1997 to $4.0 million at
June 30, 1998.
The Company's initial capital expenditure budget (excluding
acquisitions) for 1998 of $100 million was increased to $130 million in July
1998. As of June 30, 1998, the Company had spent $74 million on exploration and
development and $55 million on acquisitions, including $53.9 million for the
South Louisiana Acquisition and $1.2 million for an incremental working interest
in a producing offshore property. The budget includes amounts for development
costs associated with recently acquired properties and amounts that are
contingent upon drilling success. The Company will continue to evaluate its
capital spending plans through the year. No significant abandonment or
dismantlement costs are anticipated through 1998. Actual levels of capital
expenditures may vary significantly due to a variety of factors, including
drilling results, natural gas prices, industry conditions and outlook and future
acquisitions of properties. The Company believes cash flows from operations and
borrowings under its Credit Facility will be sufficient to fund these
expenditures. The Company will continue to selectively seek acquisition
opportunities for proved reserves with substantial exploration and development
potential both offshore and onshore. The size and timing of capital requirements
for acquisitions is inherently unpredictable.
The Company has entered into the Credit Facility with a syndicate of
lenders led by Chase Bank of Texas, National Association ("Chase"), which
provides a maximum loan amount of $150 million, subject to borrowing base
-17-
<PAGE> 18
limitations, on a revolving basis. The Credit Facility was amended in March 1998
in connection with the Company's private placement of $100 million of senior
subordinated notes, and had a borrowing base of $135 million as of June 30,
1998. At June 30, 1998, $88 million was borrowed and $0.4 million was committed
under outstanding letter of credit obligations. The Credit Facility matures on
July 1, 2000. Advances under the Credit Facility bear interest, at the Company's
election at (i) a fluctuating rate ("Base Rate") equal to the higher of the
Federal Funds Rate plus 0.5% or Chase's prime rate or (ii) a fixed rate ("Fixed
Rate") equal to a quoted LIBOR rate plus a margin between 0.375% and 1.125%
depending on the amount outstanding under the Credit Facility. Interest is due
at calendar quarters for Base Rate loans and at the earlier of maturity or three
months from the date of the loan for Fixed Rate loans. The Credit Facility
contains covenants of the Company, including certain restrictions on liens and
financial covenants which require the Company to, among other things, maintain
(i) an interest coverage ratio of 2.5 to 1.0 of earnings before interest, taxes
and depreciation ("EBIDTA") to cash interest and (ii) a total debt to
capitalization ratio of less than 60%. The Credit Facility also restricts the
Company's ability to purchase or redeem its capital stock or to pledge its oil
and gas properties or other assets. As of June 30, 1998 the Company was in
compliance with all Credit Facility covenants. The borrowing base under the
Credit Facility is determined by Chase in its discretion in accordance with
Chase's then current standards and practices for similar oil and gas loans
taking into account such factors as Chase deems appropriate.
On March 2, 1998, the Company issued $100 million of 8 5/8% Senior
Subordinated Notes (the "Notes") due January 1, 2008 in a private placement to
qualified institutional buyers. The Notes bear interest at 8 5/8% annum with
interest payable semi-annually on January 1 and July 1, commencing July 1, 1998.
The Notes are redeemable at the option of the Company, in whole or in part, at
anytime on or after January 1, 2003 at a price equal to 100% of the principal
amount plus accrued and unpaid interest, if any, plus a specified premium if the
Notes are redeemed prior to January 1, 2006. Notwithstanding the foregoing, any
time prior to January 1, 2001, the Company may redeem up to 35% of the original
aggregate principal amount of the Notes with the net proceeds of any equity
offering, provided that at least 65% of the original aggregate principal amount
of the Notes remains outstanding immediately after the occurrence of such
redemption. Upon the occurrence of a change of control (as defined), the Company
will be required to offer to purchase the Notes at a purchase price equal to
101% of the aggregate principal amount thereof, plus accrued and unpaid
interest, if any. The Notes are general unsecured obligations of the Company and
rank subordinate in right of payment to all existing and future senior debt,
including the Credit Facility, and will rank senior or pari passu in right of
payment to all existing and future subordinated indebtedness.
The Company utilizes derivative commodity instruments to hedge future
sales prices on a portion of its natural gas production to achieve a more
predictable cash flow, as well as to reduce its exposure to adverse price
fluctuations of natural gas. While the use of these hedging arrangements limits
the downside risk of adverse price movements, they may limit future revenues
from favorable price movements. The use of hedging transactions also involves
the risk that the counterparties will be unable to meet the financial terms of
such transactions. The Company has traditionally employed swaps, collars and
options, although the only hedging instruments in place as of June 30, 1998
consisted of collars. The Company generally places hedging instruments with
major financial institutions that the Company believes are minimal credit risks.
The Company accounts for these transactions as hedging activities and,
accordingly, gains or losses are included in natural gas and oil revenues in the
period the hedged production occurs. Neither the hedging contracts nor the
unrealized gains or losses on these contracts, if any, are recognized in the
consolidated financial statements.
As of June 30, 1998, the Company had entered into commodity price
hedging contracts with respect to its gas production as listed below. All such
commodity price hedging contracts in effect as of such date were "collar"
transactions. Natural gas production during the month of June 1998 was 5,483
MMcf (5,467 MMMBtu).
<TABLE>
<CAPTION>
NYMEX
VOLUME CONTRACT PRICE
PERIOD (MMMBTU) FLOOR CEILING
- ------------------ -------- -------- ---------
<S> <C> <C> <C> <C>
July 1998 2,480 $ 2.25 $ 2.70
August 1998 2,480 $ 2.25 $ 2.70
September 1998 2,400 $ 2.25 $ 2.70
October 1998 620 $ 2.20 $ 2.50
</TABLE>
-18-
<PAGE> 19
As of July 31, 1998, the Company had no commodity hedging contracts
extending beyond October 1998. The Company has entered into basis swaps with
respect to more than 50% of the indicated NYMEX hedged volume.
These hedging transactions are settled based upon the average of the
reported settlement prices on the New York Mercantile Exchange (the "NYMEX") for
the last three trading days of a particular contract month (the "settlement
price"). With respect to any particular swap transaction, the counterparty is
required to make a payment to the Company in the event that the settlement price
for any settlement period is less than the swap price for such transaction, and
the Company is required to make payment to the counterparty in the event that
the settlement price for any settlement period is greater than the swap price
for such transaction. For any particular collar transaction, the counterparty is
required to make a payment to the Company if the settlement price for any
settlement period is below the floor price for such transaction, and the Company
is required to make payment to the counterparty if the settlement price for any
settlement period is above the ceiling price for such transaction. For any
particular floor transaction, the counterparty is required to make a payment to
the Company if the settlement price for any settlement period is below the floor
price for such transaction. The Company is not required to make any payment in
connection with a floor transaction. For option contracts, the Company has the
option, but not the obligation, to buy contracts at the strike price up to the
day before the last trading day for that NYMEX contract.
The Company periodically enters into basis swaps (either as part of a
particular hedging transaction or separately) tied to a particular NYMEX-based
transaction to eliminate basis risk. Basis risk is the risk associated with the
sales point price for natural gas production varying from the reference (or
settlement) price for a particular hedging transaction. Because substantially
all of the Company's natural gas production is sold under spot contracts, that
have historically correlated with the swap price, the Company believes that it
has no material basis risk with respect to gas swaps that are not coupled with
basis swaps.
-19-
<PAGE> 20
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
On April 23, 1998, the company held its annual meeting of shareholders.
All matters brought for a vote before the shareholders as listed in the
Company's proxy statement were approved:
1. The following eight Directors of the Company were elected to
serve until the Company's next annual meeting:
<TABLE>
<CAPTION>
DIRECTOR VOTES FOR VOTES WITHHELD
----------------- ----------- --------------
<S> <C> <C>
James G. Floyd 22,259,839 41,089
Robert B. Catell 22,259,639 41,289
Gordon F. Ahalt 22,279,339 21,589
Russell D. Gordy 22,282,139 18,789
Craig G. Matthews 22,281,939 18,989
James Q. Riordan 22,258,339 42,589
Lester H. Smith 22,259,839 41,089
Donald C. Vaughn 22,281,739 19,189
</TABLE>
2. An amendment to the Company's 1996 Stock Option Plan providing
for the grant of options to non-employee directors of the
Company was approved.
<TABLE>
<CAPTION>
VOTES FOR VOTES AGAINST ABSTAINED
---------- ------------- ---------
<S> <C> <C>
19,368,787 2,920,091 12,050
</TABLE>
3. The appointment of Arthur Andersen LLP as the Company's
independent public accountants for the fiscal year ending
December 31, 1998 was ratified and approved.
<TABLE>
<CAPTION>
VOTES FOR VOTES AGAINST ABSTAINED
---------- ------------- ---------
<S> <C> <C>
22,294,428 4,250 2,250
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C> <C>
* 10.1** -- Amended and Restated 1996 Stock Option Plan.
* 10.2** -- Employment Agreement dated May 1, 1998 between The Houston
Exploration Company and Thomas E. Schwartz.
* 27.1 -- Financial Data Schedule.
- ---------------------------
* Filed herewith.
** Management contract or compensation plan.
(b) Reports on Form 8-K:
None
</TABLE>
-20-
<PAGE> 21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE HOUSTON EXPLORATION COMPANY
By: /s/ JAMES G. FLOYD
----------------------------------------
James G. Floyd
Date: August 11, 1998 President and Chief Executive Officer
By: /s/ JAMES F. WESTMORELAND
----------------------------------------
James F. Westmoreland
Date: August 11, 1998 Vice President, Chief Accounting Officer,
Comptroller and Secretary
-21-
<PAGE> 22
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C> <C>
* 10.1** -- Amended and Restated 1996 Stock Option Plan.
* 10.2** -- Employment Agreement dated May 1, 1998 between The Houston
Exploration Company and Thomas E. Schwartz.
* 27.1 -- Financial Data Schedule.
- ---------------------------
* Filed herewith.
** Management contract or compensation plan.
</TABLE>
<PAGE> 1
EXHIBIT 10.1
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
purposes of this subsection (i), the following acquisitions shall not
constitute a Change of Control: (A) any
<PAGE> 2
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) (1) 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.
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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.
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ARTICLE III
ELIGIBILITY
The individuals who shall be eligible to receive Incentive Options
shall be those key employees of the Company or any of its Affiliates as the
Committee shall determine from time to time. The individuals who shall be
eligible to receive Nonqualified Options shall be those key employees,
consultants and advisors of the Company or any of its Affiliates as the
Committee shall determine from time to time, 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> 5
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
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<PAGE> 6
then currently exercisable, (iii) adjust the terms of the Option in a manner
determined by the Committee to reflect the Change of Control, (iv) cause the
Option to be assumed, or new rights substituted therefore, by another entity, or
(v) make such other provisions as the Committee may consider equitable and in
the best interest of the Company. Any 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
-9-
<PAGE> 10
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.
-10-
<PAGE> 1
EXHIBIT 10.2
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") dated as of May 1, 1998 by
and between THE HOUSTON EXPLORATION COMPANY a Delaware corporation (the
"Company"), and THOMAS E. SCHWARTZ, (the "Executive").
WITNESSETH:
WHEREAS, the Executive has been providing services to the Company and
the Company has been compensating the Executive; and
WHEREAS, the Company desires to continue to employ the Executive upon
the terms and conditions and in the capacities set forth herein;
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Company and the Executive hereby agree as follows:
1. EMPLOYMENT AND TERM OF EMPLOYMENT. Subject to the terms and
conditions of this Agreement, the Company hereby agrees to employ the Executive,
and the Executive hereby agrees to serve the Company as Vice President,
Geophysics for a term (the "Term of Employment") beginning on the Effective Date
(defined below) and ending on the Expiration Date (defined below). As used
herein, "Effective Date" means May 1, 1998. As used in this Agreement,
"Expiration Date" means the third anniversary of the Effective Date, provided
that on the first anniversary of the Effective Date and on each subsequent
anniversary of the Effective Date (such first anniversary date and each such
subsequent anniversary date being referred to as a "Renewal Date"), the
Expiration Date shall be automatically extended one additional year unless, not
less than 60 days prior to the relevant Renewal Date, (i) either party shall
have given written notice to the other that no such automatic extension shall
occur after the date of such notice or (ii) either party shall have given a
Notice of Termination to the other pursuant to Section 7 hereof. Notwithstanding
the foregoing, if either party gives a valid Notice of Termination pursuant to
Section 7 hereof, the Term of Employment shall not extend beyond the termination
date specified in such Notice of Termination.
2. SCOPE OF EMPLOYMENT. (a) During the Term of Employment, the
Executive agrees to (i) serve as Vice President, Geophysics of the Company and
shall have and may exercise all the powers, duties and functions as are normal
and customary to such positions and that are consistent with the
responsibilities set forth with respect to such positions in the Company's
by-laws and (ii) perform such other duties not inconsistent with his position as
are assigned to him, from time to time, by the Board of Directors of the Company
(the "Board"). During the Term of Employment, the Executive shall devote
substantially all of his business time, attention, skill and efforts to the
faithful performance of his duties hereunder. Subject to Section 6, the
foregoing shall not be construed to prevent the Executive from making
investments in businesses or enterprises so long as such investments do not
require any services on the part of the Executive in the operation of such
business or enterprises of a nature or magnitude that would interfere materially
with the performance of his duties hereunder.
(b) During the Term of Employment, the Executive agrees to serve, if
elected, as an officer or director of any subsidiary or affiliate of the Company
so long as such service is commensurate with the Employee's duties
and,responsibilities to the Company.
(c) The Executive's place of employment hereunder shall be at the
Company's principal executive offices in the greater Houston, Texas metropolitan
area. Moreover, the Company agrees that it will provide immunity and indemnity
for the Executive to the fullest extent allowed by law, that if necessary it
will amend its certificate of
<PAGE> 2
incorporation and by-laws to so provide, and that it will obtain errors and
omissions insurance in the amount of no less than $10,000,000 naming the
Executive as an additional insured.
3. COMPENSATION. During the Term of Employment, in consideration of the
Executive's services hereunder, including, without limitation, service as an
officer or director of the Company or of any subsidiary or affiliate thereof,
and in consideration of the Executive's covenants regarding confidentiality in
Section 5 hereof and noncompetition in Section 6 hereof, the Executive shall
receive a salary at the rate of $160,000 per year (payable at such regular
intervals as other employees of the Company are compensated in accordance with
the Company's employment practices), which amount shall be subject to review
annually by the Board and may be adjusted at its discretion, provided that such
salary may not be reduced at any time. In addition, the Executive shall be
entitled to participate in such bonus, incentive compensation or other programs
as are created or approved by the Board from time to time including, without
limitation, those set forth on Exhibit A hereto.
4. ADDITIONAL COMPENSATION AND BENEFITS. (a) As additional compensation
for the Executive's services under this Agreement, the Executive's covenants
regarding confidentiality in Section 5 hereof and noncompetition in Section 6
hereof, during the Term of Employment, the Company agrees to provide the
Executive with the non-cash benefits being provided to him on the date of this
Agreement (or the equivalent of such benefits) and, without duplication, any
other noncash benefits provided by the Company to its other officers and key
employees as they may exist from time to time. Such benefits shall include leave
or vacation time (not less than four weeks), medical and dental insurance, life
insurance and other health care benefits, retirement and disability benefits as
may hereafter be provided by the Company in accordance with its policies as well
as any stock option plan or similar employee benefit program for which key
executives are or shall become eligible. The Executive's participation in each
employee benefit plan or program provided to officers or other senior executives
of the Company in general shall be at least as favorable to the Executive as the
most highly benefited employee thereunder.
(b) The Executive is authorized to incur reasonable business expenses
for promoting the business and reputation of the Company, including (without
limitation) reasonable expenditures for travel, lodging, club memberships, meals
and client, patron, customer and/or business associate entertainment. The
Company shall reimburse within 30 days the Executive for reasonable expenses
incurred by the Executive in furtherance of the Company's business, provided
that such expenses are incurred in accordance with the Company's policies and
upon presentation of documentation in accordance with expense reimbursement
policies of the Company as they may exist from time to time, and submission to
the Company of adequate documentation in accordance with federal income tax
regulations and administrative pronouncements.
(c) During the Term of Employment, the Company shall pay to the
Executive an automobile allowance of $700 per month. The Board shall review the
amount of such monthly allowance at least annually and may increase the same at
any time as the Board deems appropriate.
5. CONFIDENTIALITY AND OTHER MATTERS.
(a) Confidentiality. The Executive shall hold in a fiduciary capacity
for the benefit of the Company all maps, data, reports, including results of
exploration, drilling, drill cores, cuttings, and other samples, and other
information relating to the business of the Company which comes into the
possession of the Executive during the Term of Employment (such information
being collectively referred to herein as the "Confidential Information"). During
the Term of Employment and after termination of the Executive's employment
hereunder, the Executive agrees: (i) to take all such precautions as may be
reasonably necessary to prevent the disclosure to any third party of any of the
Confidential Information; (ii) not to use for the Executive's own benefit any of
the Confidential Information; and (iii) not to aid any other person or entity in
the use of the Confidential Information in competition with the Company,
provided that nothing in this Agreement shall prohibit the Executive from
disclosing or using any Confidential Information (A) in the performance of his
duties hereunder, (B) as required by applicable law, (C) in connection with the
enforcement of his rights under this Agreement or any other agreement with the
Company, (D) in connection with
<PAGE> 3
the defense or settlement of any claim, suit or action brought or threatened
against the Executive by or in the right of the Company or (E) with the prior
written consent of the Board. Notwithstanding any provision contained herein to
the contrary, the term "Confidential Information" shall not be deemed to include
any general knowledge, skills or experience acquired by the Executive or any
knowledge or information known or available to the public in general. The
Executive further agrees that, if requested by the Company in writing at any
time within 90 days after termination of his employment for any reason, he will
surrender to the Company all Confidential Information, and any copies thereof,
in his possession and agrees that all such materials, and copies thereof, are at
all times the property of the Company. Notwithstanding the foregoing, the
Executive shall be permitted to retain copies of, or have access to, all such
Confidential Information relating to any disagreement, dispute or litigation
(pending or threatened) involving the Executive.
(b) Definitions: Remedies. For purposes of this Section 5, the
"Company" shall be defined as the Company and its affiliated companies including
(without limitation) its successors and assigns and its subsidiaries and each of
their respective successors and assigns. In the event of a breach or threatened
breach by the Executive of the provisions of this Section 5, the Company shall
be entitled to an injunction restraining the Executive from violating such
provisions without the necessity of posting a bond therefor. Nothing herein
shall be construed as prohibiting the Company from pursuing any other remedies
available to it at law or in equity. Except as specifically set forth herein,
the parties agree that the provisions of this Section 5 shall survive the
earlier termination of the Executive's employment with the Company, as the
continuation of this covenant is necessary for the protection of the Company.
6. NONCOMPETITION.
(a) Noncompetition Activities. The Executive acknowledges that the
nature of the employment under this Agreement is such as will bring the
Executive in personal contact with patrons or customers of the Company and will
enable him to acquire valuable information as to the nature and character of the
business of the Company, thereby enabling him, by engaging in a competing
business in his own behalf, or for another, to take advantage of such knowledge
and thereby gain an unfair advantage. Accordingly, the Executive covenants and
agrees that he will not, without the prior written consent of the Company during
the Term of Employment and for the period of one year thereafter, engage
directly or indirectly for himself, or as an agent, representative, officer,
director or employee of others, in the exploration for or production of
hydrocarbons in waters offshore from the States of Texas and Louisiana, provided
that the foregoing restriction shall not apply at any time if the Executive's
employment is terminated during the Term of Employment by the Executive for Good
Reason (defined in Section 7 hereof) or by the Company for any reason other than
Cause (defined in Section 7 hereof) and, provided further, that nothing in this
Agreement shall prohibit the Executive from acquiring or holding any issue of
stock or securities of any entity registered under Section l 2 of the Securities
and Exchange Act of 1934 (as amended), listed on a national securities exchange
or quoted on the automated quotation system of the National Association of
Securities Dealers, Inc. so long as the Executive is not deemed to be an
"affiliate" of such entity as such term is used in paragraphs (c) and (d) of
Rule 145 under the Securities Act of 1933 (as amended).
(b) Scope. In the event that the provisions of this Section 6 should
ever be deemed to exceed the time, geographic or activity related limitations
permitted by applicable law, then such provisions shall be reformed to the
maximum time, geographic or activity related limitations permitted by applicable
law. In the event of a breach or threatened breach by the Executive of the
provisions of this Section 6, the Company shall be entitled to an injunction
restraining the Executive from violating such provisions without the necessity
of posting a bond therefor. Nothing herein shall be construed as prohibiting the
Company from pursuing any other remedies available to it at law or in equity.
Except as specifically set forth herein, the parties agree that this Section 6
shall remain in effect for its full term notwithstanding the earlier termination
of the Executive's employment with the Company, as the continuation of this
covenant is necessary for the protection of the Company. For purposes of this
Section 6, the "Company" shall be defined as the Company and its affiliated
companies, including (without limitation) its successors and assigns and its
subsidiaries and each of their respective successors and assigns.
<PAGE> 4
7. TERMINATION.
(a) General. The Executive's employment hereunder shall automatically
terminate on the earlier of his death or the Expiration Date. The Executive may,
at any time prior to the Expiration Date, terminate his employment hereunder for
any reason by delivering a Notice of Termination (defined below) to the Board.
The Company may, at any time prior to the Expiration Date, terminate the
Executive's employment hereunder for any reason by delivering a Notice of
Termination to the Executive, provided that in no event shall the Company be
entitled to terminate the Executive's employment prior to the Expiration Date
unless the Board shall duly adopt, by the affirmative vote of a least a majority
of the entire membership of the Board, a resolution authorizing such termination
and stating whether such termination is for Cause (defined below). The giving of
a notice pursuant to clause (i) of the proviso contained in the penultimate
sentence of Section l hereof shall not be deemed a termination of the
Executive's employment by the party giving such notice. As used in this
Agreement, "Notice of Termination" means a notice in writing purporting to
terminate the Executive's employment in accordance with this Section 7, which
notice shall (i) specify the effective date of such termination (not prior to
the date of such notice) and (ii) in the case of a termination by the Company
for Cause or Disability or a termination by the Executive for Good Reason or
Disability, set forth in reasonable detail the reason for such termination and
the facts and circumstances claimed to provide a basis for such termination.
(b) Automatic Termination on Expiration Date. In the event the
Executive's employment hereunder shall automatically terminate on the Expiration
Date for any reason other than death, the Executive shall only be entitled to
receive (i) all unpaid compensation accrued as of the termination date pursuant
to Section 3 hereof, (ii) all unused vacation time accrued by the Executive as
of the termination date, (iii) all amounts owing to the Executive under Sections
4(b) and 4(c) hereof and (iv) those benefits under Section 4 which are required
under the Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
or other laws. The amounts described in clauses (i), (ii) and (iii) of the
foregoing sentence shall be paid to the Executive in a lump sum payment promptly
after the Expiration Date.
(c) Termination by Company for Cause. If the Company terminates the
Executive's employment for Cause, the Executive shall only be entitled to
receive the compensation and other payments described in paragraph (b) above,
such compensation and other payments to be paid as if the Executive's employment
had automatically terminated without the giving of any Notice of Termination. As
used in this Agreement, "Cause" shall mean (i) any material failure of the
Executive to perform his duties specified in Section 2 of this Agreement (other
than any such failure resulting from the Executive's incapacity due to illness
or other disability) after written notice of such failure has been given to the
Executive by the Board and such failure shall have continued for 30 days after
receipt of such notice, (ii) gross or willful negligence or intentional
wrongdoing or misconduct, (iii) a material breach by the Executive of Section 5
or 6 of this Agreement, or (iv) conviction of the Executive of a felony offense
involving moral turpitude, any of which has or have a material adverse effect on
the Executive's ability to perform the duties of his position or on the
financial condition or profitability of the Company.
(d) Death or Disability. To provide for the event the Executive's
employment is automatically terminated on account of his death or is terminated
by either the Company or the Executive on account of Disability (defined below),
the Company shall purchase and provide for the Executive life insurance in the
amount of one times annual salary and shall purchase and provide for the
Executive supplemental executive long-term disability benefits (to the extent
necessary to provide the total benefits described herein, net of the Company's
existing group long-term disability plan) to provide salary replacement in the
amount of 60% of annual salary at the date of disability (to continue until at
least age 65, or for life if reasonably practicable). As used herein,
"Disability" means any physical or mental condition of the Executive that (i)
prevents the Executive from being able to perform the services required under
this Agreement, (ii) has continued for at least 180 consecutive days during any
12-month period and (iii) is reasonably expected to continue. The Company's
obligation to provide to the Executive long-term disability benefits hereunder
shall be defined by the long-term disability benefits contract it is able to
procure from an unrelated third party. For that purpose, the definition of
disability shall be as stated in the contract. The Company and the Executive
recognize that the definition of Disability hereunder may differ from the
contract definition and the benefits payable shall be those as stated in the
contract. The Company, however, agrees to obtain a contract with a definition of
disability as similar as possible to the
<PAGE> 5
definition stated hereunder. Moreover, the Company and the Executive agree that
for purposes of the other provisions of this Agreement, the definition of
Disability as stated herein shall control.
(e) Termination by Company Without Cause or by the Executive with Good
Reason. If either the Company terminates the Executive's employment for any
reason other than for Cause or on account of Disability or the Executive
terminates his employment for Good Reason (as hereinafter defined), the Company
shall:
(i) pay to the Executive, within 30 days after the date of
such termination, a lump sum cash payment equal to 2.99 times the
Executive's then current annual rate of total compensation;
(ii) pay the Executive any accrued but unpaid compensation as
of the date of the termination of employment; and
(iii) continue until the first anniversary of the termination
of the Executive's employment, or such longer period as any plan,
program or policy or ERISA or other laws may provide, benefits to the
Executive as set forth in Section 7(f) below.
As used in this Agreement, "Good Reason" shall mean: (A) the failure by the
Company to elect or re-elect or to appoint or re-appoint the Executive to the
office described in Section 2 hereof without Cause; (B) a material change in the
powers, duties, responsibilities or functions of the Executive as described in
Section 2 hereof, including (without limitation) any change which would alter
the Executive's reporting responsibilities or cause the Executive's position
with the Company to be of less dignity, responsibility, importance or scope than
the positions (and attributes thereof) described in Section 2 hereof, (C)
without the Executive's prior written consent, the relocation of the Company's
principal executive offices outside the greater Houston, Texas metropolitan area
or requiring the Executive to be based other than at such principal executive
offices, (D) the failure of the Company to obtain any assumption agreement
required by Section 16 hereof, (E) the failure by the Company to pay the
Executive within ten days after a written demand therefor any installment of any
previous award of or deferred compensation, if any, under any employee benefit
plan or any deferred compensation program in effect in which the Executive may
have participated, (F) any other material breach of this Agreement by the
Company, or (G) the occurrence of a Change of Control if, within one year
thereafter, the Company shall:
(1) fail to continue in effect (x) any material benefit or
compensation plan in which the Executive is participating immediately
prior to such Change of Control or (y) a plan providing the Executive
with substantially similar benefits;
(2) take any action that would materially adversely affect the
Executive's participation in or reduce the Executive's benefits under
any of the plans referred to in clause (i) above, but excluding any
such action by the Company that is required by law;
(3) amend, modify or repeal any provision of its certificate
of incorporation or bylaws that was in effect immediately prior to such
Change of Control, if such amendment, modification or repeal would
materially adversely affect the Executive's rights to indemnification
by the Company; or
(4) violate or breach any obligation of the Company in effect
immediately prior to such Change of Control (regardless whether such
obligation shall be set forth in the bylaws of the Company or
elsewhere) to indemnify the Executive against any claim, loss, expense
or liability sustained or incurred by the Executive by reason, in whole
or in part, of the fact that the Executive is or was an officer,
director or employee of the Company or any subsidiary or affiliate of
the Company.
As used in this Agreement, a "Change of Control" shall mean:
<PAGE> 6
(i) the acquisition after 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% or more of either (i) the then
outstanding shares of common stock of the Company (the "Outstanding
Common Stock") or (ii) the combined voting power of the then
outstanding voting securities of the Company entitled to vote generally
in the election of directors (the "Outstanding Voting Securities"),
provided that for purposes of this subsection (i), the following
acquisitions shall not constitute a Change of Control: (A) any
acquisition directly from the Company, (B) any acquisition by the
Company, (C) any acquisition by any employee benefit plan (or 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 shareholders, 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") in each case, unless, 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 (l)
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.
(f) Insurance and Other Special Benefits. To the extent the Executive
is eligible thereunder, for a period of 12 months following termination pursuant
to Section 7(e) hereof, the Executive shall continue to be provided life
insurance policies provided to the Executive on the date hereof or such
successor policies in effect at the time of the Executive's termination, and
shall also continue to be covered for the applicable period by each other
insurance, health or other benefit program, plan or policy (excluding long-term
disability) by which he was covered at the time of the Executive's termination.
In the event the Executive is ineligible to continue to be so covered under the
terms of any such life insurance, health or other benefit program plan or
policy, the Company shall provide to the Executive through other sources such
benefits (excluding long-term disability), including such additional benefits,
as may be necessary to make
<PAGE> 7
the benefits applicable to the Executive substantially equivalent to those in
effect immediately prior to such termination, provided that if during such
period the Executive should enter into the employ of another company or firm
which provides to the Executive substantially similar benefit coverage, the
Executive's participation in the comparable benefits provided by the Company,
either directly or through such other sources, shall cease. Nothing contained in
this paragraph shall be deemed to require or permit termination or restriction
of any of the Executive's coverage under any plan or program of the Company or
any of its subsidiaries or any successor plan or program thereto to which the
Executive is entitled under the terms of such plan or program, whether at the
end of the aforementioned 12-month period or at any other time.
(g) Certain Additional Payments by the Company. Anything in this
Agreement to the contrary notwithstanding, in the event it shall be determined
that any payment or distribution by the Company to or for the benefit of the
Executive, whether paid or payable or distributed or distributable pursuant to
the terms of this Agreement or otherwise (a "Payment"), would be subject to the
excise tax imposed by Section 4999 of the Code or any interest or penalties with
respect to such excise tax (such excise tax, together with any such interest and
penalties, are hereinafter collectively referred to as the "Excise Tax"), then
the Executive shall be entitled to receive an additional payment (a "Gross-Up
Payment") in an amount such that after payment by the Executive of all taxes
(including any interest or penalties imposed with respect to such taxes),
including any Excise Tax imposed upon the Gross-Up Payment, the Executive
retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon
the Payments. Subject to the provisions of this Section 7(g), all determinations
required to be made hereunder, including whether a Gross-Up Payment is required
and the amount of such Gross-Up Payment, shall be made by Arthur Andersen L.L.P.
or such other accounting firm which at the time audits the financial statements
of the Company (the "Accounting Firm") at the sole expense of the Company, which
shall provide detailed supporting calculations both to the Company and the
Executive within 15 business days of the date of termination of the Executive's
employment under this Agreement, if applicable, or such earlier time as is
requested by the Company. If the Accounting Firm determines that no Excise Tax
is payable by the Executive, the Accounting Firm shall furnish the Executive
with an opinion that he has substantial authority not to report any Excise Tax
on his federal income tax return. Any determination by the Accounting Firm shall
be binding upon the Company and the Executive. As a result of the uncertainty in
the application of Section 4999 of the Code at the time of the initial
determination by the Accounting Firm hereunder, it is possible that Gross-Up
Payments, which will not have been made by the Company should have been made (an
"Underpayment"), consistent with the calculations required to be made hereunder.
If the Company exhausts its remedies pursuant hereto and the Executive
thereafter is required to make a payment of any Excise Tax, the Accounting Firm
shall determine the amount of the Underpayment that has occurred and any such
Underpayment shall be promptly paid by the Company to or for the benefit of the
Executive.
The Executive shall notify the Company in writing of any claim by the
Internal Revenue Service that, if successful, would require the payment by the
Company of the Gross-Up Payment. Such notification shall be given as soon as
practicable but no later than ten business days after the Executive knows of
such claim and shall apprise the Company of the nature of such claim and the
date on which such claim is requested to be paid. The Executive shall not pay
such claim prior to the expiration of the 30-day period following the date on
which it gives such notice to the Company (or such shorter period ending on the
date that any payment of taxes with respect to such claim is due). If the
Company notifies the Executive in writing prior to the expiration of such period
that it desires to contest such claim, the Executive shall:
(i) give the Company any information reasonably requested by
the Company relating to such claim,
(ii) take such action in connection with contesting such claim
as the Company shall reasonably request in writing from time to time,
including (without limitation) accepting legal representation with
respect to such claim by an attorney reasonably selected by the
Company,
(iii) cooperate with the Company in good faith to effectively
contest such claim, and
<PAGE> 8
(iv) permit the Company to participate in any proceedings
relating to such claim;
provided that the Company shall bear and pay directly all costs and expenses
(including additional interest and penalties) incurred in connection with such
contest and shall indemnify and hold the Executive harmless, on an after-tax
basis, for any Excise Tax or income tax, including interest and penalties with
respect thereto, imposed as a result of such representation and payment of costs
and expenses. Without limitation on the foregoing provisions hereof the Company
shall control all proceedings taken in connection with such contest and, at its
sole option, may pursue or forego any and all administrative appeals,
proceedings, hearings and conferences with the taxing authority in respect of
such claim and may, at its sole option, either direct the Executive to pay the
tax claimed and sue for a refund or contest the claim in any permissible manner,
and the Executive agrees to prosecute such contest to a determination before any
administrative tribunal, in a court of initial jurisdiction and in one or more
appellate courts, as the Company shall determine, provided that if the Company
directs the Executive to pay such claim and sue for a refund, the Company shall
advance the amount of such payment to the Executive, on an interest-free basis
and shall indemnify and hold the Executive harmless, on an after-tax basis, from
any Excise Tax or income tax, including interest or penalties with respect
thereto, imposed with respect to such advance or with respect to any imputed
income with respect to such advance, and further provided that any extension of
the statute of limitations relating to payment of taxes for the taxable year of
the Executive with respect to which such contested amount is claimed to be due
is limited solely to such contested amount. Furthermore, the Company's control
of the contest shall be limited to issues with respect to which a Gross-Up
Payment would be payable hereunder and the Executive shall be entitled to settle
or contest, as the case may be, any other issue raised by the Internal Revenue
Service or any other taxing authority.
If, after the receipt by the Executive of an amount advanced by the
Company pursuant hereto, the Executive becomes entitled to receive any refund
with respect to such claim, the Executive shall (subject to the Company's
complying with the requirements hereof) promptly pay to the Company the amount
of such refund (together with any interest paid or credited thereon after taxes
applicable thereto). If, after the receipt by the Executive of an amount
advanced by the Company pursuant hereto, a determination is made by the Internal
Revenue Service or other taxing authority that the Executive shall not be
entitled to any refund with respect to such claim and the Company does not
notify the Executive in writing of its intent to contest such denial of refund
prior to the expiration of 30 days after such determination, then such advance
shall be forgiven and shall not be required to be repaid and the amount of such
advance shall offset, to the extent thereof, the amount of Gross-Up Payment
required to be paid.
(h) Either party may, within 15 days after receipt of a Notice of
Termination from the other party, provide notice to the other party that a
dispute exists concerning the termination, in which event the dispute shall be
resolved in accordance with Section 9 hereof. Notwithstanding the pendency of
any such dispute and notwithstanding any provision of this Agreement to the
contrary, the Company will (i) continue to pay the Executive the annual base
salary described in Section 3 hereof and (ii) continue the Executive as a
participant in all compensation and benefit plans in which the Executive was
participating when the relevant Notice of Termination was given, until the
dispute is finally resolved or, with respect to a Notice of Termination given by
the Executive, the date of termination specified in such Notice of Termination
if earlier, but, in each case, not past the Expiration Date. If (i) the Company
gives a Notice of Termination to the Executive, (ii) the Executive disputes the
termination as contemplated by this paragraph (h) and (iii) such dispute is
finally resolved in favor of the Company in accordance with Section 9 hereof,
the Executive shall be required to refund to the Company any amounts paid to the
Executive under this paragraph (h) but only if, and then only to the extent, the
Executive is not otherwise entitled to receive such amounts under this
Agreement.
8. NONEXCLUSIVITY OF RIGHTS. Nothing in this Agreement shall prevent or
limit the Executive's continuing or future participation in any benefit, bonus
incentive or other plan or program provided by the Company or any of its
affiliated companies and for which the Executive may qualify, nor shall anything
herein limit or otherwise affect such rights as the Executive may have under any
stock option or other agreements with the Company or any of its affiliated
companies. Amounts which are vested benefits or which the Executive is otherwise
entitled to receive under any plan or program of the Company or any of its
affiliated companies at or subsequent to the date of termination of the
Executive's employment under this Agreement shall be payable in accordance with
such plan or program.
<PAGE> 9
9. RESOLUTION OF DISPUTES.
(a) Negotiation. The parties shall attempt in good faith to resolve any
dispute arising out of or relating to this Agreement promptly by negotiations
between the Executive and an executive officer of the Company who has authority
to settle the controversy. Any party may give the other party written notice of
any dispute not resolved in the normal course of business. Within 10 days after
the effective date of such notice, the Executive and an executive officer of the
Company shall meet at a mutually acceptable time and place within the Houston,
Texas metropolitan area, and thereafter as often as they reasonably deem
necessary, to exchange relevant information and to attempt to resolve the
dispute. If the matter has not been resolved within 30 days of the disputing
party's notice, or if the parties fail to meet within 10 days, either party may
initiate arbitration of the controversy or claim as provided hereinafter. If a
negotiator intends to be accompanied at a meeting by an attorney, the other
negotiator shall be given at least three business days' notice of such intention
and may also be accompanied by an attorney. All negotiations pursuant to this
Section 9(a) shall be treated as compromise and settlement negotiations for the
purposes of the federal and state rules of evidence and procedure.
(b) Arbitration. Any dispute arising out of or relating to this
Agreement or the breach, termination or validity thereof, which has not been
resolved by nonbinding means as provided in Section 9(a) within 60 days of the
initiation of such procedure, shall be finally settled by arbitration conducted
expeditiously in accordance with the Center for Public Resources, Inc. ("CPR")
Rules for Non-Administered Arbitration of Business Disputes by three independent
and impartial arbitrators, of whom each party shall appoint one, provided that
if one party has requested the other to participate in a non-binding procedure
and the other has failed to participate, the requesting party may initiate
arbitration before the expiration of such period. Any such arbitration shall
take place in Harris County, Texas. Any arbitrator not appointed by a party
shall be appointed from the CPR Panels of Neutrals. The arbitration shall be
governed by the United States Arbitration Act and any judgment upon the award
decided upon by the arbitrators may be entered by any court having jurisdiction
thereof. Each party hereby acknowledges that compensatory damages include
(without limitation) any benefit or right of indemnification given by another
party to the other under this Agreement.
10. EXPENSES. The Company shall promptly pay or reimburse the Executive
for all costs and expenses, including, without limitation, court costs and
attorneys' fees, incurred by the Executive as a result of any claim, action or
proceeding (including, without limitation a claim action or proceeding by the
Executive against the Company) arising out of, or challenging the validity or
enforceability of, this Agreement or any provision hereof.
11. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the internal laws of the State of Texas. Venue and jurisdiction
of any act on relating to this agreement shall lie in Harris County, Texas.
12. NOTICE. Any notice, payment, demand or communication required or
permitted to be given by this Agreement shall be deemed to have been
sufficiently given or served for all purposes if delivered personally or if sent
by registered or certified mall, return receipt requested, postage prepaid,
addressed to such party at its address set forth below such party's signature to
this Agreement or to such other address as shall have been furnished in writing
by such party for whom the communication is intended. Any such notice shall be
deemed to be given on the date so delivered.
13. SEVERABILITY. In the event any provisions hereof shall he modified
or held ineffective by any court, such adjudication shall not invalidate or
render ineffective the balance of the provisions hereof.
14. ENTIRE AGREEMENT. This Agreement constitutes the sole agreement
between the parties with respect to the employment of the Executive by the
Company and supersedes any and all other agreements, oral or written, between
the parties.
15. AMENDMENT AND WAIVER. This Agreement may not be modified or amended
except by a writing signed by the parties. Any waiver or breach of any of the
terms of this Agreement shall not operate as a waiver of any
<PAGE> 10
other breach of such terms or conditions, or any other terms or conditions, nor
shall any failure to enforce any provisions hereof operate as a waiver of such
provision or any other provision hereof.
16. ASSIGNMENT. This Agreement is a personal employment contract and
the rights and interests of the Executive hereunder may not be sold,
transferred, assigned or pledged. The Company may assign its rights under this
Agreement to (i) any entity into or with which the Company is merged or
consolidated or to which the Company transfers all or substantially all of its
assets or (ii) any entity, which at the time of such assignment, controls, is
under common control with, or is controlled by the Company, provided that the
Company will require any successor (whether direct or indirect, by purchase,
merger, consolidation or otherwise) to all or substantially all of the business
and/or assets of the Company, by agreement in form and substance reasonably
acceptable to the Executive, to expressly assume and agree to perform this
Agreement in the same manner and to the same extent that the Company would be
required to perform it if not such succession had taken place.
17. SUCCESSORS. This Agreement shall be binding upon and inure to the
benefit of the Executive and his heirs, executors, administrators and legal
representatives. This Agreement shall be binding upon and inure to the benefit
of the Company and its successors and assigns.
18. SECTION HEADINGS. The section headings in this Agreement have been
inserted for convenience and shall not be used for interpretive purposes or to
otherwise construe this Agreement.
19. NO MITIGATION OR SET-OFF. The provisions of this Agreement are not
intended to, nor shall they be construed to, require that the Executive mitigate
the amount of any payment provided for in this Agreement by seeking or accepting
other employment, nor shall the amount of any payment provided for in this
Agreement be reduced by any compensation earned by the Executive as a result of
his employment by another employer or otherwise. The Company's obligations to
make the payments to the Executive required under this Agreement and otherwise
to perform its obligations hereunder shall not be affected by any set off,
counterclaim, recoupment, defense or other claim, right or action that the
Company may have against the Executive.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first written above and intend that this Agreement have the effect
of a sealed instrument.
/s/ Thomas E. Schwartz
----------------------
Thomas E. Schwartz
THE HOUSTON EXPLORATION COMPANY
By:/s/ James G. Floyd
-------------------------
Name: James G. Floyd
Title: President
<PAGE> 11
THOMAS E. SCHWARTZ
EXHIBIT A
---------
Annual Incentive Plan
The Executive will participate in the Company's annual incentive bonus
plan which will be based on a target measure of profitability to be determined
by the Board of Directors from year to year ("Target"). If the Company reaches
100% of Target, the Executive would earn 100% of his target bonus. The target
bonus will be determined as a percentage of the Executive's annual salary. The
percentage for the annual bonus for the Executive and the other senior
executives of the Company will be:
<TABLE>
<CAPTION>
Percentage of Salary
for Target Annual Bonus
-----------------------
<S> <C>
Thomas E. Schwartz, 55%
Vice President,
Geophysics
</TABLE>
Moreover, if the Company performs better or worse than the Target, the bonus
will be directly affected. A schedule of Target and target bonus will be as
follows:
<TABLE>
<CAPTION>
Percentage of Percentage of Target Annual
Target Earned by Company Incentive Bonus Earned
---------------------------
<S> <C>
Less than 70% 0%
70% 40%
80% 60%
90% 80%
100% 100%
110% 120%
120% 140%
130% 160%
140% 180%
150% and more 200%
</TABLE>
<PAGE> 12
As an example, if (1) the Target is $4,500,000, (2) an executive's annual salary
is $250,000, (3) the target annual bonus percentage is 45%, and (4) actual
results achieved reaches $4,500,000, the executive's target bonus would be
$112,500. Since actual results achieved equalled 100% of Target, he would earn
$112,500. If actual results achieved were $5,220,000 (116%), he would be
entitled to 132% of his target bonus, or $148,500.
Long Term Incentive Plan
The Executive will participate in the Company's 1996 Stock Option Plan.
The 1996 Stock Option Plan shall be paid in Company stock options under a plan
providing for qualified incentive stock options (for federal income tax
purposes) to the extent possible and non-qualified stock options for the
remainder. On May 1, 1998, a grant of options with an exercise price at the
market trading price per share shall be granted in amounts described as follows:
<TABLE>
<CAPTION>
Shares
------
<S> <C>
Thomas E. Schwartz 30,000 shares @ $22.9375
</TABLE>
**As approved by the Compensation Committee, the Executive has been granted the
option to purchase 30,000 shares at $22.9375 per share effective May 1, 1998.
These options will have a term of ten years and will vest in one-fifth
increments over five years beginning on the first anniversary of the date
granted; provided, however, that such options shall be deemed fully vested (i)
on the death of the Executive, (ii) on the termination of the Executive's
employment on the Disability of the Executive after the Executive had already
vested 60% or more of the option grant, or (iii) on the termination of the
Executive's employment by the Company without Cause or by the Executive for Good
Reason, or after the third anniversary of the date granted for any reason by the
Company other than for Cause.
Thereafter, and during the Term of Employment, each year on the
anniversary of his Employment Agreement, the Executive shall be eligible for
consideration in accordance with the Company's performance and the terms of the
<PAGE> 13
Plan for an additional option grant for that number of shares equal to a
percentage of the Executive's annual salary divided by a per share option value
determined under the Black-Scholes model. The percentage of the annual Long Term
Incentive grant for the Executive will be:
<TABLE>
<CAPTION>
<S> <C>
Target Percentage of Base Salary
--------------------------------
Thomas E. Schwartz 50
</TABLE>
These options will vest in accordance with the Plan at the rate of one-third per
year of the number of option shares beginning with the first anniversary of the
award and each anniversary thereafter with accelerated vesting as provided
above. These options will have a ten year term.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF THE HOUSTON EXPLORATION COMPANY SET FORTH IN THE
COMPANY'S FORM 10-Q FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 4,063
<SECURITIES> 0
<RECEIVABLES> 25,938
<ALLOWANCES> 0
<INVENTORY> 1,423
<CURRENT-ASSETS> 32,650
<PP&E> 810,165
<DEPRECIATION> 275,986
<TOTAL-ASSETS> 570,243
<CURRENT-LIABILITIES> 31,052
<BONDS> 188,000
0
0
<COMMON> 239
<OTHER-SE> 274,936
<TOTAL-LIABILITY-AND-EQUITY> 570,243
<SALES> 68,025
<TOTAL-REVENUES> 68,595
<CGS> 0
<TOTAL-COSTS> 52,687
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,250
<INCOME-PRETAX> 14,658
<INCOME-TAX> 4,629
<INCOME-CONTINUING> 10,029
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,029
<EPS-PRIMARY> .42
<EPS-DILUTED> .42
</TABLE>
