<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to ss. 240.14a-11(c) or ss. 240.14a-12
THE HOUSTON EXPLORATION COMPANY
--------------------------------------------------------------------------
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
--------------------------------------------------------------------------
(NAME OF PERSON(S) FILING PROXY STATEMENT IF OTHER THAN THE REGISTRANT)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
-----------------------------------------------------------------------
2) Aggregate number of securities to which transaction applies:
-----------------------------------------------------------------------
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
-----------------------------------------------------------------------
4) Proposed maximum aggregate value of transaction:
5) Total fee paid:
-------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
-----------------------------------------------
2) Form, Schedule or Registration Statement No.:
-----------------------------------------------------------------------
3) Filing Party:
----------------------------------------------------------
4) Date Filed:
------------------------------------------------------------
<PAGE> 2
THE HOUSTON EXPLORATION COMPANY
1100 LOUISIANA, SUITE 2000
HOUSTON, TEXAS 77002
March 29, 1999
TO OUR STOCKHOLDERS:
You are cordially invited to attend the 1999 Annual Meeting of
Stockholders of The Houston Exploration Company to be held on Tuesday, April 27,
1999, at 10:00 a.m., local time, at the DoubleTree Hotel--Allen Center, 400
Dallas Street, Houston, Texas. A Notice of the Annual Meeting, Proxy Statement
and form of proxy are enclosed with this letter.
We encourage you to read the Notice of the Annual Meeting and Proxy
Statement so that you may be informed about the business to come before the
meeting. Your participation in the Company's business is important, regardless
of the number of shares that you hold. To ensure your representation at the
meeting, please promptly sign and return the accompanying proxy card in the
postage-paid envelope.
We look forward to seeing you on April 27th.
Sincerely,
James G. Floyd
President
<PAGE> 3
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD APRIL 27, 1999
To the Stockholders of The Houston Exploration Company:
The Annual Meeting of Stockholders (the "Annual Meeting") of The
Houston Exploration Company will be held on Tuesday, April 27, 1999, at 10:00
a.m., local time, at the DoubleTree Hotel--Allen Center, 400 Dallas Street,
Houston, Texas, for the following purposes:
1. To elect seven Directors of the Company;
2. To approve the issuance to MarketSpan Corporation d/b/a
KeySpan Energy ("KeySpan Energy"), the owner of 64% of Houston
Exploration's voting stock, of up to $150 million of Houston
Exploration common stock, par value $.01 per share (the "Common Stock")
upon conversion of any amounts outstanding under a subordinated loan
from KeySpan Energy at January 1, 2000 at a conversion price based on
the market price of Houston Exploration's common stock or based on a
formula with a conversion ratio that is designed to achieve market
price;
3. To ratify and approve the appointment of Arthur Andersen
LLP as the Company's independent public accountants for its fiscal year
ending December 31, 1999; and
4. To act upon such other business as may properly come before
the meeting or any adjournments thereof.
Only stockholders of record at the close of business on March 8, 1999
will be entitled to notice of and to vote at the Annual Meeting.
It is important that your shares be represented at the Annual Meeting
regardless of whether you plan to attend. THEREFORE, PLEASE MARK, SIGN AND DATE
THE ENCLOSED PROXY AND RETURN IT IN THE ACCOMPANYING POSTPAID ENVELOPE AS
PROMPTLY AS POSSIBLE. If you are present at the Annual Meeting, and wish to do
so, you may revoke the proxy and vote in person.
By Order of the Board of Directors,
James F. Westmoreland
Secretary
Houston, Texas
March 29, 1999
<PAGE> 4
THE HOUSTON EXPLORATION COMPANY
1100 LOUISIANA, SUITE 2000
HOUSTON, TEXAS 77002
PROXY STATEMENT
FOR
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD APRIL 27, 1999
SOLICITATION AND REVOCABILITY OF PROXIES
The accompanying proxy is solicited by the Board of Directors of The
Houston Exploration Company (the "Company"), to be voted at the Annual Meeting
of Stockholders of the Company to be held on Tuesday, April 27, 1999 (the
"Annual Meeting"), at 10:00 a.m., local time, at the DoubleTree Hotel--Allen
Center, 400 Dallas Street, Houston, Texas, for the purposes set forth in the
accompanying Notice of Annual Meeting of Stockholders, and at any adjournment(s)
of the Annual Meeting. If the accompanying proxy is properly executed and
returned, the shares it represents will be voted at the Annual Meeting in
accordance with the directions noted thereon or, if no direction is indicated,
it will be voted in favor of the proposals described in this Proxy Statement. In
addition, the proxy confers discretionary authority to the persons named in the
proxy authorizing those persons to vote, in their discretion, on any other
matters properly presented at the Annual Meeting. The Board of Directors is not
currently aware of any such other matters.
Each stockholder of the Company has the unconditional right to revoke
his proxy at any time prior to its exercise, either in person at the Annual
Meeting or by written notice to the Company addressed to Secretary, The Houston
Exploration Company, 1100 Louisiana, Suite 2000, Houston, Texas 77002. No
revocation by written notice will be effective unless such notice has been
received by the Secretary of the Company prior to the day of the Annual Meeting
or by the inspector of election at the Annual Meeting.
The principal executive offices of the Company are located at 1100
Louisiana, Suite 2000, Houston, Texas 77002. This Proxy Statement and the
accompanying Notice of Annual Meeting of Stockholders and Proxy are being mailed
to the Company's stockholders on or about March 29, 1999.
In addition to the solicitation of proxies by use of this Proxy
Statement, directors, officers and employees of the Company may solicit the
return of proxies by mail, personal interview, telephone or telegraph. Officers
and employees of the Company will not receive additional compensation for their
solicitation efforts, but they will be reimbursed for any out-of-pocket expenses
incurred. Brokerage houses and other custodians, nominees and fiduciaries will
be requested, in connection with the stock registered in their names, to forward
solicitation materials to the beneficial owners of such stock.
All costs of preparing, printing, assembling and mailing the Notice of
Annual Meeting of Stockholders, this Proxy Statement, the enclosed form of proxy
and any additional materials, as well as the cost of forwarding solicitation
materials to the beneficial owners of stock and all other costs of solicitation,
will be borne by the Company.
<PAGE> 5
PURPOSES OF THE MEETING
At the Annual Meeting, the Company's stockholders will be asked to
consider and act upon the following matters:
1. To elect seven Directors of the Company;
2. To approve the issuance to KeySpan Energy, the owner of 64%
of Houston Exploration's voting stock, of up to $150 million of
Houston Exploration Common Stock upon conversion of any amounts
outstanding under a subordinated loan from KeySpan Energy at January 1,
2000 at a conversion price based on the market price of Houston
Exploration's common stock or based on a formula with a conversion
ratio that is designed to achieve market price;
3. To ratify and approve the appointment of Arthur Andersen
LLP as the Company's independent public accountants for its fiscal year
ending December 31, 1999; and
4. To act upon such other business as may properly come before
the meeting or any adjournments thereof.
QUORUM AND VOTING
The close of business on March 8, 1999 has been fixed as the record
date (the "Record Date") for the determination of the stockholders entitled to
vote at the Annual Meeting and any adjournment(s) thereof. As of the Record
Date, the Company had issued and outstanding 23,895,040 shares of common stock,
par value $.01 per share (the "Common Stock").
Each stockholder of record of Common Stock will be entitled to one vote
per share on each matter that is called to vote at the Annual Meeting. Shares of
Common Stock may not be voted cumulatively.
The presence, either in person or by proxy, of holders of a majority of
the outstanding shares of Common Stock is necessary to constitute a quorum at
the Annual Meeting. Abstentions and broker non-votes are counted for purposes of
determining whether a quorum is present. A plurality vote is required for the
election of Directors in Proposal Number 1. Accordingly, if a quorum is present
at the Annual Meeting, the seven persons receiving the greatest number of votes
will be elected to serve as Directors. Withholding authority to vote for a
Director nominee and broker non-votes in the election of Directors will not
affect the outcome of the election of Directors.
All other matters to be voted on will be decided by the vote of the
holders of a majority of the shares present or represented at the Annual Meeting
and entitled to vote on such matter. On any such matter, an abstention will have
the same effect as a negative vote but, because shares held by brokers will not
be considered entitled to vote on matters as to which the brokers withhold
authority, a broker non-vote will have no effect on such vote.
All proxies that are properly completed, signed and returned prior to
the Annual Meeting will be voted. Any Proxy given by a stockholder may be
revoked by the stockholder at any time before it is exercised by (1)filing with
the Secretary of the Company an instrument revoking the proxy, (2) executing and
returning a proxy bearing a later date or (3) attending the Annual Meeting and
expressing a desire to vote his shares of Common Stock in person.
Votes will be counted by The Bank of New York, the Company's transfer
agent and registrar.
-2-
<PAGE> 6
PROPOSAL NUMBER 1:
ELECTION OF DIRECTORS
Each of the persons named below has been nominated by the Board of
Directors for election as a Director of the Company until the 2000 Annual
Meeting of Stockholders or until his successor has been duly elected and
qualified. The seven nominees for election as Directors that receive the most
votes cast at the Annual Meeting will be elected as Directors. Each of the
nominees listed below is a member of the Company's present Board of Directors.
Lester H. Smith, a Director of the Company since 1996 whose term
expires at the Annual Meeting, will not stand for reelection. Pursuant to the
Company's Restated Certificate of Incorporation, as amended on April 24, 1997,
and the Company's Bylaws, the Board has passed a resolution reducing the number
of Directors from eight to seven, effective as of the date of the Annual
Meeting.
If, at the time of or prior to the Annual Meeting, any of the nominees
should be unable or decline to serve, the discretionary authority provided in
the Proxy may be used to vote for a substitute or substitutes designated by the
Board of Directors. The Board of Directors has no reason to believe that any
substitute nominee or nominees will be required.
NOMINEES FOR ELECTION AS DIRECTORS
The names of the nominees for election as Directors, and certain
additional information with respect to each of them, are set forth below.
<TABLE>
<CAPTION>
YEAR FIRST
NAME AGE POSITION WITH THE COMPANY BECAME A DIRECTOR
---- --- ------------------------- -----------------
<S> <C> <C> <C>
James G. Floyd................ 62 President and Chief Executive Officer 1986
and Director
Robert B. Catell.............. 62 Chairman of the Board of Directors 1986
Gordon F. Ahalt............... 71 Director 1996
Russell D. Gordy.............. 48 Director 1986
Craig G. Matthews............. 56 Director 1993
James Q. Riordan.............. 71 Director 1996
Donald C. Vaughn.............. 63 Director 1997
</TABLE>
James G. Floyd has been President and Chief Executive Officer and a
Director of the Company since 1986. Mr. Floyd was President of Seagull E&P Inc.
("Seagull") and a Director of Seagull Energy Corporation, Seagull's parent, from
1981 to 1986. Mr. Floyd was general manager of the offshore division of Houston
Oil and Minerals from 1978 to 1981. Mr. Floyd joined Houston Oil and Minerals
Corporation ("Houston Oil and Minerals") in 1972 after five years as an
independent geologist. Mr. Floyd began his career with Amoco Production Company
in 1962. Mr. Floyd holds a B.S. and an M.S. in geology from the University of
Florida.
Robert B. Catell has been Chairman of the Board of Directors of the
Company since 1986. Mr. Catell has been Chairman of the Board and Chief
Executive Officer of The Brooklyn Union Gas Company ("Brooklyn Union") since
1996 and Chairman of the Board, President and Chief Executive Officer of KeySpan
Energy Corporation since 1997. Brooklyn Union became a wholly owned subsidiary
of KeySpan in September 1997. Mr. Catell was appointed Chairman and Chief
Executive Officer of MarketSpan Corporation d/b/a KeySpan Energy, the company
formed by the merger of KeySpan Energy Corporation and the Long Island Lighting
Company on July 31, 1998. Mr. Catell was Chief Executive Officer and President
of Brooklyn Union from 1991 to 1996. Mr. Catell has been associated with
Brooklyn Union since 1958 and has been an officer of Brooklyn Union since 1974.
He is also the Chairman of the Board of Taylor Gas Liquids, Ltd., a publicly
traded royalty trust based in Canada. Mr. Catell received both his Bachelor's
and Master's Degrees in Mechanical Engineering from City College of New York. He
holds a Professional Engineer's License in New York State, and attended Columbia
University's Executive Development Program and Harvard Business School's
Advanced Management Program. Mr. Catell is Trustee of Brooklyn Law School;
Chairman and Director of Alberta Northeast Inc. and Boundary Gas, Inc.; Past
Chairman of Energy Association of New York State the American Gas Association; a
Director of Independence Community Bank; Director and Vice Chairman of The
Business Council
-3-
<PAGE> 7
of New York State, Inc.; Director and Chairman of the Gas Research Institute;
and Director of New York City Partnership and New York State Energy Research and
Development Authority.
Gordon F. Ahalt has been a Director of the Company since 1996. Mr.
Ahalt has been President of G.F.A. Inc., a petroleum industry financial and
management consulting firm, since 1982. Mr. Ahalt was a consultant to Brooklyn
Union until May 1998. He is a consultant to W.H. Reaves Co., Inc. Mr. Ahalt
serves as a Director for the Bancroft and Ellsworth Convertible Funds, the
Harbinger Group and Cal Dive International. Mr. Ahalt received a B.S. in
Petroleum Engineering in 1951 from the University of Pittsburgh, attended New
York University's Business School and is a graduate of Harvard Business School's
Advanced Management Program. He worked for Amoco Corporation from 1951 to 1955,
Chase Manhattan Bank from 1955 to 1972, White Weld & Co., Inc. from 1972 to
1973, Chase Manhattan Bank from 1974 through 1976, served as President and Chief
Executive Officer of International Energy Bank London from 1977 through 1979 and
as Chief Financial Officer of Ashland Oil Inc. from 1980 through 1981.
Russell D. Gordy has been a Director of the Company since 1986. Mr.
Gordy has been Managing General Partner of S.G. Interests, a private firm
specializing in oil and gas investments, since 1992. Prior to forming S.G.
Interests, Mr. Gordy was Managing Partner of Northwind Exploration, a private
oil and gas firm formed in 1981 to specialize in exploration along the Texas and
Louisiana Gulf Coast. From 1974 to 1981 Mr. Gordy served in various financial
capacities for Houston Oil and Minerals Corporation. Mr. Gordy holds a B.B.A. in
accounting from Sam Houston State University and is a C.P.A. Mr. Gordy is a
member of the Board of Directors, or equivalent directing body in the case of
partnerships or limited liability companies, of SG Interests I-IV, Gordy Oil
Company, Gordy Gas Corporation, San Juan Compression, L.L.C., SG Interests,
Inc., SG Methane Company, Inc., Gurnee Gas Company L.L.C., Rock Creek Ranch,
Inc. and Lone Star Land & Cattle Company.
Craig G. Matthews has been a Director of the Company since 1993. Mr.
Matthews has been President and Chief Operating Officer of Brooklyn Union since
May 1996 and President of KeySpan Energy since January 1999, was Executive Vice
President of Brooklyn Union since 1994 to 1996, and was Executive Vice President
and Chief Financial Officer of Brooklyn Union from 1991 to 1994. Mr. Matthews
joined Brooklyn Union in 1965. He graduated from Rutgers University in 1965 with
a Bachelor's Degree in Civil Engineering, and acquired an M.S. Degree in
Industrial Management from Polytechnic University. Mr. Matthews is a member of
the Board of Directors for the Brooklyn Philharmonic, the Public Utilities
Reports, Inc., the Brooklyn Chamber of Commerce, Neighborhood Housing Services,
Greater Jamaica Development Corp., Regional Plan Association, Public Utilities
Reports, Inc., the Community Advisory Board of Brooklyn College, Polytechnic
University, the National and New York City Advisory Board of the Salvation Army.
Mr. Matthews is the President of the Society of Gas Lighters.
James Q. Riordan has been a Director of the Company since 1996 and a
Director of KeySpan Energy since May 1998. He was a Director of Brooklyn Union
from 1991 to May 1998. Mr. Riordan is the retired Vice Chairman and Chief
Financial Officer of Mobil Corp. He joined Mobil Corp. in 1957 as Tax Counsel
and was named Director and Chief Financial Officer in 1969. Mr. Riordan served
as Vice Chairman of Mobil Corp. from 1986 until his retirement in 1989. He
joined Bekaert Corporation in 1989 and was elected its President, and served as
President until his retirement in 1992. Mr. Riordan is a Director of
Tri-Continental Corporation and the Public Broadcasting Service;
Director/Trustee of the mutual funds in the Seligman Group of investment
companies; Trustee for the Committee for Economic Development and The Brooklyn
Museum; and Member of the Policy Council of the Tax Foundation.
Donald C. Vaughn is Vice Chairman of Haliburton Co. and has served in
that capacity since Haliburton Co. merged with Dresser Industries, Inc.
("Dresser") in 1998. Prior to the merger, Mr. Vaughn was President, Chief
Operating Officer and member of the board of directors of Dresser starting in
1996. Prior to his appointment as President and Chief Operating Officer, Mr.
Vaughn served as Executive Vice President of Dresser, responsible for Dresser's
Petroleum Products and Services and Engineering Services Segment, from November
1995 to December 1996; Senior Vice President of Operations of Dresser from
January 1992 to November 1995; and Chairman, President and Chief Executive
Officer of The M.W. Kellogg Company from November 1983 to June 1996. Mr. Vaughn
joined M.W. Kellogg in 1958 and is a registered professional engineer in the
State of Texas. He has been recognized as a distinguished engineering alumnus of
Virginia Polytechnic Institute, from which he holds a B.S. degree in civil
engineering. Mr. Vaughn serves as a director on the boards of several Dresser
joint venture companies, including Dresser-Rand Company, Ingersoll-Dresser Pump
Company and Bredero-Shaw.
-4-
<PAGE> 8
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR" THE
ELECTION OF EACH OF THE ABOVE-NAMED NOMINEES. PROXIES SOLICITED HEREBY WILL BE
VOTED FOR ALL EIGHT NOMINEES UNLESS THE STOCKHOLDERS SPECIFY OTHERWISE IN THEIR
PROXIES.
DIRECTORS' MEETINGS AND COMPENSATION
During 1998, the Board of Directors met six times and took certain
additional actions by unanimous written consents in lieu of meetings. During
1998, no Director of the Company attended fewer than 75 percent of the meetings
of the Board of Directors (during the period served).
Each outside Director of the Company receives a fee of $5,000 per
calendar quarter and $1,000 per board meeting and $1,000 per committee meeting
attended. Chairman of committees of the Board of Directors receive an additional
fee of $500 per committee meeting. Such fees are payable in cash or, at the
option of the Director, may be deferred in an unfunded phantom stock or
interest-bearing account, pursuant to the Company's Deferred Compensation Plan
for Non-Employee Directors.
Under the Company's Amended 1996 Stock Option Plan, each individual who
served as a "Non-Employee Director," as such term is defined in Rule 16b-3 under
the Securities Exchange Act of 1934, received a nonqualified option to purchase
2,000 shares of Common Stock effective on September 21, 1998.
In addition, on September 21, 1998, each Director who was an employee
of KeySpan Energy, received a nonqualified option to purchase 7,000 shares of
Common Stock.
Each individual who becomes a Non-Employee Director upon his or her
first election to the Board of Directors is entitled to receive an option to
purchase 5,000 shares of Common Stock on the date of his or her election as a
Non- Employee Director. On September 20 of each year (commencing September 20,
1997), each individual who is a Non-Employee Director on such date received or
will receive a nonqualified option to purchase 2,000 shares of common 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 would be granted on the next following business day.
BOARD COMMITTEES
The Company's Board of Directors has an Executive Committee, an Audit
Committee, a Compensation Committee, and a Nominating Committee.
The Executive Committee, during the intervals between meetings of the
Board of Directors, has and may exercise all of the powers of the Board of
Directors in the management or direction of the business and affairs of the
Company, except as reserved to the Board of Directors, delegated to another
committee or prohibited by the Company's bylaws or applicable law. The Executive
Committee currently consists of Messrs. Ahalt, Catell and Floyd.
The Audit Committee's functions include providing assistance to the
Board of Directors in fulfilling its responsibilities relating to corporate
accounting and reporting practices, maintaining a direct line of communication
between the Board of Directors and the Company's independent public accountants,
and performing such other functions as may be prescribed with respect to audit
committees under applicable rules, regulations and policies of the New York
Stock Exchange, Inc. The Audit Committee currently consists of Messrs. Ahalt,
Gordy and Riordan, who serves as Chairman.
The Compensation Committee administers the Company's Amended 1996 Stock
Option Plan, makes recommendations, determines and authorizes the amount, terms
and conditions of payment of any and all forms of compensation for the Company's
directors, officers, employees and agents, approves and administers any loan to,
guarantee or any obligation of, or other assistance to any officer or other
employee of the Company. The Compensation Committee currently consists of
Messrs. Ahalt, Catell and Riordan.
-5-
<PAGE> 9
The Nominating Committee's function is to nominate new directors. The
Nominating Committee did not meet in 1998. The members of the nominating
committee are Mr. Vaughn and Mr. Ahalt.
During 1998, the Executive Committee met four times, the Audit
Committee met three times and the Compensation Committee met twice. During 1998,
no Director of the Company attended fewer than 75 percent of the number of
meetings of committees on which he served.
In connection with the KeySpan Joint Venture, the Board of Directors on
February 9, 1999 appointed a Special Committee to determine the fairness of the
KeySpan Joint Venture to the Company and its shareholders. On March 4, 1999, the
Special Committee determined that the KeySpan Joint Venture was fair to the
Company and its shareholders. The members of the Special Committee are Messrs.
Vaughn and Gordy.
-6-
<PAGE> 10
PROPOSAL NUMBER 2:
APPROVAL OF THE ISSUANCE OF UP TO $150 MILLION OF COMMON STOCK TO KEYSPAN
The Company proposes to issue to KeySpan Energy, the owner of 64% of
Houston Exploration's voting stock, up to $150 million of Houston Exploration
Common Stock, in connection with the conversion of any amounts outstanding under
the KeySpan Credit Facility (as defined below) as of January 1, 2000, into
Houston Exploration Common Stock, with the conversion price based on the market
price of Houston Exploration's Common Stock or based on a formula with a
conversion ratio that is designed to achieve market price as determined by a
nationally recognized investment bank.
On November 30, 1998, the Company entered into a revolving subordinated
loan agreement with KeySpan Energy (the "KeySpan Credit Facility") which
provides the Company with an unsecured credit line of $150 million. The KeySpan
Credit Facility provides that any amounts outstanding as of January 1, 2000 will
be converted into Common Stock at the market price of Houston Exploration's
Common Stock or based on a formula with a conversion ration that is designed to
achieve market price. The Company has the option to pay down any amounts
outstanding under the KeySpan Credit Facility prior to January 1, 2000, the date
of maturity and mandatory conversion. If all of the outstanding indebtedness is
repaid prior to January 1, 2000, the conversion feature of the KeySpan Credit
Facility would not be triggered and the Company would not be required to issue
any of its common stock to KeySpan.
As of March 29, 1999, Houston Exploration has borrowings of $80 million
outstanding under the KeySpan Credit Facility. Assuming a conversion price of
$16-7/16, the March 12, 1999 closing price of the Common Stock, a conversion of
this $80 million loan would result in the issuance to KeySpan Energy of
4,866,921 shares of common stock representing approximately 20% of the Company's
currently outstanding common stock. This issuance would cause KeySpan Energy's
percentage ownership in the Company to increase from the current 15,295,215
shares, representing 64% of the currently outstanding Common Stock, to
approximately 21,162,135 shares, or 70%.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR"
PROPOSAL NUMBER 2, AND PROXIES EXECUTED AND RETURNED WILL BE SO VOTED UNLESS
CONTRARY INSTRUCTIONS ARE INDICATED THEREON.
KEYSPAN ENERGY, THE OWNER OF 64% OF THE OUTSTANDING VOTING SECURITIES
OF HOUSTON EXPLORATION, HAS INDICTED THAT IT WILL VOTE ALL ITS SHARES "FOR"
PROPOSAL 2. ACCORDINGLY, STOCKHOLDER APPROVAL OF THIS PROPOSAL NUMBER 2 IS
ASSURED.
-7-
<PAGE> 11
PROPOSAL NUMBER 3:
RATIFICATION AND APPROVAL OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors has appointed the firm of Arthur Andersen LLP as
the Company's independent public accountants to make an examination of the
accounts of the Company for the fiscal year ending December 31, 1999, subject to
ratification by the Company's stockholders. Representatives of Arthur Andersen
LLP will be present at the Annual Meeting and will have an opportunity to make a
statement, if they desire to do so. They will also be available to respond to
appropriate questions from the stockholders attending the Annual Meeting.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR"
PROPOSAL NUMBER 3, AND PROXIES EXECUTED AND RETURNED WILL BE SO VOTED UNLESS
CONTRARY INSTRUCTIONS ARE INDICATED THEREON.
-8-
<PAGE> 12
EXECUTIVE COMPENSATION
EXECUTIVE OFFICERS
Set forth below is certain information concerning the executive
officers of the Company, including the business experience of each during the
past five years.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
James G. Floyd................ 62 President and Chief Executive Officer and Director
Randall J. Fleming............ 57 Senior Vice President--Exploration and Production
Thomas W. Powers.............. 54 Senior Vice President--Business Development and Finance and
Treasurer
James F. Westmoreland......... 43 Vice President, Chief Accounting Officer, Comptroller and Secretary
Charles W. Adcock............. 45 Vice President--Project Development
Thomas E. Schwartz............ 42 Vice President--Geophysics
Sammye L. Dees................ 63 Vice President--Land
</TABLE>
Information regarding the business experience of James G. Floyd is set
forth above under the heading "Proposal Number 1: Election of Directors."
Randall J. Fleming has been Senior Vice President--Exploration and
Production of the Company since October 1995 and was Vice President--Exploration
of the Company from 1986 to 1995. Mr. Fleming was Vice President--Geology of
Seagull from 1981 to 1986 and was an exploration geologist at Houston Oil and
Minerals from 1976 to 1981. Prior to such time, Mr. Fleming was an exploration
geologist for Superior Oil Company and Sinclair Oil Company. Mr. Fleming holds a
B.A. and M.S. in geology from the University of Alabama.
Thomas W. Powers has been Senior Vice President--Business Development
and Finance of the Company since October 1995 and Treasurer since May 1996. Mr.
Powers was General Manager of Diversification for Brooklyn Union from 1991 to
1995 and Executive Vice President and Chief Operating Officer of Fuel Resources
Inc., a Brooklyn Union subsidiary, from 1986 to 1991. Prior to joining Brooklyn
Union, Mr. Powers was Manager of Corporate Development for Anglo Energy. He
holds a B.S. in Economics from Bowling Green University and an M.B.A. from Long
Island University.
James F. Westmoreland has been Vice President, Chief Accounting
Officer, Comptroller and Secretary of the Company since October 1995 and was
Vice President and Comptroller of the Company from 1986 to 1995. Mr.
Westmoreland was supervisor of natural gas and oil accounting at Seagull from
1983 to 1986. Mr. Westmoreland holds a B.B.A. in accounting from the University
of Houston.
Charles W. Adcock has been Vice President--Project Development of the
Company since 1996. Mr. Adcock held the same position with FRI, the Brooklyn
Union subsidiary that previously owned the Company's onshore properties, from
1993 to 1996. Prior to joining FRI, Mr. Adcock worked at NERCO Oil & Gas as
Reservoir Engineering Specialist. Prior to NERCO, he held various engineering
positions with Apache, ANR Production and Aminoil U.S.A. Mr. Adcock is a
Registered Professional Engineer in the State of Texas, and received his B.S. in
Civil Engineering from Texas A&M University and an M.B.A. from the University of
St. Thomas.
Thomas E. Schwartz was appointed Vice President - Geophysics in May
1998. Prior to his appointment to Vice President, Mr. Schwartz was a senior
offshore geophysicist for the Company from 1990 to 1998. From 1984 until 1990,
Mr. Schwartz held the positions of senior geologist and senior geophysicist for
Sonat Exploration Company. Prior to joining Sonat Exploration Company, he was an
explorationist with Eason Oil Company from 1980 to 1984. Mr. Schwartz received
his B.S. in Geology from the University of New Orleans.
-9-
<PAGE> 13
Sammye L. Dees has been Vice President--Land of the Company since 1986.
Ms. Dees was Vice President of Land of Seagull from 1981 to 1986, and was Land
Manager, Offshore Division, of Houston Oil and Minerals from 1974 to 1981. Prior
to joining Houston Oil and Minerals, Ms. Dees worked for Allied Chemical
Corporation. Ms. Dees is a Certified Petroleum Landman and attended Stephen F.
Austin University.
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
The Compensation Committee (the "Committee") of the Board of Directors
of the Company currently consists of Gordon F. Ahalt, Robert B. Catell and James
Q. Riordan, none of whom are officers or employees of the Company. The Committee
is responsible for evaluating the performance of management, determining the
compensation for the directors, officers, employees and agents of the Company,
administering the Company's Amended 1996 Stock Option Plan under which grants
may be made to employees of the Company and approving and administering any loan
to, guarantee of any obligation of, or other assistance to any employee of the
Company.
The Committee has furnished the following report on executive
compensation for 1998:
Under the supervision of the Committee, the Company has developed a
compensation policy which is designated to attract and retain key executives
responsible for the success of the Company and motivate management to enhance
long-term stockholder value. The annual compensation package for executive
officers primarily consists of (1) a cash salary which reflects the
responsibilities relating to the position and individual performance, (2)
long-term stock-based incentive awards which strengthen the mutuality of
interests between the executive officers and the Company's stockholders and (3)
variable performance awards payable in cash or stock and tied to the
individual's or the Company's achievement of certain goals or milestones.
In determining the level and composition of compensation of each of the
Company's executive officers, the Committee takes into account various
qualitative and quantitative indicators of corporate and individual performance.
The Committee generally seeks to set salaries competitive with those of peer
group companies. In setting such salaries, the Committee considers its peer
group to be certain independent oil and gas exploration and production companies
with offshore operations in the Gulf of Mexico. Such peer group includes the
same companies comprising the Peer Group reflected in the performance graph in
this Proxy Statement.
Base compensation is established through negotiation between the
Company and the executive officer at the time the executive is hired, and then
subsequently adjusted when such officer's base compensation is subject to review
or reconsideration. While the Company has entered into employment agreements
with certain of its executive officers, such agreements provide that base
salaries may be increased at the Committee's discretion pursuant to annual
reviews. When establishing or reviewing base compensation levels for each
executive officer, the Committee, in accordance with its general compensation
policy, considers numerous factors, including the responsibilities relating to
the position, the qualifications of the executive and the relevant experience
the individual brings to the Company, strategic goals for which the executive
has responsibility, and compensation levels of Peer Group companies. No
pre-determined weights are given to any one of such factors.
In addition to each executive officer's base compensation, the
Committee may award cash bonuses, grants under the Amended 1996 Stock Option
Plan and variable performance awards to chosen executive officers depending on
the extent to which certain defined personal and common performance goals are
achieved. Such corporate performance goals are the same as discussed above.
Stock based performance awards, such as the grants of Options under the Amended
1996 Stock Option Plan awarded to executive officers in 1998, are consistent
with the Committee's emphasis on trading-off annual incentive compensation for
enhanced long-term incentives linked to stockholder value creation.
All employees of the Company, including its executive officers, are
eligible to receive long-term stock-based incentive awards under the Amended
1996 Stock Option Plan as a means of providing such individuals with a
continuing proprietary interest in the Company. Such grants further the
mutuality of interest between the Company's employees and its stockholders by
providing significant incentives for such employees to achieve and maintain high
-10-
<PAGE> 14
levels of performance. The Amended 1996 Stock Option Plan enhances the Company's
ability to attract and retain the services of qualified individuals. Factors
considered in determining whether such awards are granted to an executive
officer of the Company include the executive's position in the Company, his or
her performance and responsibilities, the amount of Options, if any, currently
held by the officer, the vesting schedules of any such options and the executive
officer's other compensation. While the Committee does not adhere to any firmly
established formulas or schedules for the issuance of awards such as Options or
restricted stock, the Committee will generally tailor the terms of any such
grant to achieve its goal as a long-term incentive award by providing for a
vesting schedule encompassing several years or tying the vesting dates to
particular corporate or personal milestones.
The annual base salary of James G. Floyd, the Chief Executive Officer
and President of the Company, was set at $340,000 pursuant to his employment
agreement with the Company, effective September 19, 1996, and increased to
$405,000, effective October 1, 1998. Mr. Floyd actually received $395,000 in
base salary in 1998 as well as a cash bonus of $213,000 in conjunction with the
cash bonuses granted to all other executive officers of the Company. The Board
of Directors sets annual financial targets for the Company under the categories
of return on stockholder value (measured against a peer group of companies),
earnings per share, and net asset value change (the "Annual Financial Targets").
Mr. Floyd was eligible to receive up to 70% of his base salary as a bonus under
the Company's incentive compensation plan during 1998, and the Company achieved
an average of 75% of its 1998 Annual Financial Targets. The Company used Mr.
Floyd's year-end base salary rate of $405,000 in calculating his 1998 bonus
award, and accordingly, Mr. Floyd received $213,000 as a cash bonus for 1998.
Mr. Floyd also received a payment of $173,000 in 1998 under the terms of certain
Phantom Stock Rights awarded in 1996. Additionally, Mr. Floyd was granted
Options pursuant to the Amended 1996 Stock Option Plan to purchase 75,324 shares
of Common Stock. The Options become exercisable and payable, respectively, in
five equal annual installments from the date of grant. The Options were granted
in recognition of Mr. Floyd's continuing contributions to the Company and are
consistent with the Committee's emphasis on trading-off annual incentive
compensation for enhanced long-term incentives linked to stockholder value
creation.
Section 162(m) of the Code, added by the Revenue Reconciliation Act of
1993, places a $1 million per executive cap on the deductible compensation that
can be paid to certain executives of publicly-traded corporations. Amounts that
qualify as "performance based" compensation under Section 162(m)(4)(c) of the
Code are exempt from the cap and do not count toward the $1 million limit.
Generally, stock options will qualify as performance based compensation. The
Committee has discussed and considered and will continue to evaluate the
potential impact of Section 162(m) on the Company in making compensation
determinations, but has not established a set policy with respect to future
compensation determinations.
The foregoing report is given by the following members of the
Compensation Committee: Gordon F. Ahalt, Robert B. Catell and James Q. Riordan.
The report of the Compensation Committee shall not be deemed
incorporated by reference by any general statement incorporating by reference
this Proxy Statement into any filing under the Securities Act of 1933, as
amended (the "Securities Act"), or under the Exchange Act, except to the extent
that the Company specifically incorporates this information by reference, and
shall not otherwise be deemed filed under such Acts.
-11-
<PAGE> 15
COMPENSATION OF EXECUTIVE OFFICERS
Summary Compensation Table
The following table sets forth certain summary information concerning
the compensation provided by the Company in 1998, 1997 and 1996 to its Chief
Executive Officer and each other person serving as an executive officer during
1998 who earned $100,000 or more in combined salary and bonus during such year
(collectively, the "Named Executive Officers"):
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION(1) ----------------------
---------------------- SECURITIES ALL OTHER
NAME AND UNDERLYING PHANTOM COMPEN-
PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS(2) PAYOUTS(3) SATION
------------------ ---- ------ ----- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
James G. Floyd............................. 1998 $ 395,000 $ 213,000 75,324 $ 173,000 $ 196,000(4)
President and Chief Executive Officer 1997 354,000 295,000 10,000 200,000 91,000(4)
1996 309,000 330,000 335,992 -- 314,000(4)
Randall J. Fleming......................... 1998 253,000 117,000 36,924 90,000 263,000(4)
Senior Vice President--Exploration and 1997 228,000 158,000 10,000 104,000 394,000(4)
Production 1996 204,000 175,000 174,996 -- 300,000(4)
Thomas W. Powers(6)........................ 1998 164,000 72,000 24,342 54,000 --
Senior Vice President--Business 1997 146,000 91,000 10,000 63,000 --
Development and Finance and Treasurer 1996 35,000 104,000 104,997 -- --
James F. Westmoreland...................... 1998 154,000 68,000 21,410 44,000 31,000(4)
Vice President, Chief Accounting Officer, 1997 136,000 85,000 10,000 50,000 44,000(4)
Comptroller and Secretary 1996 121,000 87,000 83,998 -- 30,000(4)
Charles W. Adcock.......................... 1998 146,000 66,000 18,500 31,000 --
Vice President--Project Development 1997 129,000 79,000 10,000 36,000 --(5)
1996 125,000 67,000 60,000 -- 1,211,000(5)
Thomas E. Schwartz (7)..................... 1998 155,000 68,000 48,500 15,000 61,000(4)
Vice President--Geophysics
Sammye L. Dees............................. 1998 119,000 22,000 4,000 10,000 218,000(4)
Vice President--Land 1997 115,000 37,000 5,000 11,000 327,000(4)
1996 111,000 27,000 15,000 -- 261,000(4)
</TABLE>
- ---------------------------
(1) Amounts exclude perquisites and other personal benefits because such
compensation did not exceed the lesser of $50,000 or 10% of the total
annual salary and bonus reported for each executive officer.
(2) The Company has not issued any stock appreciation rights to the Named
Executive Officers.
(3) Phantom Stock Rights ("PSRs") granted effective December 16, 1996 and, of
which 20% are payable on December 16th of each of the years 1997 through
2001. Each PSR represents the right to receive a cash payment determined by
reference to the average of the closing price on the New York Stock
Exchange, Inc. (the "NYSE") of one share of Common Stock for the five
trading days preceding the payout date ($18.513 in 1998), multiplied by the
number of PSRs payable on payout date.
(4) Consists of distributions attributable to overriding royalty interests and
net profits interests in properties of the Company. See "Certain
Transactions -- Transactions Between the Company and Management."
(5) Consists of distributions received in exchange for the termination of Mr.
Adcock's rights under the long-term incentive program of Fuel Resources,
Inc. See "Certain Transactions--Transaction Between the Company and
Management."
(6) Prior to September 30, 1996, Mr. Powers was an employee of Brooklyn Union.
(7) Mr. Schwartz was appointed Vice President - Geophysics in May of 1998.
-12-
<PAGE> 16
Options Granted in 1998
The following table provides certain information with respect to
Options granted to the Chief Executive Officer and to each of the Named
Executive Officers during 1998 under the Amended 1996 Stock Option Plan:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS(1)
-------------------------
PERCENT OF
TOTAL POTENTIAL REALIZABLE VALUE
NUMBER OF OPTIONS AT ASSUMED ANNUAL
SECURITIES GRANTED TO RATES OF STOCK PRICE
UNDERLYING EMPLOYEES EXERCISE APPRECIATION FOR OPTION TERM(2)
OPTIONS IN FISCAL PRICE EXPIRATION -------------------------------
NAME GRANTED YEAR ($/SH) DATE 5% 10%
---- ---------- ---------- --------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
James G. Floyd......... 75,324 18% $ 18.563 9/21/08 $ 879,322 $ 2,228,373
Randall J. Fleming..... 36,924 9% 18.563 9/21/08 431,045 1,092,354
Thomas W. Powers....... 24,342 6% 18.563 9/21/08 284,165 720,130
James F. Westmoreland.. 21,410 5% 18.563 9/21/08 249,937 633,390
Charles W. Adcock...... 18,500 4% 18.563 9/21/08 215,966 547,301
Thomas E. Schwartz..... 48,500 11% 21.269 9/21/08 648,724 1,643,995
Sammye L. Dees......... 4,000 1% 18.563 9/21/08 46,695 118,335
</TABLE>
- ---------------------------
(1) The Company has not issued any stock appreciation rights to the Named
Executive Officers.
(2) The Securities and Exchange Commission requires disclosure of the potential
realizable value or present value of each grant. The disclosure assumes the
Options will be held for the full ten-year term prior to exercise. Such
Options may be exercised prior to the end of such ten-year term. The actual
value, if any, an executive officer may realize will depend upon the excess
of the stock price over the exercise price on the date the Option is
exercised. There can be no assurance that the stock price will appreciate
at the rates shown in the table.
Aggregated Option Exercises in 1998 and Fiscal Year End Option Values
The following table provides certain information regarding (1) stock
options exercised by the Named Executive Officers during the fiscal year ended
December 31, 1998, (2) the number of shares of Common Stock underlying
unexercised options held by each Named Executive Officer on December 31, 1998
and (3) the value, at December 31, 1998, of exercisable and unexercisable
"in-the-money" stock options held by each of the Named Executive Officers:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS AT OPTIONS AT
SHARES FISCAL YEAR END(#) FISCAL YEAR END(2)($)
ACQUIRED ON VALUE ---------------------------- ----------------------------
NAME EXERCISE REALIZED (1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
James G. Floyd......... -- -- 136,397 284,919 $ 587,986 $ 980,842
Randall J. Fleming..... -- -- 71,998 149,922 306,243 507,827
Thomas W. Powers....... -- -- 43,999 95,340 183,745 307,566
James R. Westmoreland.. -- -- 18,800 79,809 73,498 248,594
Charles W. Adcock...... -- -- 26,000 62,500 96,000 168,281
Thomas E. Schwartz..... -- -- 11,800 73,700 38,500 82,031
Sammye L. Dees......... -- -- 7,000 17,000 26,250 44,625
</TABLE>
- ---------------------------
(1) The value realized upon the exercise of a stock option is equal to the
difference between the market price on the date of exercise and exercise
price of the stock option.
(2) The value of each unexercised in-the-money stock option is equal to the
difference between the closing price of the Company's common stock on the
NYSE on December 31, 1998 of $19.875 per share and the exercise price of
the stock option.
-13-
<PAGE> 17
PERFORMANCE GRAPH
The following performance graph compares the performance of the
Company's Common Stock to the S&P 500 Index and to a Peer Group. The "Peer
Group" is composed of other independent oil and gas exploration and production
companies with offshore operations in the Gulf of Mexico (Apache Corporation,
Forcenergy Inc, Newfield Exploration Company, Noble Affiliates, Inc., Nuevo
Energy Company, Pogo Producing Co., Seagull Energy Corporation, and Vastar
Resources, Inc.). The Peer Group was revised for the year ended 1998 to exclude
United Meridian Corporation which merged with Ocean Energy, Inc. during 1998.
The index of Peer Group companies is weighted according to the respective market
capitalization of its component companies as of December 31, 1998. The graph
covers the period from September 20, 1996, the date on which the Common Stock of
the Company began publicly trading, to December 31, 1998. The graph assumes that
the value of the investment in the Company's Common Stock and each index was
$100 at September 20, 1996 and that all dividends were reinvested.
COMPARISON OF 27 MONTH CUMULATIVE TOTAL RETURN
BASED ON $100 INVESTED ON SEPTEMBER 20, 1996 IN STOCK OR INDEX -
INCLUDING REINVESTMENT OF DIVIDENDS.
FISCAL YEAR ENDING DECEMBER 31.
[GRAPHIC OMITTED]
<TABLE>
<CAPTION>
9/20/96 12/31/96 12/31/97 12/31/98
- --------------------------------------- ----------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
The Houston Exploration Company 100 113 119 128
- --------------------------------------- ----------- ------------- ------------ ------------
Peer Group Index 100 120 104 77
- --------------------------------------- ----------- ------------- ------------ ------------
Standard & Poor's 500 Index 100 108 145 186
- --------------------------------------- ----------- ------------- ------------ ------------
</TABLE>
The foregoing stock price performance comparisons shall not be deemed
incorporated by reference by any general statement incorporating by reference
this Proxy Statement into any filing under the Securities Act or under the
Exchange Act, except to the extent that the Company specifically incorporates
this graph by reference, and shall not otherwise be deemed filed under such
Acts.
There can be no assurance that the Company's stock performance will
continue into the future with the same or similar trends depicted in the graph
above. The Company will not make or endorse any predictions as to future stock
performance.
-14-
<PAGE> 18
EMPLOYMENT AGREEMENTS
Messrs. Floyd, Fleming, Powers, Westmoreland and Adcock entered into
employment agreements with the Company effective as of September 19, 1996,
pursuant to which they serve as executive officers of the Company. Mr. Schwartz
entered into an employment agreement with the Company effective as of May 1,
1998, pursuant to which he serves as an executive officer of the Company.
Such employment agreements provide for Messrs. Floyd, Fleming, Powers,
Westmoreland, Adcock and Schwartz to receive current annual base salaries of
$405,000, $260,000, $175,000, $165,000, $160,000, and $165,000, respectively.
Under such agreements, Messrs. Floyd, Fleming, Powers, Westmoreland, Adcock and
Schwartz are entitled to annual incentive bonuses of 70%, 60%, 55%, 55%, 55% and
55%, respectively, of base salary if the Company meets financial targets
established by the Board of Directors. In addition, Messrs. Floyd, Fleming,
Powers, Westmoreland, Adcock and Schwartz are entitled to participate in such
incentive compensation and other programs as are adopted by the Company's Board
of Directors, including the Company's Amended 1996 Stock Option Plan. The
initial term of each employment agreement extends to the third anniversary of
the effective date of such agreement; provided, however, that the term of each
agreement is automatically extended one year on each anniversary unless notice
that the agreement will not be extended is given by either party at least 60
days prior to such anniversary.
Each of the employment agreements is subject to early termination by
the Company for cause or upon the death or disability of the employee and is
subject to early termination by the employee for any reason. If an employment
agreement is terminated without cause by the Company or with good reason
(including certain changes in control of the Company) by the employee, the
Company is obligated to pay such employee a lump-sum severance payment of 2.99
times the employee's then current annual rate of total compensation. Based upon
their current annual base rate of compensation, Messrs. Floyd, Fleming, Powers,
Westmoreland, Adcock and Schwartz would be entitled to lump sum severance
payments of $1,211,000, $777,000, $523,000, $493,000, $478,000, and $493,000,
respectively, if terminated without cause or by the employee for good reason.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
Effective immediately prior to the Company's initial public offering,
the Company adopted an unfunded, nonqualified Supplemental Executive Retirement
Plan (the "Supplemental Plan") for the benefit of Mr. Floyd. The Supplemental
Plan provides that, if the executive remains with the Company until age 65, upon
his retirement on or after age 65, the executive will be paid $100,000 per year
for life. If, after retirement, the executive predeceases his spouse, 50% of the
executive's Supplemental Plan benefit will continue to be paid to the
executive's surviving spouse for her life.
401(K) PLAN
The Company maintains a 401(k) Profit Sharing Plan (the "401(k) Plan")
for its employees. Under the 401(k) Plan, eligible employees may elect to have
the Company contribute on their behalf up to 15% of their base compensation
(subject to certain limitations imposed under the Code) on a before tax basis.
The Company makes a matching contribution of $0.50 for each $1.00 of employee
deferral, not to exceed 5% of an employee's base compensation, subject to
limitations imposed by the Code. The amounts contributed under the 401(k) Plan
are held in a trust and invested among various investment funds in accordance
with the directions of each participant. An employee's salary deferral
contributions under the 401(k) Plan are 100% vested. The Company's matching
contributions vest at the rate of 20% per year of service. Participants are
entitled to payment of their vested account balances upon termination of
employment.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN
COMPENSATION DECISIONS
Robert B. Catell, a member of the Compensation Committee, is Chairman
of the Board and Chief Executive Officer of KeySpan Energy.
-15-
<PAGE> 19
CERTAIN TRANSACTIONS
TRANSACTIONS BETWEEN THE COMPANY AND KEYSPAN ENERGY
The Company was incorporated in December 1985 to conduct certain of the
natural gas and oil exploration and development activities of Brooklyn Union.
Brooklyn Union became a wholly owned subsidiary of KeySpan Energy Corporation in
September 1997. In May 1998, KeySpan Energy Corporation merged with the Long
Island Lighting Company, creating MarketSpan Corporation d/b/a KeySpan Energy.
The Company has focused since its inception primarily on the exploration and
development of high potential prospects in the Gulf of Mexico. Effective
February 29, 1996, Brooklyn Union implemented a reorganization of its
exploration and production assets by transferring to the Company certain onshore
producing properties and developed and undeveloped acreage not previously owned
by the Company.
Joint Venture Drilling Program. On March 10, 1999, the Company signed a
definitive joint venture agreement ( the "KeySpan Joint Venture") with, KeySpan
Exploration and Production, LLC, a subsidiary of KeySpan Energy to explore for
natural gas and oil over a term of three years expiring December 31, 2001. The
Joint Venture may be terminated at the option of either party at the end of the
then current calendar year. Houston Exploration is Joint Venture manager and
operator. Effective January 1, 1999, KeySpan Energy will commit approximately
$100 million per calendar year and Houston Exploration will commit its
proportionate share of the funds per calendar year necessary to fund a joint
exploration and development drilling program. Houston Exploration will
contribute all of its currently undeveloped offshore leases to the Joint Venture
and KeySpan will receive 45% of Houston Exploration's working interest in all
prospects to be drilled under the program. During the first three years of the
KeySpan Joint Venture, KeySpan Energy will pay 100% of actual intangible
drilling costs up to a maximum of $20.7 million per year. All additional
intangible drilling costs incurred during such year will be paid 51.75% by
KeySpan Energy and 48.25% by Houston Exploration. In addition, Houston
Exploration will receive reimbursement of a portion of its general and
administrative costs during the initial three year term of the KeySpan Joint
Venture. The Company plans to drill approximately 8 to 10 offshore exploratory
wells under the terms of the KeySpan Joint Venture during 1999. Both Houston
Exploration and KeySpan Energy obtained separate opinions, each from a
nationally recognized investing banking firm, as to the fairness to the Company
and to KeySpan Energy, respectively, of the KeySpan Joint Venture, from a
financial point of view. A special committee, comprised of outside, unaffiliated
directors, appointed by the Company's Board of Directors, has determined that
the KeySpan Joint Venture is fair to the Company and its stockholders.
KeySpan Credit Facility. On November 30, 1998, the Company entered into
a revolving credit facility with KeySpan Energy (the "KeySpan Credit Facility"),
which provides a maximum commitment of $150 million. The KeySpan Credit Facility
ranks subordinate to the Company's bank credit facility and pari passu to the
Company's 8- 5/8% Senior Subordinated Notes due 2008. Borrowings under the
KeySpan Credit Facility are unsecured and may be repaid by the Company any time
prior to maturity or January 1, 2000. Subject to stockholder approval, any
unpaid borrowings as of January 1, 2000 are convertible into common stock of the
Company at a conversion price based on the market price of Houston Exploration's
common stock or based on a formula with a conversion ratio that is designed to
achieve market price. See Proposal Number 2. Interest is payable monthly and
borrowings bear interest at LIBOR plus 0.014%. In addition, the Company pays a
commitment fee of 0.0125% on the unused portion of the maximum commitment and
has incurred an up-front fee of $50,000. As of December 31, 1998, outstanding
borrowings under the facility were $80 million. For the year ended December 31,
1998, the Company paid a total $0.5 million in interest and fees to KeySpan.
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 (1) retained a volumetric production payment and a
net profits interest of 100% in the properties, (2) received a cash down payment
of $1.4 million and (3) receives a quarterly payment of $0.75 for every dollar
of tax credit utilized. The Company manages and administers the daily operations
of the properties in exchange for an annual management fee of $100,000. The
income statement
-16-
<PAGE> 20
effect for the year ended December 31, 1998 was a reduction to income tax
expense of $1.0 million representing benefits received from the Section 29 tax
credits.
Tax Sharing Agreement. The Company was included in the consolidated
federal income tax returns filed by Brooklyn Union during all periods in which
it was a wholly owned subsidiary of Brooklyn Union ("Affiliation Years"). The
Affiliation Years are the period commencing January 1986 and ending in September
1996, the consummation of the Company's initial public offering. The Company and
Brooklyn Union, a wholly owned subsidiary of KeySpan Energy, are parties to an
agreement (the "Tax Sharing Agreement") providing for the manner of determining
payments with respect to federal income tax liabilities and benefits arising in
Affiliation Years. Under the Tax Sharing Agreement, the Company paid to or
received from Brooklyn Union an amount equal to the Company's share of Brooklyn
Union's consolidated federal income tax liability, generally determined on a
separate return basis, for the years ended and the portion of 1996 preceding
consummation of the Company's initial public offering, and Brooklyn Union paid
the Company for any reduction in Brooklyn Union's consolidated federal income
tax liability resulting from utilization or deemed utilization of deductions,
losses, and credits arising in such periods which are attributable to the
Company, in each case net of any amounts theretofore paid or credited by
Brooklyn Union or the Company to the other with respect thereto. In the event
that Brooklyn Union's consolidated federal income tax liability for any
Affiliation Year is adjusted upon audit or otherwise, the Company will bear any
additional liability or receive any refund which is attributable to adjustments
of items of income, deduction, gain, loss or credit of the Company. Brooklyn
Union shall permit the Company to participate in any audits or litigation with
respect to Affiliation Years, but Brooklyn Union will otherwise have exclusive
and sole responsibility and control over any such proceedings. As of September
1996, the Company ceased to be included in the consolidated federal income tax
returns filed by Brooklyn Union, and has filed on a separate basis with respect
to periods after consummation of the Company's initial public offering.
Registration Rights Agreement. Under a Registration Rights Agreement
(the "Registration Rights Agreement") entered into between the Company and
Brooklyn Union, a wholly owned subsidiary of KeySpan Energy, the Company will
file, upon the request of Brooklyn Union, a registration statement under the
Securities Act for the purpose of enabling Brooklyn Union to offer and sell any
securities of the Company which Brooklyn Union may hold. KeySpan Energy, as the
parent of Brooklyn Union, may exercise these rights at any time. The Company
will bear the costs of any registered offering, except that Brooklyn Union will
pay any underwriting commissions relating to any such offering, any transfer
taxes and any costs of complying with foreign securities laws at Brooklyn
Union's request, and each will pay for its counsel and accountants. The Company
has the right to require Brooklyn Union to delay any exercise by Brooklyn Union
of its rights to require registration and other actions for a period of up to
180 days if, in the judgment of the Company, the Company or any offering by the
Company then being conducted or about to be conducted would be adversely
affected. The Company has also granted Brooklyn Union the right to include its
securities in certain registration statements covering offerings by the Company,
and the Company will pay all costs of such offerings other than underwriting
commissions and transfer taxes attributable to the securities sold on behalf of
Brooklyn Union. The Company has agreed to indemnify Brooklyn Union, its
officers, directors, agents, any underwriter, and each person controlling any of
the foregoing, against certain liabilities under the Securities Act or the
securities laws of any state or country in which securities of the Company are
sold pursuant to the Registration Rights Agreement.
TRANSACTIONS BETWEEN THE COMPANY AND MANAGEMENT
The Company entered into employment agreements with Messrs. Floyd,
Fleming, Powers, Westmoreland and Adcock effective as of September 19, 1996.
These employment agreements replaced the Company's previous employment
agreements with such officers. On May 1, 1998, the Company entered into an
employment agreement with Mr. Schwartz. See "Executive Compensation--Employment
Agreements" for a description of such employment agreements.
The Company's previous employment agreement with Mr. Floyd, its
President and Chief Executive officer, provided Mr. Floyd with the option to
obtain up to a 5% working interest in certain exploration prospects of the
Company, exercisable prior to the commencement of drilling of the initial well
on any such prospect. During 1995 and 1996 and pursuant to such employment
agreement, affiliates of Mr. Floyd obtained a 5% working interest in 142 wells
in the Charco Field and the right to participate with a 5% working interest in
any future wells drilled by the Company on the Charco Field acreage acquired by
the Company in the Charco Acquisition. During 1998, affiliates of the Company's
President and Chief Executive Officer paid $2.7 million in costs and expenses
attributable to working interests owned in properties operated by the Company,
and received $4.7 million in distribution attributable to such
-17-
<PAGE> 21
working interests. The termination of the Company's previous employment
agreement with Mr. Floyd in September 1996 terminated Mr. Floyd's right to
obtain working interests on any further properties, but did not affect working
interests in properties of the Company acquired by Mr. Floyd or his affiliates
prior to the date of termination.
On July 2, 1996 the Company loaned Mr. Floyd the $3.1 million purchase
price for his purchase of a 5% working interest in certain properties purchased
by the Company in July 1996 from TransTexas Gas Corporation and TransTexas
Transmission Corporation. In addition, the Company has agreed to loan Mr. Floyd,
on a revolving basis, the amounts required to fund the expenses attributable to
Mr. Floyd's working interest. Mr. Floyd is required to repay amounts owed under
the loan in the amount of 65% of all distributions received by Mr. Floyd in
respect of such working interest, as distributions are received. Amounts
outstanding under such loan bear interest at an interest rate equal to the
Company's cost of borrowing under the Company's revolving credit facility. Mr.
Floyd's obligations under the agreement are secured by a pledge of his working
interest in, and the production from, such properties. As of December 31, 1998,
the outstanding balance owed by Mr. Floyd under the agreement was $3.5 million
and the loan will mature on July 2, 2006.
The Company's previous employment agreement with Mr. Floyd also
provided for the assignment to Mr. Floyd of a 2% net profits interest in all
exploration prospects of the Company at the time such properties were acquired
by the Company. The termination of the Company's previous employment agreement
with Mr. Floyd in September 1996 terminated Mr. Floyd's right to receive any
further assignments but did not affect net profits interests in properties of
the Company assigned to Mr. Floyd prior to the date of termination.
The Company's previous employment agreement with Mr. Floyd also
provided for the assignment to certain key employees designated by Mr. Floyd of
overriding royalty interests equivalent to a 4% net revenue interest in certain
properties of the Company at the time such properties were acquired by the
Company. The termination of the Company's previous employment agreement with Mr.
Floyd in September 1996 terminated all rights to any further assignments but did
not affect overriding royalty interests in properties of the Company assigned to
key employees prior to the date of termination.
The Company's previous employment agreement with Mr. Floyd also
provided for the assignment of a 6.75% after program-payout working interest in
the leases upon which the Company began drilling an exploratory well (whether or
not successful) during a calendar year. During 1998, Mr. Floyd received
approximately $83,000 in distributions under this arrangement. The termination
of the Company's previous employment agreement with Mr. Floyd in September 1996
terminated Mr. Floyd's right to receive any further assignments but did not
affect after program-payout working interests on properties of the Company
assigned to Mr. Floyd prior to the date of termination.
-18-
<PAGE> 22
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table presents certain information regarding the
beneficial ownership of the Company's Common Stock as of March 29, 1999 by
o each person who is known by the Company to own beneficially
more than five percent of the outstanding shares of
Common Stock
o each Director of the Company
o the Company's chief executive officer and each of the other
Named Executive Officers and
o all Directors and executive officers as a group.
Except as described below, each of the persons listed in the table has sole
voting and investment power with respect to the shares listed.
<TABLE>
<CAPTION>
COMMON STOCK PERCENT
AND OF
COMMON STOCK COMMON COMMON STOCK COMMON
NAME OF BENEFICIAL OWNER EQUIVALENTS STOCK(1) EQUIVALENTS(2) STOCK
<S> <C> <C> <C> <C>
MarketSpan Corporation d/b/a
KeySpan Energy....................... 15,295,215 15,295,215 -- 64%
One Metrotech Center
Brooklyn, New York 11201-3850
James G. Floyd.......................... 308,738 280,658 28,080 *
Randall J. Fleming...................... 88,709 74,098 14,611 *
Russell D. Gordy........................ 21,231 19,000 2,231 *
Thomas W. Powers........................ 53,867 45,099 8,768 *
James F. Westmoreland................... 26,507 19,456 7,051 *
Charles W. Adcock....................... 33,220 28,201 5,019 *
Thomas E. Schwartz...................... 16,171 13,800 2,371 *
Robert B. Catell........................ 11,000 11,000 -- *
James Q. Riordan........................ 12,919 9,500 3,419 *
Lester H. Smith......................... 9,500 7,726 1,774 *
Gordon F. Ahalt......................... 11,000 11,000 -- *
Sammye L. Dees.......................... 8,996 7,386 1,610 *
Donald C. Vaughn........................ 10,966 9,000 1,966 *
Craig G. Matthews....................... 8,000 8,000 -- *
All Directors and officers as a group
(14 persons).......................... 620,824 543,924 76,900 *
</TABLE>
- ---------------------------
* Less than 1%.
(1) Includes outstanding options to purchase shares of Common Stock that are
exercisable within 60 days from the date hereof.
(2) Includes Phantom Stock Rights granted to each of the Named Executive
Officers in 1996 and includes phantom stock accumulated by Non-Employee
Directors pursuant to the Company's Deferred Compensation Plan for
Non-Employee Directors.
-19-
<PAGE> 23
COMPLIANCE WITH SECTION 16(A)
Section 16(a) of the Exchange Act requires the Company's directors and
officers, and persons who own more than 10% of the Common Stock, to file initial
reports of ownership and reports of changes in ownership (Forms 3, 4, and 5) of
Common Stock with the Securities and Exchange Commission and the New York Stock
Exchange. Officers, directors and greater than 10% stockholders are required by
Securities and Exchange Commission regulation to furnish the Company with copies
of all such forms that they file.
To the Company's knowledge, based solely on the Company's review of the
copies of such reports received by the Company and on written representations by
certain reporting persons that no reports on Form 5 were required, the Company
believes that during the fiscal year ended December 31, 1997, all Section 16(a)
filing requirements applicable to its officers, directors and 10% stockholders
were complied with in a timely manner.
PROPOSAL OF STOCKHOLDERS
Any proposal of a stockholder intended to be presented at the next
annual meeting must be received at the Company's principal executive offices no
later than November 19, 1999, if the proposal is to be considered for inclusion
in the Company's Proxy Statement relating to such meeting.
FINANCIAL INFORMATION
A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K, INCLUDING ANY
FINANCIAL STATEMENTS AND SCHEDULES AND EXHIBITS THERETO, MAY BE OBTAINED WITHOUT
CHARGE BY WRITTEN REQUEST TO JAMES F. WESTMORELAND, VICE PRESIDENT, CHIEF
ACCOUNTING OFFICER, COMPTROLLER AND SECRETARY, THE HOUSTON EXPLORATION COMPANY,
1100 LOUISIANA, SUITE 2000, HOUSTON, TEXAS 77002.
By Order of the Board of Directors
James F. Westmoreland
Secretary
March 29, 1998
Houston, Texas
-20-
<PAGE> 24
PROXY
THE HOUSTON EXPLORATION COMPANY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF THE COMPANY
Annual Meeting April 27, 1999
The undersigned having received the notice and accompanying Proxy Statement
for said meeting hereby constitutes and appoints JAMES G. FLOYD and JAMES F.
WESTMORELAND (the "Proxy Committee"), and each of them, his true and lawful
agents and proxies with power of substitution in each, to represent and vote at
the Annual Meeting to be held at 10:00 a.m. on April 27, 1999 at the DoubleTree
Hotel, Allen Center, 400 Dallas Street, Houston, Texas, or, at any adjournment
thereof on all matters coming before said meeting, all shares of THE HOUSTON
EXPLORATION COMPANY which the undersigned may be entitled to vote. The above
proxies are hereby instructed to vote as shown on the reverse side of this card.
(Continued on Reverse Side)
<PAGE> 25
- --- Please mark your votes
X as in this example.
- ---
<TABLE>
<CAPTION>
FOR WITHHOLD
(except as AUTHORITY
marked to vote for all
below) nominees
<S> <C> <C>
1. Election of Directors; Nominees: James G. Floyd, / / / /
Robert B. Catell, Gordon F. Ahalt, Russell D. Gordy,
Craig G. Matthews, James Q. Riordan, Donald C. Vaughn
For, except vote withheld from the following
nominee(s): ______________________________
2. Approval the Issuance of $150 million of Common Stock ABSTAIN FOR AGAINST
to KeySpan Energy upon conversion of any amounts
outstanding at January 1, 2000 under the KeySpan / / / / / /
Credit Facility
3. Ratification and approval of Arthur Andersen FOR AGAINST ABSTAIN
LLP as the Company's independent public
accountants for the fiscal year ending / / / / / /
December 31, 1999
4. In the discretion of the Proxy Committee, upon FOR AGAINST ABSTAIN
other matters as may properly come before the
meeting / / / / / /
</TABLE>
This proxy, when properly executed, will be voted in the manner directed by the
undersigned stockholder. If no direction is made, this proxy will be voted
FOR proposals (1), (2), and (3). The Proxy Committee is authorized to vote in
their discretion on any other matters that may properly come before the meeting.
You are encouraged to specify your choices by marking the appropriate boxes
above, but you need not mark any boxes if you wish to vote in accordance with
the Board of Directors' recommendations. The Proxy Committee cannot vote
your shares unless you sign and return this card.
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE
ENCLOSED ENVELOPE.
SIGNATURE(S)___________________________________ DATE_____________________
Note: Executors, administrators, trustees, etc., please give full title
as such. If a corporation, please sign full corporate name by duly
authorized officer. Joint owners should each sign personally.
