<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the registrant /X/ / / Confidential, for Use of the
Filed by a party other than the Commission Only (as permitted
registrant / / by Rule 14a-(e)(2))
Check the appropriate box:
/ / Preliminary Proxy Statement
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
TOM BROWN, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement)
Payment of filing fee (Check the appropriate box):
/X/ $125 per Exchange Act Rule 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(j)(2)
or Item 22(a)(2) of Schedule 14A.
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
/ / 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 transactions applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rules 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:
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<PAGE> 2
TOM BROWN, INC.
500 EMPIRE PLAZA BUILDING
508 WEST WALL STREET
MIDLAND, TEXAS 79701
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 17, 1995
To the Stockholders
of Tom Brown, Inc.:
The 1995 Annual Meeting of Stockholders of Tom Brown, Inc. (the "Company"),
a Delaware corporation, will be held Wednesday, May 17, 1995, at 9:00 a.m.,
local time, in the Wildcatters Room, Midland Petroleum Club, 501 West Wall
Street, Midland, Texas, for the following purposes:
(1) To elect seven directors to hold office until the next succeeding
annual meeting of stockholders and until their successors have been duly
elected and qualified;
(2) To approve an amendment to authorize an additional 400,000 shares
of Common Stock for issuance under the Company's 1989 Stock Option Plan;
and
(3) To transact such other business as may properly come before the
meeting or any adjournments thereof.
Stockholders of record at the close of business on April 12, 1995, will be
entitled to notice of and to vote at this meeting or any adjournment or
adjournments thereof. A list of stockholders entitled to vote at the meeting
will be available for a period of at least ten days prior to the meeting at the
offices of the Company, 500 Empire Plaza Building, 508 West Wall Street,
Midland, Texas 79701, for examination during ordinary business hours by any
stockholder for any purpose germane to the meeting.
By Order of the Board of Directors
/s/ JAMES M. ALSUP
------------------------------------
JAMES M. ALSUP, Secretary
Midland, Texas
April 17, 1995
IT IS IMPORTANT THAT YOUR SHARES ARE REPRESENTED AT THE MEETING, REGARDLESS
OF THE NUMBER OF SHARES YOU MAY HOLD. WHETHER OR NOT YOU PLAN TO BE PRESENT AT
THE MEETING IN PERSON, PLEASE COMPLETE, SIGN, DATE AND MAIL THE ENCLOSED PROXY
IN THE ACCOMPANYING RETURN ENVELOPE TO WHICH NO POSTAGE NEED BE AFFIXED BY THE
SENDER IF MAILED WITHIN THE UNITED STATES. IF YOU RECEIVE MORE THAN ONE PROXY
BECAUSE YOUR SHARES ARE REGISTERED IN DIFFERENT NAMES OR ADDRESSES, EACH SUCH
PROXY SHOULD BE SIGNED AND RETURNED TO ASSURE THAT ALL OF YOUR SHARES WILL BE
VOTED.
<PAGE> 3
TOM BROWN, INC.
500 EMPIRE PLAZA BUILDING
508 WEST WALL STREET
MIDLAND, TEXAS 79701
PROXY STATEMENT
FOR
ANNUAL MEETING OF STOCKHOLDERS
GENERAL
The accompanying Proxy is solicited on behalf of the Board of Directors of
Tom Brown, Inc. (the "Company").
Holders of outstanding shares of Common Stock of the Company of record at
the close of business on April 12, 1995 will be entitled to cast one vote for
each share of such stock so held by them upon all matters submitted to the vote
of stockholders at the Annual Meeting of Stockholders to be held in The
Wildcatters Room, Midland Petroleum Club, 501 West Wall Street, Midland, Texas,
at 9:00 a.m., local time, on Wednesday, May 17, 1995 and at any and all
adjournments thereof.
SOLICITATION OF PROXIES
Properly executed proxies will be voted in accordance with the
stockholders' directions. If the Proxy card is signed and returned without any
direction given, shares will be voted in accordance with the Directors'
recommendations, which are noted herein, and in accordance with the best
judgment of the persons named as proxies upon such other matters as may properly
come before the meeting. Any stockholder giving a Proxy has the power to revoke
it at any time before it is voted by appearing and voting in person at the
meeting, by delivering a later dated Proxy, or by delivering to the Secretary of
the Company a written revocation of such Proxy prior to the voting of such
Proxy.
The cost of preparing, assembling, printing and mailing this Proxy
Statement and enclosed Proxy and the cost of soliciting Proxies relating to the
meeting will be borne by the Company. The Company may request banks and brokers
to solicit their customers who beneficially own shares of Common Stock of the
Company listed of record in names of nominees and will reimburse said banks and
brokers for their reasonable out-of-pocket expenses of such solicitation. It is
contemplated that the original solicitation of Proxies by mail will be
supplemented by telephone, telegram and personal solicitation by officers,
Directors and other regular employees of the Company. No additional compensation
will be paid to such individuals for such activities.
This Proxy Statement and the accompanying form of Proxy are being mailed to
stockholders beginning on or about April 17, 1995.
<PAGE> 4
VOTING SECURITIES AND PRINCIPAL STOCKHOLDERS
The outstanding voting securities of the Company consisted of 15,536,129
shares of Common Stock, $.10 par value, at the close of business on April 12,
1995, the record date fixed by the Board of Directors for the determination of
stockholders entitled to vote at the Annual Meeting. Each share of Common Stock
entitles its owner to one vote. Cumulative voting for Directors is not
authorized.
The holders of a majority of the issued and outstanding shares of Common
Stock entitled to vote, whether present in person or represented by Proxy,
constitutes a quorum at the Annual Meeting. Assuming the presence of a quorum,
the affirmative vote of the holders of a majority of the shares of Common Stock
represented in person or by Proxy at the Annual Meeting is required for the
election of Directors and for approval of the Directors' proposal to amend the
Company's 1989 Stock Option Plan to increase the number of authorized shares of
Common Stock. Shares of Common Stock represented in person or by Proxy
(including shares which abstain) will be counted for purposes of determining
whether a quorum is present at the Annual Meeting. An abstention from voting on
a matter or a Proxy instructing that a vote be withheld has the same effect as a
vote against the matter since it is one less vote for approval. Broker non-votes
on one or more matters will have no impact on such matters since they are not
considered "shares present" for voting purposes.
2
<PAGE> 5
The following table sets forth certain information as of April 12, 1995
with respect to the Common Stock beneficially owned by (i) each person known to
the Company to be the beneficial owner of more than five percent of the
outstanding Common Stock, (ii) each executive officer named in the Summary
Compensation Table, (iii) each Director and nominee for Director of the Company
and (iv) all Directors (and nominees) and executive officers as a group.
<TABLE>
<CAPTION>
AMOUNT
AND
NATURE
OF PERCENT
NAME AND ADDRESS BENEFICIAL OF
OF BENEFICIAL OWNER OWNERSHIP(1) CLASS
- --------------------------------------------------------------- -------- -----
<S> <C> <C>
Donald L. Evans................................................ 605,236(2) 3.75%
500 Empire Plaza
Midland, Texas 79701
Thomas C. Brown................................................ 117,909(3) *
500 Empire Plaza
Midland, Texas 79701
William R. Granberry........................................... 10,037(4) *
9400 N. Central Expressway, Suite 1209
Dallas, Texas 75231
Henry Groppe................................................... 65,900(5) *
1111 Bagby, Suite 1640
Houston, Texas 77002
Edward W. LeBaron, Jr.......................................... 58,260(6) *
400 Capitol Mall, 17th Floor
Sacramento, California 95814
Peter R. Scherer............................................... 87,175(7) *
500 Empire Plaza
Midland, Texas 79701
James B. Wallace............................................... 39,600(8) *
475 17th Street, Suite 1300
Denver, Colorado 80202
Robert H. Whilden, Jr.......................................... 55,000(6) *
3300 First City Tower
1001 Fannin
Houston, Texas 77002
State Farm Mutual Automobile Insurance Company................. 2,200,000(9) 14.16%
One State Farm Plaza
Bloomington, Illinois 61701
Peter B. Cannell & Co., Inc.................................... 856,131(9) 5.51%
919 Third Avenue
New York, New York 10022
Metropolitan Life Insurance Company............................ 1,520,300(9)(10) 9.79%
One Madison Avenue
New York, New York 10010
Steinberg Asset Management Company, Inc........................ 884,300(9)(11) 5.69%
12 East 49th Street
New York, New York 10017
The Equitable Companies Incorporated........................... 1,536,200(9)(12) 9.89%
787 Seventh Avenue
New York, New York 10019
All Directors and Executive Officers as a Group (13 persons)... 1,121,915(13) 6.75%
</TABLE>
(Footnotes begin on following page)
3
<PAGE> 6
- ---------------
* Less than one percent.
(1) Unless otherwise indicated, all shares of Common Stock are held directly
with sole voting and dispositive powers.
(2) Includes 605,000 shares of Common Stock underlying presently exercisable
stock options and 236 shares of Common Stock allocated to Mr. Evans'
account under the Company's 401(k) Profit Sharing Plan.
(3) Includes (i) 105,000 shares of Common Stock underlying presently
exercisable stock options, (ii) 5,253 shares of Common Stock allocated to
Mr. Brown's account under the Company's 401(k) Profit Sharing Plan, and
(iii) 5,714 shares of Common Stock owned by the C.V. Lyman Testamentary
Trust (the "Trust"). Mr. Brown serves as a Co-Trustee of the Trust and,
consequently, has shared voting and investment powers with respect to such
shares of Common Stock. Mr. Brown disclaims beneficial ownership of all of
the shares held by the Trust.
(4) Includes 10,000 shares of Common Stock underlying a presently exercisable
stock option.
(5) Includes 55,000 shares of Common Stock underlying presently exercisable
stock options. Also included are 9,000 shares of Common Stock held by five
adult children of Mr. Groppe, the beneficial ownership of which is
disclaimed by Mr. Groppe.
(6) Includes 55,000 shares of Common Stock underlying presently exercisable
stock options.
(7) Includes 85,000 shares of Common Stock underlying presently exercisable
stock options; 94 shares of Common Stock allocated to Mr. Scherer's account
under the Company's 401(k) Profit Sharing Plan and 1,999 shares allocated
to his account under the Company's Employee Stock Ownership Plan.
(8) Includes 35,000 shares of Common Stock underlying presently exercisable
stock options.
(9) The number of shares and nature of beneficial ownership is as of December
31, 1994 and is based on information contained in Schedule 13G filed by
such person with the Securities and Exchange Commission.
(10) Metropolitan Life Insurance Company ("Met Life") and State Street Research
and Management Company, Inc. ("State Street"), an investment adviser and
subsidiary of Met Life, reported sole voting power with respect to
1,141,000 shares and sole dispositive power with respect to 1,520,300
shares. State Street disclaims beneficial ownership of all of such shares.
(11) As reported in Schedule 13G filed jointly by Steinberg Asset Management
Company, Inc. ("SAMC"), Steinberg Asset Management Company, L.P. ("SAMP"),
Michael A. Steinberg & Company, Inc. ("S&C"), and Michael A. Steinberg
("M.A.S."), SAMC is the beneficial owner of 6,500 shares, of which SAMC has
sole voting power with respect to 5,000 shares and sole dispositive power
with respect to 6,500 shares; SAMP is the beneficial owner of 825,900
shares, of which SAMP has sole voting power with respect to 590,100 shares
and sole dispositive power with respect to 825,900 shares; S&C has sole
dispositive power with respect to 9,900 shares; and M.A.S. has sole voting
and dispositive powers with respect to 2,000 shares. SAMC, the general
partner of SAMP, may be deemed to beneficially own the shares beneficially
owned by SAMP, and M.A.S. may be deemed to have beneficial ownership of the
shares owned by all of the reporting entities.
(12) The Equitable Companies Incorporated ("Equitable"), AXA, Alliance Capital
Management L.P., a subsidiary of Equitable, and a group of five French
mutual insurance companies reported sole voting power with respect to
1,248,800 shares and sole dispositive power with respect to 1,536,200
shares.
(13) Includes 1,079,700 shares of Common Stock underlying presently exercisable
stock options.
REPORTS OF BENEFICIAL OWNERSHIP
Section 16(a) of the Securities Exchange Act of 1934 requires, among other
things, that the Company's Directors and officers file at specified times
reports of beneficial ownership and changes in beneficial ownership of the
Company's Common Stock and other equity securities. To the Company's knowledge,
all Section 16(a) filing requirements have been complied with, except that the
ownership of 1,942 shares of the
4
<PAGE> 7
Company's Common Stock was inadvertently omitted from five Form 4 reports filed
by Thomas C. Brown, a Director of the Company, during the period from October,
1991 to October, 1994. These shares, and Mr. Brown's ownership thereof had,
however, been included and reported in Form 4 reports filed by Mr. Brown prior
to October, 1991. All of Mr. Brown's transactions in the Company's Common Stock
during such period were timely reported by Mr. Brown, and none of such
transactions affected or related to Mr. Brown's ownership of the 1,942 shares.
Mr. Brown's ownership of such shares was again reported and included in his 1994
year-end Form 5 report.
ELECTION OF DIRECTORS
Directors of the Company are elected annually by the stockholders to serve
until the next annual meeting of stockholders and until their successors are
duly elected and qualified. The number of directors is established by resolution
of the Board of Directors. In November, 1994, Mr. George W. Bush resigned as a
Director of the Company following his election to the Office of Governor of the
State of Texas and, in January, 1995, Mr. William R. Granberry was appointed to
the Board to fill the vacancy created by the resignation of Mr. Bush. The Board
of Directors is recommending that the seven current Directors of the Company,
including Mr. Granberry, be re-elected to hold office until the 1996 annual
meeting of stockholders and until their respective successors have been duly
elected and qualified.
If any nominee becomes unavailable for any reason, a substitute nominee may
be proposed by the Board of Directors and the shares represented by Proxy will
be voted for any substitute nominee, unless the Board reduces the number of
directors. The Board of Directors has no reason to expect that any nominee will
become unavailable. Except for Mr. Granberry, all of the nominees listed below
were previously elected Directors by the stockholders at the last annual meeting
of stockholders. There are no family relationships among any of the nominees or
among any of the nominees and any officer, nor any arrangements or
understandings between any nominee and any other person pursuant to which the
nominee was selected. The seven nominees for the Board of Directors are as
follows:
<TABLE>
<CAPTION>
POSITION WITH COMPANY DIRECTOR
NOMINEE AGE AND PRINCIPAL OCCUPATION SINCE
- ------------------------------ --- --------------------------------------- ----
<S> <C> <C> <C>
Donald L. Evans............... 48 Chairman of the Board of Directors, 1980
Chief Executive Officer and President
of the Company; Director of
TMBR/Sharp Drilling, Inc.
Thomas C. Brown............... 68 Director of the Company; Director of 1968
Weatherford International
Incorporated; Chairman of the Board
of Directors of TMBR/Sharp Drilling,
Inc.
William R. Granberry.......... 52 Director of the Company; Chairman of 1995
the Board of Directors and President of
Mineral Development, Inc.
Henry Groppe.................. 69 Director of the Company; Oil and gas 1989
consultant with Groppe, Long &
Littell.
Edward W. LeBaron, Jr......... 65 Director of the Company; Chairman of 1987
the Board of Directors of Pacific
Casino Management, Inc.; Retired
partner from the law firm of
Pillsbury, Madison and Sutro.
</TABLE>
(Table continued on following page)
5
<PAGE> 8
<TABLE>
<CAPTION>
POSITION WITH COMPANY DIRECTOR
NOMINEE AGE AND PRINCIPAL OCCUPATION SINCE
- ------------------------------ --- --------------------------------------- ----
<S> <C> <C> <C>
James B. Wallace.............. 66 Director of the Company; Partner in 1992
Brownlie, Wallace, Armstrong and
Bander Exploration.
Robert H. Whilden, Jr......... 59 Director of the Company; Partner in the 1989
law firm of Vinson & Elkins.
</TABLE>
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR EACH OF THE DIRECTOR NOMINEES.
OTHER INFORMATION
The Company's Audit Committee has the responsibility of recommending
employment of the Company's independent auditors, reviewing with management and
the independent auditors the Company's financial statements, basic accounting
and financial policies and practices, audit scope and competency of control
personnel. The Audit Committee met one time during the fiscal year ended
December 31, 1994. The members of the Audit Committee in 1994 were James B.
Wallace and Edward W. LeBaron, Jr.
The Company's Compensation Committee reviews and recommends to the Board of
Directors the compensation and promotion of officers of the Company, the terms
of any proposed employee benefit arrangements and the making of awards under
such arrangements. The Compensation Committee took action by unanimous written
consent on three occasions during 1994. The members of the Compensation
Committee in 1994 were Henry Groppe, Robert H. Whilden, Jr. and George W. Bush,
until his resignation from the Board of Directors in November, 1994.
The Board of Directors held four meetings during the year ended December
31, 1994, and action was also taken by unanimous written consent on two
occasions. No Director participated in fewer than 75% of the total number of
meetings of the Board of Directors or committees of which he is a member.
The Company does not have a standing nominating committee. The review of
recommendations for nominees for Directors is made by the Board of Directors.
PROPOSAL TO AMEND 1989 STOCK OPTION PLAN
The Company has since 1969 maintained one or more employee stock option
plans, which management believes have served as a valuable incentive for
employees of the Company and have thus been a significant contributing factor to
the Company's accomplishments. The Board of Directors continues to believe that
a stock option program is an important factor in retaining and rewarding
executives and other selected key employees. When originally adopted by the
Company's stockholders in August, 1990, the Company's 1989 Stock Option Plan
(the "Plan") authorized and reserved for issuance 1,000,000 shares of the
Company's Common Stock. At January 31, 1995, 21,750 shares remained available
for grant under the Plan. Therefore, in February, 1995, the Board of Directors
adopted an amendment to the Plan, subject to approval of the Company's
stockholders, which would, if adopted, increase the number of shares of Common
Stock authorized and reserved for issuance under the Plan from 1,000,000 shares
to 1,400,000 shares of Common Stock.
If the proposed amendment to the Plan is approved, the number of shares
authorized and reserved for issuance under the Plan would change from 1,000,000
to 1,400,000, so that the first sentence of Paragraph V of the Plan, as amended,
shall read as follows:
"The aggregate number of shares which may be issued under Options
granted under the Plan shall not exceed 1,400,000 shares of Stock."
6
<PAGE> 9
At the Annual Meeting, stockholders will be asked to approve and ratify
action taken by the Board of Directors in adopting the amendment to the Plan.
Unless otherwise indicated, the Proxies received from stockholders will be voted
in favor thereof.
The Compensation Committee of the Company's Board of Directors administers
the Plan. At the date of this Proxy Statement, the Compensation Committee had
not taken any action with respect to future grants of options under the Plan.
Consequently, while it is expected that the current executive officers of the
Company will likely be granted options in the future, the officers that may
receive such options, the number of options and dollar values, are not currently
determinable.
While stockholder approval of the Plan is not required under Delaware law,
the Internal Revenue Code of 1986, as amended, requires that the proposed
amendment to the Plan be submitted to a vote of the Company's stockholders in
order for the incentive stock options to qualify as "incentive stock options"
for federal income tax purposes. Further, in order for the officers and
Directors of the Company to derive all of the benefits of the options without a
risk of exposure to liability under Section 16(b) of the Securities Exchange Act
of 1934, management desires to maintain the protection afforded by Rule 16b-3.
If the required stockholder approval is not obtained, the amendment will not be
implemented and the number of shares of Common Stock authorized to be issued
under the Plan will not be increased.
A summary description of the major provisions of the Plan is included below
under "Executive Compensation -- 1989 Stock Option Plan".
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSAL TO AMEND THE 1989
STOCK OPTION PLAN.
EXECUTIVE COMPENSATION
COMPENSATION PHILOSOPHY AND POLICIES
The Compensation Committee of the Board of Directors of the Company is
responsible for setting and administering the policies which govern both annual
cash compensation and incentive programs for the Company's executive officers.
The Compensation Committee is currently composed of two independent non-employee
Directors. Following review and approval of executive compensation by the
Compensation Committee, all recommendations of the Compensation Committee are
submitted to the full Board of Directors for approval.
The Compensation Committee has not adopted a structured salary or incentive
compensation program; however, the Compensation Committee maintains the
philosophy that compensation of its executive officers should be balanced
between a fair and reasonable cash compensation and incentives linked to the
Company's overall operating performance. To achieve this balance executives
have, in addition to their cash compensation, been awarded stock options,
phantom stock options and cash bonuses that reward executives through the
creation of stockholder value. The Compensation Committee takes into account
that corporate performance, especially in the oil and gas business, is often
cyclical and that the Company's performance in any given year, whether favorable
or unfavorable, may not necessarily be representative of immediate past results
or future performance. Consequently, the Compensation Committee examines and
recommends executive compensation levels based on certain factors compared over
a period of several years, rather than applying such factors on an isolated or
"snapshot" basis at the time compensation levels are recommended by the
Compensation Committee to the full Board. In this regard, and partly due to the
peculiarities of financial accounting requirements for oil and gas companies,
the Compensation Committee emphasizes performance factors such as growth in the
Company's proved oil and gas reserves, increases in volumes of oil and gas sold
by the Company, "finding" costs, and the achievement by management of specific
goals set by the Board of Directors from time to time; however, the Compensation
Committee does not establish any specific performance levels which would
necessarily result in increases in compensation, nor does the Compensation
Committee assign relative weights or rankings to such factors, but instead makes
a subjective determination based upon a consideration of all of such factors.
Additionally, in the case of Mr. Evans, the Chief Executive Officer, the
Compensation Committee also considers and takes into account Mr. Evans' ability
to maintain and strengthen
7
<PAGE> 10
the Company's relationships with the investment community, generate employee
confidence and morale, and demonstrate leadership qualities.
In January, 1995, the Compensation Committee reviewed the Company's
performance in 1994. For the year ended December 31, 1994, the Company reported
oil and gas reserves of approximately 207 billion cubic feet equivalent, a 37%
increase from the previous year's record level. The Company also reported a five
year average finding cost of approximately $.32/thousand cubic feet equivalent,
one of the lowest in the industry. Notably, the Company achieved these results
during a period of weak gas prices, and without incurring debt. Based on these
performance results, in January, 1995, the Compensation Committee determined
that the performance of and the results achieved by the Company merited the
payment of bonuses and the award of stock options to certain of the Company's
executive officers, including a $35,000 cash bonus to Mr. Evans. The
Compensation Committee also awarded Mr. Evans a stock option to purchase 150,000
shares of the Company's Common Stock at an exercise price of $12.00, the fair
market value of the Company's stock on the date of grant, and a stock option to
purchase an additional 150,000 shares at an exercise price of $15.00, or 25%
greater than the market value on the date of grant. The Compensation Committee
believes the cash bonus recognizes the past successful management efforts
demonstrated by Mr. Evans, while the stock options provide a future incentive
for Mr. Evans that is tied to the creation of future value for all stockholders
of the Company. In light of the $50,000 increase in Mr. Evans' salary in
October, 1993, the Compensation Committee determined that his current salary was
appropriate and that an additional increase would not be recommended until
further consideration by the Compensation Committee. The Compensation Committee
believes that the current mix between the cash and equity incentive
opportunities presently in place for Mr. Evans is adequate to motivate and
retain him, as well as the other executive officers of the Company.
Internal Revenue Code Section 162(m), enacted in 1993, precludes a public
corporation from taking a deduction in 1994 or subsequent years for compensation
in excess of $1 million for its chief executive officer or any of its four other
highest-paid officers. The new law generally eliminates such deductions unless
compensation is awarded under plans meeting a number of requirements based upon
objective performance standards and advance stockholder approval. Because of the
current levels of compensation paid to the Company's executive officers and
certain transition provisions of the new law, the Compensation Committee does
not believe that the limitations on compensation deductions imposed by the new
law will impact the Company in the near future. However, the Compensation
Committee will continue to assess the impact of the new tax legislation on
executive compensation and determine what action, if any, will be appropriate.
The foregoing report is made by the Compensation Committee of the Company's
Board of Directors. Members of the Compensation Committee are Henry Groppe and
Robert H. Whilden, Jr.
8
<PAGE> 11
SUMMARY OF ANNUAL COMPENSATION
The following table sets forth for each of the three fiscal years ended
December 31, 1994, a summary of the types and amounts of compensation paid to
the Chief Executive Officer of the Company and the only other executive officer
of the Company whose salary and bonuses during the fiscal year ended December
31, 1994 exceeded $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-------------------------------
ANNUAL COMPENSATION AWARDS
------------------------------- -------------------
OTHER SECURITIES PAY- OUTS ALL
ANNUAL RESTRICTED UNDERLYING -------- OTHER
COMPEN- STOCK OPTIONS/ LTIP COMPENSA-
NAME AND SALARY BONUS SATION AWARDS SARS PAYOUTS TION(1)
PRINCIPAL POSITION YEAR ($) ($) ($) ($) (#) ($) ($)
- ------------------------------------- ---- -------- ------- -------- -------- ------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
D. L. Evans, 1994 $279,260 $35,000 0 0 0 0 $ 0
Chairman of the Board of Directors, 1993 $241,960 $35,000 0 0 300,000 0 $2,370
Chief Executive Officer & President 1992 $210,627 0 0 0 0 0 $1,446
P. R. Scherer, 1994 $ 91,920 $20,000 0 0 0 0 $ 0
Executive Vice President 1993 $ 91,480 $20,000 0 0 60,000 0 $1,297
1992 $ 79,960 0 0 0 20,000(2) 0 $2,565
</TABLE>
- ---------------
(1) Such amounts represent, for Mr. Evans, allocations to his account under the
Company's 401(k) Profit Sharing Plan ("401(k) Plan"). For Mr. Scherer, such
amounts represent allocations to his accounts under the Company's 401(k)
Plan and Employee Stock Ownership Plan ("ESOP") as follows: 1992 -- $1,340
to the 401(k) Plan and $1,225 to the ESOP; and 1993 -- $1,297 to the 401(k)
Plan only.
(2) In March, 1992, a cash-only phantom stock option covering 20,000 "units" was
granted to Mr. Scherer, which was subsequently cancelled in October, 1993.
STOCK OPTIONS
Historically, the Company has utilized stock options and cash-only phantom
stock options as part of the overall compensation paid to executive officers of
the Company. However, no options were granted in 1994 to either of the executive
officers named in the Summary Compensation Table. Descriptions of the Company's
two stock option plans are set forth below under "-- 1989 Stock Option Plan" and
"-- 1993 Stock Option Plan".
The table below sets forth certain information with respect to the value of
each named executive officer's unexercised stock options at December 31, 1994.
Neither of the named executive officers exercised any options during 1994.
AGGREGATED OPTION/SAR EXERCISES IN
LAST FISCAL YEAR AND FISCAL YEAR - END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
SHARES OPTIONS/SARS OPTIONS/SARS
ACQUIRED AT FISCAL YEAR-END AT FISCAL YEAR-END
ON VALUE (#) ($)(1)
EXERCISE REALIZED -------------------- -----------------------
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------------------- ------- ------- ------- ------ --------- -------
<S> <C> <C> <C> <C> <C> <C>
D. L. Evans............................ -- -- 455,000 25,000 $2,850,000(2) -- (2)
P. R. Scherer.......................... -- -- 52,500 32,500 $ 245,650(3) $95,650(3)
</TABLE>
- ---------------
(1) Value of in-the-money options is equal to the fair market value of a share
of Common Stock at fiscal year-end ($11.50) less the exercise price, based
on the last sale price of the Company's Common Stock.
(Footnotes continued on following page)
9
<PAGE> 12
(2) One stock option to purchase 100,000 shares of Common Stock is excluded from
the calculation since the exercise price of such option ($14.687) exceeded
the market price ($11.50) of the underlying Common Stock at December 31,
1994.
(3) One stock option to purchase 40,000 shares of Common Stock is excluded from
the calculation since the exercise price of such option ($14.687) exceeded
the market price ($11.50) of the underlying Common Stock at December 31,
1994.
FIVE YEAR CUMULATIVE TOTAL RETURN
Set forth below is a line graph comparing the annual cumulative total
stockholder return on the Company's Common Stock with the cumulative total
return of the S&P Composite -- 500 Stock Index and the S&P Energy Composite
Index for the period of five fiscal years commencing December 31, 1989 and
ending December 31, 1994. The table assumes that the value of an investment in
the Company's Common Stock and each Index was $100 on December 31, 1989 and that
all dividends were reinvested. The stock price performance shown on the graph
below is not necessarily indicative of future price performance.
<TABLE>
<CAPTION>
1989 1990 1991 1992 1993 1994
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Tom Brown, Inc. 100 93 77 130 209 214
S&P 500 Index 100 97 126 136 150 152
Energy Composite 100 103 111 113 131 136
</TABLE>
TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL ARRANGEMENTS
The Company has entered into a five year employment agreement with Mr.
Evans expiring on December 31, 1996. The agreement provides for a severance
benefit payment upon the occurrence of Mr. Evans' resignation from employment,
preceded by either (1) without his express written consent, the assignment of
Mr. Evans to any duties inconsistent with his position, duties, responsibilities
or status with the Company or a reduction of his duties or responsibilities for
reasons other than good cause; (2) any failure of the Company or its
stockholders, as the case may be, to re-elect Mr. Evans to the offices of
President, Chief Executive Officer and Director or his removal from any such
office for reasons other than good cause; or (3) any breach by the Company (or
any successor) of any of the provisions of the agreement or any failure by the
Company to carry out any of its obligations under the agreement for reasons
other than good cause. The severance benefit payment is an amount equal to Mr.
Evans' then existing annual base pay (or an amount equal to his base pay for the
balance of the term of the agreement if less than one year). If a dispute arises
regarding a termination of Mr. Evans or the interpretation or enforcement of the
agreement, all legal fees and
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<PAGE> 13
expenses incurred by Mr. Evans in contesting or disputing any such termination
or seeking to obtain or enforce any right or benefit provided for in the
agreement will be paid by the Company, to the extent Mr. Evans prevails.
The Company's 1989 Stock Option Plan and 1993 Stock Option Plan both
contain "change of control" provisions which are applicable to all holders of
options granted under the plans, including Messrs. Evans and Scherer. The change
of control provisions in both plans, which are substantially identical,
generally provide that if (i) the Company is not the surviving entity in any
merger, consolidation or other reorganization (or survives only as a subsidiary
of an entity other than a previously wholly-owned subsidiary of the Company),
(ii) the Company sells, leases or exchanges all or substantially all of its
assets to any other person or entity (other than a wholly-owned subsidiary of
the Company), (iii) the Company is to be dissolved and liquidated, (iv) any
person or group acquires ownership or control of more than 50% of the
outstanding shares of the Company's voting stock, or (v) in connection with a
contested election of directors, the persons who were directors of the Company
before such election cease to constitute a majority of the Board (each such
event constituting a "Corporate Change"), then (a) ten days after the approval
by the stockholders of the Company of such merger, consolidation,
reorganization, sale, lease or exchange of assets or dissolution or such
election of directors or (b) thirty days after a change of control of the type
described in clause (iv), the Board's Compensation Committee shall effect one or
more of the following alternatives: (1) accelerate the time at which options
then outstanding may be exercised so that such options may be exercised in full
for a limited period of time on or before a specified date (before or after a
Corporate Change) fixed by the Compensation Committee, after which specified
date all unexercised options and all rights of optionees shall terminate, (2)
require the mandatory surrender to the Company by selected optionees of some or
all of the outstanding options held by such optionees (irrespective of whether
such options are then exercisable under the provisions of the plan) as of the
date, before or after a Corporate Change, specified by the Compensation
Committee, in which event the Compensation Committee shall thereupon cancel such
options and the Company shall pay to each optionee an amount of cash per share
equal to the excess, if any, of the "Change of Control Value" of the shares
subject to such option over the exercise prices under such options for such
shares, (3) make such adjustments to options then outstanding as the
Compensation Committee deems appropriate to reflect the Corporate Change, or (4)
provide that thereafter upon any exercise of an option theretofore granted the
optionee shall be entitled to purchase under such option, in lieu of the number
of shares of stock then covered by such option the number and class of shares of
stock or other securities or property to which the optionee would have been
entitled pursuant to the terms of the agreement of merger, consolidation or sale
of assets and dissolution if, immediately prior to such merger, consolidation or
sale of assets and dissolution the optionee had been the holder of record of the
number of shares of stock then covered by such option. The "Change of Control
Value" is an amount equal to, whichever is applicable, (i) the per share price
offered to stockholders of the Company in any merger, consolidation,
reorganization, sale of assets or dissolution transaction, (ii) the price per
share offered to stockholders of the Company in any tender offer or exchange
offer whereby a Corporate Change takes place, or (iii) if such Corporate Change
occurs other than pursuant to a tender or exchange offer, the fair market value
per share of the shares into which such options being surrendered are
exercisable, as determined by the Compensation Committee as of the date
determined by the Compensation Committee to be the date of cancellation and
surrender of such options. If the consideration offered to stockholders of the
Company in any transaction consists of anything other than cash, the
Compensation Committee shall determine the fair cash equivalent of the portion
of the consideration offered which is other than cash.
COMPENSATION OF DIRECTORS
Directors who are employees of the Company receive no additional
compensation for service on the Board of Directors or its committees. Directors
who are not employees of the Company receive a monthly fee of $1,000. For the
year ended December 31, 1994, the Company paid $12,000 to each of Messrs.
Groppe, LeBaron, Wallace, Whilden and Bush. In addition, the Company reimbursed
such Directors approximately $3,300 in total during 1994 for expenses incurred
in attending meetings of the Board of Directors.
11
<PAGE> 14
Pursuant to the Company's arrangement with Mr. Brown, the Company pays Mr.
Brown a consulting fee in the amount of $6,355 per month. During the year ended
December 31, 1994, an aggregate of $76,260 was paid to Mr. Brown under such
arrangement.
The Company's Directors participate in the 1989 Stock Option Plan which, in
the case of non-employee Directors, provides for the granting of an option to
purchase 25,000 shares of the Company's Common Stock to each individual who was
a non-employee Director of the Company on December 12, 1989 and to each
individual who becomes a non-employee Director following December 12, 1989. In
connection with the Company's adoption of its 1989 Stock Option Plan in
December, 1989, Messrs. Bush, Groppe, LeBaron and Whilden, non-employee
Directors of the Company, were each granted nonstatutory stock options on
December 12, 1989 at an exercise price of $5.25 per share, the fair market value
of the Company's Common Stock on the date of grant. Mr. Brown was granted a
nonstatutory stock option to purchase 75,000 shares and Messrs. Bush, Groppe,
LeBaron and Whilden were each granted nonstatutory stock options to purchase
25,000 shares of Common Stock. Such options expire on December 12, 1999.
All Directors of the Company are also eligible to participate in the
Company's 1993 Stock Option Plan. During 1994, Messrs. Brown, Groppe, LeBaron,
Whilden and Wallace, were each granted a nonstatutory stock option to purchase
10,000 shares of the Company's Common Stock. The options were granted at an
exercise price of $11.875 per share, the fair market value of the Company's
Common Stock on the date of grant, and the options expire ten years from the
date of grant. See "-- 1993 Stock Option Plan" below.
1989 STOCK OPTION PLAN
The Board of Directors adopted the Company's 1989 Stock Option Plan (the
"1989 Plan") on December 12, 1989. The 1989 Plan, which was approved by the
Company's stockholders on September 28, 1990, provides for the granting to
employees of the Company and Directors who are not employees of the Company of
incentive and nonstatutory stock options to purchase up to 1,000,000 shares of
Common Stock (1,400,000 shares if the proposal to increase the authorized Common
Stock is approved by the stockholders). Options granted under the 1989 Plan to
employees may be either incentive stock options within the meaning of Section
422 of the Internal Revenue Code of 1986, as amended (the "Code"), or options
which do not constitute incentive stock options. Options granted to non-employee
Directors will not be incentive stock options.
Purpose. The purpose of the 1989 Plan is to provide a means whereby certain
employees and Directors who are not employees ("non-employee Directors") of the
Company and its subsidiaries may develop a sense of proprietorship and personal
involvement in the development and financial success of the Company, and to
encourage them to remain with and devote their best efforts to the business of
the Company, thereby advancing the interests of the Company and its
stockholders.
Administration. The 1989 Plan is administered by the Compensation Committee
of the Board of Directors, none of whom are eligible to participate in the Plan
except to receive an option to purchase 25,000 shares at the time he becomes a
Director. The Compensation Committee has the sole authority to select the
employees who are to be granted options and to establish the number of shares
issuable under each option. The Compensation Committee is authorized to
interpret the 1989 Plan, and may from time to time adopt such rules and
regulations, consistent with the provisions of the 1989 Plan, as it may deem
advisable.
Eligibility. Key employees (including officers and Directors who are also
key employees) whom the Compensation Committee selects shall be eligible to
receive one or more non-qualified options or incentive options under the 1989
Plan. In addition, the 1989 Plan provides for the granting of an option to
purchase 25,000 shares of Common Stock to each individual who was a non-employee
Director of the Company on December 12, 1989 and to each individual who becomes
a non-employee Director following December 12, 1989. No incentive stock option
may be granted to an individual if, at the time the option is granted, such
individual owns stock possessing more than 10% of the total combined voting
power of all classes of stock of the Company, unless (i) at the time such option
is granted the option price is at least 110% of the fair market value of the
stock subject to the option and (ii) such option by its terms is not exercisable
after the expiration of five years from the date of grant. Members of the
Compensation Committee are not eligible, and shall not
12
<PAGE> 15
have been eligible at any time within one year prior to their appointment to the
Compensation Committee, to participate in a Company stock plan, other than the
eligibility of non-employee Directors to receive a non-qualified stock option to
purchase 25,000 shares of Common Stock as described above, or to participate in
any other Company stock plan which would not cause such members to cease to be
"disinterested persons" within the meaning of Rule 16b-3 under the 1934 Act.
Stock to be Optioned. The aggregate number of shares of Common Stock which
may be issued pursuant to the exercise of stock options granted under the 1989
Plan may not exceed in the aggregate 1,000,000 shares (1,400,000 shares if the
proposal to increase the authorized Common Stock is approved by the
stockholders), subject to adjustments in the number of shares with respect to
options and purchase prices therefor in the event of stock splits or stock
dividends, and for equitable adjustments in the event of recapitalizations,
mergers, consolidations, acquisitions of more than 50% of the outstanding shares
of Common Stock by any person or entity, dissolution and liquidation, and
similar events. In addition, the aggregate number of shares remaining available
under the 1989 Plan shall be appropriately adjusted. If any outstanding option
granted under the 1989 Plan expires or terminates prior to its exercise in full,
the shares allocable to the unexercised portion of such option may be
subsequently granted under the 1989 Plan. Exercise of an option in any manner,
including an exercise involving a stock appreciation right by an employee, shall
result in a decrease in the number of shares of stock which may thereafter be
available, both for purposes of the 1989 Plan and for sale to any one
individual, by the number of shares as to which the option is exercised.
Terms of Grant. The purchase price of Common Stock issued under each option
will not be less than the fair market value of the stock subject to the option
at the time of grant. The 1989 Plan further provides that to the extent the
aggregate fair market value of the Common Stock (determined at the time of
grant) with respect to which incentive options granted after 1986 are
exercisable for the first time by an individual during any calendar year under
all incentive stock option plans of the Company exceeds $100,000, such incentive
stock options shall be treated as options which do not constitute incentive
stock options. The Compensation Committee determines, in accordance with
applicable provisions of the Code, which of an optionee's incentive stock
options will not constitute incentive stock options because of such limitation.
Options granted to an employee contain such terms and conditions and may be
exercisable for such periods as may be approved by the Compensation Committee.
The 1989 Plan provides that an option agreement may provide an optionee with the
right to request the Compensation Committee to permit surrender of the option in
return for a payment in cash and/or shares of Common Stock equal to the excess
of the fair market value of the shares with respect to which the option is
surrendered over the option price therefor, on such terms and conditions as the
Compensation Committee, in its sole discretion, may prescribe. Options may
provide for the exercise of the option by payment in cash or by delivery to the
Company of a number of shares of Common Stock having a fair market value equal
to the purchase price, or any combination of cash or Common Stock.
An option may be granted in exchange for an individual's right and option
to purchase shares of Common Stock pursuant to the terms of an agreement that
existed prior to the date such option is granted ("Prior Option"). An option
agreement that grants an option in exchange for a Prior Option must provide for
the surrender and cancellation of the Prior Option. The purchase price of Common
Stock issued under an option granted in exchange for a Prior Option shall be
determined by the Compensation Committee and, such purchase price may, without
limitation, be equal to the price for which the optionee could have purchased
Common Stock under the Prior Option.
Options granted under the 1989 Plan are not transferable other than by will
or the laws of descent and distribution and are exercisable during the
optionee's lifetime only by the optionee or the optionee's guardian or legal
representative. Generally, in the event of termination of employment as a result
of death or disability, any options held by the optionee may be exercised at any
time during the period of one year following such termination. In the event of
termination other than for cause, death or disability, options may be exercised
within three months of the date of termination.
Amendment or Termination. The Board of Directors of the Company may amend
or terminate the 1989 Plan at any time, but may not in any way terminate or
restrict the rights of a participant under an outstanding
13
<PAGE> 16
option without the consent of such participant. The Board of Directors may not
make any alteration or amendment which would materially increase the benefits
accruing to participants under the 1989 Plan, increase the aggregate number of
shares which may be issued pursuant to the provisions of the 1989 Plan, change
the class of individuals eligible to receive options, or extend the term of the
1989 Plan, without the approval of the stockholders of the Company.
Term. The 1989 Plan will terminate upon and no further options shall be
granted after the expiration of ten years from the date of its adoption by the
Board of Directors.
Federal Income Tax Consequences. Non-qualified options under the 1989 Plan
will not have a "readily ascertainable value" at the time of the grant of such
options or at any time until the options are exercised, and as a result, a
participant who receives a non-qualified option will not be taxed upon the
receipt of the option.
A participant who receives a non-qualified option will generally recognize
ordinary income upon the exercise of the option in the amount by which the fair
market value of the underlying shares at the time of exercise exceeds the
exercise price. The Company will be entitled to a deduction from income as an
ordinary and necessary business expense when and to the extent ordinary income
is recognized by optionees.
Upon the sale of the shares received upon the exercise of a non-qualified
option, the seller will generally recognize either short-term or long-term
capital gain or loss, depending upon the holding period of the shares. The
required holding period for long-term capital gain or loss treatment is more
than one year. The measure of the taxable gain or loss is determined by the
difference between the price paid for the shares upon the exercise of the
options (plus the amount of income recognized) and the selling price of the
shares.
Employees who receive incentive stock options under the 1989 Plan will not
recognize any income for federal income tax purposes as a result of the receipt
of such options. An optionee, upon exercise of an incentive option under the
1989 Plan, will not recognize taxable income nor will the Company then be
entitled to a deduction. Any gain or loss realized upon the subsequent
disposition of the stock acquired upon exercise of incentive options will be
treated as long term capital gain or loss, provided that no such disposition is
made within two years before the option was granted and one year after the
option was exercised. If such holding period requirements are not satisfied, the
optionee will recognize ordinary income equal to the lesser of (i) the fair
market value of the stock on the date of exercise minus the exercise price or
(ii) the amount realized on disposition minus the exercise price. Any gain in
excess of the amount taxed as ordinary income will be recognized as capital
gain. If the stock is sold for less than the option price, the loss is a capital
loss.
The Company will not be entitled to a compensation deduction for federal
income tax purposes with respect to the grant of an incentive option to an
employee under the 1989 Plan or the exercise of the incentive option by the
employee. Upon an employee's disposition of shares acquired pursuant to an
incentive option, the Company will be entitled to a deduction for federal income
tax purposes equal to the amount, if any, of ordinary income recognized by such
employee.
The foregoing statements are based upon current federal income tax laws and
regulations and are subject to change if the tax laws and regulations, or
interpretations thereof, change.
1993 STOCK OPTION PLAN
In February, 1993, the Board of Directors adopted the Company's 1993 Stock
Option Plan ("1993 Plan"). The 1993 Plan provides for the granting to employees
and Directors of the Company of nonstatutory stock options to purchase up to
525,000 shares of Common Stock.
The 1993 Plan is administered by the Board's Compensation Committee. The
Compensation Committee has sole authority to select optionees, establish the
number of shares which may be issued under each option, interpret the 1993 Plan
and to adopt rules and regulations, consistent with the terms of the 1993 Plan,
as the Compensation Committee deems advisable to carry out the 1993 Plan.
Options granted under the 1993 Plan are evidenced by written agreements
between the Company and the optionee containing such terms and conditions as may
be approved by the Compensation Committee. Options granted under the 1993 Plan
are not transferable other than by the laws of descent and distribution and are
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<PAGE> 17
exercisable during the optionee's lifetime only by the optionee or the
optionee's guardian or legal representative. The purchase price of Common Stock
issued under each option is determined by the Compensation Committee, and may be
less than the fair market value of the Common Stock subject to the option.
Except with respect to options then outstanding, the 1993 Plan terminates
and no further options may be granted under the 1993 Plan after the expiration
of ten years from the date of its adoption by the Board of Directors. The Board
also has the right to alter or amend the 1993 Plan or any part thereof from time
to time, provided that no change in options theretofore granted may be made
which would impair the rights of the optionee without the consent of the
optionee.
EMPLOYEE STOCK OWNERSHIP PLAN
Under the Company's employee stock ownership plan (the "ESOP"), the Company
may contribute cash or Common Stock to a trust for the benefit of all employees
of the Company. Amounts allocated each year to the individual accounts of
participants are based on the ratio that each participant's compensation for
such year bears to the total compensation of all participants for such year. A
participant's accrued benefits under the ESOP derived from Company contributions
vest 100% at age 65, or upon termination of employment as a result of death or
disability. If a participant's employment terminates prior to age 65 for any
reason other than death or disability and the ESOP has not been determined to be
a top-heavy plan (as defined in the ESOP), then accrued benefits derived from
Company contributions vest 10% after one year of service, 25% after two years,
40% after three years, 55% after four years, 70% after five years, 85% after six
years and 100% after seven years of service. Each employee of the Company
becomes eligible to participate in the ESOP on the first day of the calendar
quarter following the later of the date on which he completes one year of
service or attains age twenty-one. Decisions with respect to the timing, pricing
and amount of contributions to the ESOP are made by the Company's Compensation
Committee. The ESOP does not permit a participant to make voluntary
contributions. In January, 1995, the Company made a cash contribution to the
ESOP in the amount of $60,000 which was allocated to employee participants
effective December 31, 1994. Directors of the Company who are not also employees
of the Company are not eligible to participate in the ESOP. Mr. Evans, the
Chairman of the Board of Directors, Chief Executive Officer and President of the
Company, and Mr. Scherer, the Executive Vice President of the Company, do not
participate in the ESOP.
PROFIT SHARING PLAN
The Company maintains a profit sharing plan (the "Profit Sharing Plan") for
the benefit of all employees. Under the Profit Sharing Plan, the Company
contributes to a trust administered by a third party trustee (the "Profit
Sharing Trustee"), out of current or accumulated net profits, such amounts as it
may, from time to time, deem advisable. The contributions are invested by the
Profit Sharing Trustee in various investments selected by employee participants.
Company contributions to the Profit Sharing Trust are allocated at December 31
of each year to the individual accounts of the participants. A participant's
accrued benefit derived from Company contributions is 100% vested upon attaining
age 65, or if his employment terminates as a result of death, disability or for
any other reason. Each employee of the Company becomes eligible to participate
in the Profit Sharing Plan on the first day of the calendar quarter following
the later of the date on which such employee commenced employment or attains age
twenty-one. Directors of the Company who are not also employees of the Company
are not eligible to participate in the Profit Sharing Plan. In addition to
Company contributions, participants may also contribute such amount as the
participant determines each year, subject to certain annual maximum limitations.
Participants are always 100% vested in their individual contributions. The
Company did not make a contribution to the Profit Sharing Plan for 1994.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Donald L. Evans, the Chairman of the Board of Directors, Chief Executive
Officer and President of the Company, serves on the Board of Directors and
compensation committee of TMBR/Sharp Drilling, Inc. Thomas C. Brown, the
Chairman of the Board of Directors of TMBR/Sharp Drilling, Inc., is a Director
of the Company. As of April 12, 1995, Mr. Brown and Mr. Evans beneficially owned
approximately 13.44% and
15
<PAGE> 18
2.97%, respectively, of the outstanding common stock of TMBR/Sharp Drilling,
Inc. See "Certain Transactions" below.
Mr. Whilden, a partner in the law firm of Vinson & Elkins, Houston, Texas,
is a Director of the Company and a member of the Board's Compensation Committee.
The Company paid Vinson & Elkins approximately $37,000 for legal services
rendered during 1994. Mr. Groppe, a partner in the oil and gas consulting firm
of Groppe, Long & Littell, Houston, Texas, is a Director of the Company and is
also a member of the Compensation Committee. The Company paid Groppe, Long &
Littell approximately $35,000 for oil and gas consulting services provided in
1994.
CERTAIN TRANSACTIONS
Historically, TMBR/Sharp Drilling, Inc. ("TMBR") has provided contract
drilling and other related oil and gas services to the Company in connection
with the Company's oil and gas exploration and development activities, and it is
anticipated that TMBR will continue to perform contract drilling services for
the Company in the future. From time to time the Company acquires interests in
oil and gas leasehold acreage from TMBR and participates with TMBR and other
interest owners in the drilling and development of such acreage where TMBR acts
as operator. During the year ended December 31, 1994, the Company incurred costs
of approximately $1,323,000 in connection with such services provided by TMBR,
and the Company paid approximately $1,054,000 to TMBR for such services. At
December 31, 1994, the Company owed TMBR approximately $269,000 for such
services. The largest aggregate amount owed by the Company to TMBR at any one
time during the fiscal year ended December 31, 1994 was approximately $484,000.
The Company and TMBR participate on the same or similar terms afforded
non-affiliated third parties.
From time to time, TMBR acquires interests in oil and gas leasehold acreage
from the Company and participates with the Company and other interest owners in
the drilling and development of such acreage where the Company acts as operator.
TMBR participates in such drilling ventures under standard form operating
agreements on the same or similar terms afforded non-affiliated third parties.
The Company invoices all working interest owners, including TMBR, on a monthly
basis for their share of operating expenses. During the year ended December 31,
1994, the Company billed TMBR approximately $98,000 for TMBR's proportionate
share of drilling costs and related expenses incurred on properties operated by
the Company. The largest amount owed to the Company by TMBR at any one time
during the year ended December 31, 1994 for its share of drilling costs and
related expenses and for services provided by the Company was approximately
$62,000. At December 31, 1994 TMBR owed the Company approximately $15,000 for
operating expenses.
The C. V. Lyman Testamentary Trust (the "Trust") owns working interests in
certain oil and gas properties in which the Company also owns working interests
and serves as operator. Mr. Brown, a Director of the Company, is a cotrustee of
the Trust. As a result of its ownership interest in the properties, the Trust
has at various times been indebted to the Company. During the year ended
December 31, 1994, the Company billed the Trust approximately $142,000 for the
Trust's proportionate share of costs and expenses attributable to its ownership
of working interests in such oil and gas properties. The largest amount owed by
the Trust to the Company at any one time during the year ended December 31, 1994
was approximately $16,200 and, at December 31, 1994, the Trust was indebted to
the Company in the approximate amount of $10,700. Payments to the Company are
due after monthly billings by the Company on the same basis as all other working
interest owners, and the Trust's participation in the oil and gas properties is
on the same basis as all other participants.
During the year ended December 31, 1994, the Company billed Wind
River -- Pavillion, Ltd., a Texas limited partnership (the "Partnership")
organized in June, 1986, an aggregate of approximately $2,745,000 for the
Partnership's proportionate share of lease operating and related expenses
associated with the Partnership's ownership of working interests in oil and gas
leases located in Fremont County, Wyoming. The Company is the sole general
partner of the Partnership and also serves as operator of all of the leases
owned by the Partnership. State Farm Mutual Automobile Insurance Company ("State
Farm") is the sole limited partner of the Partnership and the holder of
2,200,000 shares of the Company's Common Stock. Revenues and costs (excluding
capital costs) of the Partnership are allocated 20% to the Company and 80% to
State Farm before
16
<PAGE> 19
payout (defined as recovery of all of State Farm's costs plus a specified rate
of return), increasing to 75% (including capital costs) to the Company after
payout. The Partnership owed the Company approximately $1,038,000 at December
31, 1994. The largest amount owed by the Partnership to the Company at any one
time during the year was approximately $1,572,000. Payments to the Company are
due after monthly billings by the Company on the same basis as all other working
interest owners, and the Partnership's participation in the leases is on the
same basis as all other participants.
Brownlie, Wallace, Armstrong and Bander Exploration ("BWAB"), a
partnership, owns interests in options to purchase working interests in oil and
gas leases located in Wyoming, and in which the Company also owns interests and
acts as operator. Mr. Wallace, a Director of the Company, is a partner in BWAB.
As a result of its ownership interest in the option, and oil and gas leases
acquired by the Company pursuant to such options, BWAB has at various times been
indebted to the Company. During the year ended December 31, 1994, the Company
billed BWAB approximately $686,000 for BWAB's proportionate share of lease costs
associated with the acquisition of leases under option. The largest amount owed
by BWAB to the Company at any one time during 1994 was approximately $217,000.
At December 31, 1994, BWAB was indebted to the Company in the approximate amount
of $217,000. Payments to the Company are due after monthly billings by the
Company on the same basis as all other interest owners, and BWAB's participation
in the option, and underlying leases, is on the same basis as all other
participants.
INDEPENDENT PUBLIC ACCOUNTANTS
Arthur Andersen & Co. has served the Company as independent auditors since
March, 1990, and currently serves the Company as independent auditors. A
representative of Arthur Andersen & Co. will be present at the Annual Meeting
and will have an opportunity to make a statement to the stockholders if he
desires to do so, and to respond to appropriate questions.
OTHER BUSINESS
Management of the Company is not aware of any matters, other than those
stated in the accompanying Notice of Annual Meeting, which will be brought
before the meeting. If, however, any other matters properly come before the
meeting, the persons named as proxies in the enclosed Proxy will vote the shares
in accordance with their best judgment on such matters.
STOCKHOLDER PROPOSALS
Proposals of stockholders intended to be presented at the 1996 Annual
Meeting must be received by the Company for inclusion in its Proxy Statement and
form of Proxy relating to that meeting not later than December 16, 1995.
Proposals should be sent to: Corporate Secretary, Tom Brown, Inc., 508 West Wall
Street, Suite 500, Midland, Texas 79701. The use of certified mail, return
receipt requested, is suggested.
ANNUAL REPORT
Additional information concerning the Company, including financial
statements of the Company and Management's Discussion and Analysis of Financial
Condition and Results of Operations, is provided in the Company's Annual Report
that accompanies this Proxy Statement. The Annual Report is not deemed to be
part of this Proxy Statement.
A copy of the Company's Annual Report on Form 10-K will be furnished at no
charge to each stockholder of the Company upon receipt of a written request of
such person addressed to the Secretary, Tom Brown, Inc., P. O. Box 2608,
Midland, Texas 79702. The Company will also furnish such Annual Report on Form
10-K to any "beneficial owner" of such securities upon receipt of a written
request, likewise addressed, containing a good faith representation that, as of
April 12, 1995 such person was a beneficial owner of securities of the Company
entitled to vote at the Annual Meeting of Stockholders to be held May 17, 1995.
17
<PAGE> 20
YOUR COOPERATION IN PROMPTLY SIGNING, DATING AND MAILING THE ENCLOSED PROXY
WILL BE GREATLY APPRECIATED.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ JAMES M. ALSUP
-------------------------------------
JAMES M. ALSUP, Secretary
Midland, Texas
April 17, 1995
18
<PAGE> 21
EXHIBIT 10
APPENDIX A
TO
TOM BROWN, INC. PROXY STATEMENT
TOM BROWN, INC.
1989 STOCK OPTION PLAN
I. PURPOSE OF THE PLAN
The TOM BROWN, INC. 1989 STOCK OPTION PLAN (the "Plan") is intended to
provide a means whereby certain employees and directors who are not employees
("Nonemployee Directors") of TOM BROWN, INC., a Delaware corporation (the
"Company"), and its subsidiaries may develop a sense of proprietorship and
personal involvement in the development and financial success of the Company,
and to encourage them to remain with and devote their best efforts to the
business of the Company, thereby advancing the interests of the Company and its
shareholders. Accordingly, the Plan provides for granting certain employees and
Nonemployee Directors the option ("Option") to purchase shares of the common
stock of the Company ("Stock"), as hereinafter set forth. Options granted under
the Plan to employees may be either incentive stock options, within the meaning
of section 422A(b) of the Internal Revenue Code of 1986, as amended (the
"Code"), ("Incentive Stock Options") or options which do not constitute
Incentive Stock Options. Options granted under the Plan to Nonemployee Directors
will be options which do not constitute Incentive Stock Options.
II. ADMINISTRATION
The Plan shall be administered by the Board of Directors of the Company
(the "Board") or by a committee (the "Committee") of three or more directors of
the Company appointed by the Board. If the Plan is administered by the Board, a
majority of the members of the Board, and a majority of the members of the Board
acting in the matter, shall not be eligible, and shall not have been eligible at
any time within one year prior to their appointment to the Board, to participate
in the Plan or in any other stock, stock option or stock appreciation rights
plan of the Company or any of its affiliates ("Company Stock Plan"), other than
the eligibility of Nonemployee Directors to participate in the Plan pursuant to
paragraph (b) of Article IV or eligibility to participate in any other Company
Stock Plan which would not cause the individuals constituting such majority to
cease to be "disinterested persons" within the meaning of Rule 16b-3 under the
Securities Exchange Act of 1934, as amended (the "1934 Act"). Moreover, members
of the Committee shall not be eligible, and shall not have been eligible at any
time within one year prior to their appointment to the Committee, to participate
in a Company Stock Plan, other than the eligibility of Nonemployee Directors to
participate in the Plan pursuant to paragraph (b) of Article IV or eligibility
to participate in any other Company Stock Plan which would not cause such
members to cease to be "disinterested persons" within the meaning of Rule 16b-3
under the 1934 Act. If a Committee is not appointed by the Board, the Board
shall act as and be deemed to be the Committee for all purposes of the Plan
other than the immediately preceding sentence. The Committee shall have sole
authority to select the employees who are to be granted Options from among those
eligible hereunder and to establish the number of shares which may be issued to
employees under each Option. The Committee is authorized to interpret the Plan
and may from time to time adopt such rules and regulations, consistent with the
provisions of the Plan, as it may deem advisable to carry out the Plan. All
decisions made by the Committee in selecting the employees to whom Options shall
be granted, in establishing the number of shares which may be issued to
employees under each Option and in construing the provisions of the Plan shall
be final.
III. OPTIONS AGREEMENTS
Each Option granted to an employee shall be evidenced by an Employee Option
Agreement and shall contain such terms and conditions, and may be exercisable
for such periods, as may be approved by the
<PAGE> 22
Committee. The terms and conditions of the respective Employee Option Agreements
need not be identical. Specifically, an Employee Option Agreement may provide
for the surrender of the right to purchase shares under the Option in return for
a payment in cash or shares of Stock or a combination of cash and shares of
Stock equal in value to the excess of the fair market value of the shares with
respect to which the right to purchase is surrendered over the option price
therefor ("Stock Appreciation Rights"), on such terms and conditions as the
Committee in its sole discretion may prescribe; provided, that with respect to
Stock Appreciation Rights granted to employees who are subject to Section 16 of
the 1934 Act, except as provided in Subparagraph IX(c) hereof, the Committee
shall retain final authority (i) to determine whether an employee optionee shall
be permitted, or (ii) to approve an election by an employee optionee, to receive
cash in full or partial settlement of Stock Appreciation Rights. Moreover, an
Employee Option Agreement may provide for the payment of the option price, in
whole or in part, by the delivery of a number of shares of Stock (plus cash if
necessary) having a fair market value equal to such option price. For all
purposes under the Plan, the fair market of a share of Stock on a particular
date shall be equal to the mean of the reported high and low sales prices of the
Stock on the stock exchange composite tape if the Stock is traded on a stock
exchange on that date, or if no prices are reported on that date, on the last
preceding date on which such prices of the Stock are so reported. If the Stock
is traded over the counter at the time a determination of its fair market value
is required to be made hereunder, its fair market value shall be deemed to be
equal to the average between the reported high and low or closing bid and asked
prices of Stock on the most recent date on which Stock was publicly traded. In
the event Stock is not publicly traded at the time a determination of its value
is required to be made hereunder, the determination of its fair market value
shall be made by the Committee in such manner as it deems appropriate. Each
Option granted to a Nonemployee Director shall be evidenced by a Nonemployee
Option Agreement in the form attached to the Plan as Exhibit 1. Each Option and
all rights granted thereunder shall not be transferable other than by will or
the laws of descent and distribution, and shall be exercisable during the
optionee's lifetime only by the optionee or the optionee's guardian or legal
representative.
IV. ELIGIBILITY OF OPTIONEE
(a) Subject to the provisions of Article II and paragraphs (b) and (c)
below, Options may be granted only to individuals who are key employees
(including officers and directors who are also key employees) of the Company or
any parent or subsidiary corporation (as defined in section 425 of the Code) of
the Company at the time the Option is granted. Options may be granted to the
same employee on more than one occasion.
(b) Subject to the limitation on the number of shares of stock set forth in
Article V, (i) each individual who is a Nonemployee Director on December 12,
1989 is hereby granted, effective as of such date, an Option to purchase 25,000
shares of Stock and (ii) each individual who becomes a Nonemployee Director
following December 12, 1989 shall be granted, effective the Monday following
such individual's election to the Board as a Nonemployee Director, an Option to
purchase 25,000 shares of Stock.
(c) No Incentive Stock Option shall be granted to an individual if, at the
time the Option is granted, such individual owns stock possessing more than 10%
of the total combined voting power of all classes of stock of the Company or of
its parent or subsidiary corporation, within the meaning of Section 422A(b)(6)
of the Code, unless (i) at the time such Option is granted the option price is
at least 110% of the fair market value of the Stock subject to the Option and
(ii) such Option by its terms is not exercisable after the expiration of five
years from the date of grant. To the extent that the aggregate fair market value
(determined at the time the respective Incentive Stock Option is granted) of
stock with respect to which Incentive Stock Options granted after 1986 are
exercisable for the first time by an individual during any calendar year under
all incentive stock option plans of the Company and its parent and subsidiary
corporations exceeds $100,000, such Incentive Stock Options shall be treated as
options which do not constitute Incentive Stock Options. The Committee shall
determine, in accordance with applicable provisions of the Code, Treasury
Regulations and other administrative pronouncements, which of an employee
optionee's Incentive Stock Options will not constitute Incentive Stock Options
because of such limitation and shall notify the employee optionee of such
determination as soon as practicable after such determination.
2
<PAGE> 23
V. SHARES SUBJECT TO THE PLAN
The aggregate number of shares which may be issued under Options granted
under the Plan shall not exceed 1,000,000 shares of Stock. Such shares may
consist of authorized but unissued shares of Stock or previously issued shares
of Stock reacquired by the Company. Any of such shares which remain unissued and
which are not subject to outstanding Options at the termination of the Plan
shall cease to be subject to the Plan, but, until termination of the Plan, the
Company shall at all times make available sufficient number of shares to meet
the requirements of the Plan. Should any Option hereunder expire or terminate
prior to its exercise in full, the shares theretofore subject to such Option may
again be subject to an Option granted under the Plan. The aggregate number of
shares which may be issued under the Plan shall be subject to adjustment in the
same manner as provided in Paragraph IX hereof with respect to share of Stock
subject to Options then outstanding. Exercise of an Option in any manner,
including an exercise involving a Stock Appreciation Right by an employee, shall
result in a decrease in the number of shares of Stock which may thereafter be
available, both for purposes of the Plan and for sale to any one individual, by
the number of shares as to which the Option is exercised. Separate stock
certificates shall be issued by the Company for those shares acquired pursuant
to the exercise of an Incentive Stock Option and for those shares acquired
pursuant to the exercise of any Option which does not constitute an Incentive
Stock Option.
VI. OPTION PRICE
Subject to the provisions of Article VII, the purchase price of Stock
issued under each Option shall be the fair market value of Stock subject to the
Option on the date the Option is granted.
VII. OPTIONS EXCHANGED FOR PRIOR OPTIONS
An Option may be granted in exchange for an individual's right and option
to purchase shares of Stock pursuant to the terms of an agreement that existed
prior to the date of such Option is granted ("Prior Option"). An Option
Agreement that grants an Option in exchange for a Prior Option shall provide for
the surrender and cancellation of the Prior Option. The purchase price of Stock
issued under an Option granted in exchange for a Prior Option shall be
determined by the Committee and, such purchase price may, without limitation, be
equal to the price for which the optionee could have purchased Stock under the
Prior Option.
VIII. TERM OF PLAN
The Plan shall be effective upon the date of its adoption by the Board.
Except with respect to Options then outstanding, if not sooner terminated under
the provisions of Paragraph X, the Plan shall terminate upon and no further
Options shall be granted after the expiration of ten years from the date of its
adoption by the Board.
IX. RECAPITALIZATION OR REORGANIZATION
(a) The existence of the Plan and the Options granted hereunder shall not
affect in any way the right or power of the Board or the shareholders of the
Company to make or authorize any adjustment, recapitalization, reorganization or
other change in the Company's capital structure or its business, any merger or
consolidation of the Company, any issue of debt or equity securities ahead of or
affecting Stock or the rights thereof, the dissolution or liquidation of the
Company or any sale, lease, exchange or other disposition of all or any part of
its assets or business or any other corporate act or proceeding.
(b) The shares with respect to which Options may be granted are shares of
Stock as presently constituted, but if, and whenever, prior to the expiration of
an Option theretofore granted, the Company shall effect a subdivision or
consolidation of shares of Stock or the payment of a stock dividend on Stock
without receipt of consideration by the Company, the number of shares of Stock
with respect to which such Option may thereafter be exercised (i) in the event
of an increase in the number of outstanding shares shall be proportionately
increased, and the purchase price per share shall be proportionately reduced,
and (ii) in the
3
<PAGE> 24
event of a reduction in the number of outstanding shares shall be
proportionately reduced, and the purchase price per share shall be
proportionately increased.
(c) If the Company recapitalizes or otherwise changes its capital
structure, thereafter upon any exercise of an Option theretofore granted the
optionee shall be entitled to purchase under such Option, in lieu of the number
of shares of Stock as to which such Option shall then be exercisable, the number
and class of shares of stock and securities to which the optionee would have
been entitled pursuant to the terms of the recapitalization if, immediately
prior to such recapitalization, the optionee had been the holder of record of
the number of shares of Stock as to which such Option is then exercisable. If
(i) the Company shall not be the surviving entity in any merger or consolidation
(or survives only as a subsidiary of an entity other than a previously
wholly-owned subsidiary of the Company), (ii) the Company sells, leases or
exchanges or agrees to sell, lease or exchange all or substantially all of its
assets to any other person or entity (other than a wholly-owned subsidiary of
the Company), (iii) the Company is to be dissolved and liquidated, (iv) any
person or entity, including a "group" as contemplated by Section 13(d)(3) of the
1934 Act, acquires or gains ownership or control (including, without limitation,
power to vote) of more than 50% of the outstanding shares of Stock, or (v) as a
result of or in connection with a contested election of directors, the persons
who were directors of the Company before such election shall cease to constitute
a majority of the Board (each such event is referred to herein as a "Corporate
Change"), then effective as of a date (selected by the Committee) within (a) ten
days after the approval by the shareholders of the Company of such merger,
consolidation, sale, lease or exchange of assets or dissolution or such election
of directors or (b) thirty days of such change of control, the Committee, acting
in its sole discretion without the consent or approval of any optionee, shall
effect one or more of the following alternatives with respect to the then
outstanding Options held by employees, which may vary among individual employee
optionees: (1) accelerate the time at which such Options may be exercised so
that such Options may be exercised in full for a limited period of time on or
before a specified date (before or after such Corporate Change) fixed by the
Committee, after which specified date all unexercised Options and all rights of
employee optionees thereunder shall terminate, (2) require the mandatory
surrender to the Company by selected employee optionees of some or all of such
Options (irrespective of whether such Options are then exercisable under the
provisions of the Plan) as of a date, before or after such Corporate Change,
specified by the Committee, in which event the Committee shall thereupon cancel
such Options any pay to each employee optionee an amount of cash per share equal
to the excess of the amount calculated in Subparagraph (d) below (the "Change of
Control Value") of the shares subject to such Option over the exercise price(s)
under such Options for such shares, (3) make such adjustments to such Options as
the Committee deems appropriate to reflect such Corporate Change (provided,
however, that the Committee may determine in its sole discretion that no
adjustment is necessary to such Options) or (4) provide that thereafter upon any
exercise of an Option theretofore granted the employee optionee shall be
entitled to purchase under such Option, in lieu of the number of shares of Stock
as to which such Option shall then be exercisable, the number and class of
shares of stock or other securities or property to which the employee optionee
would have been entitled pursuant to the terms of the agreement of merger,
consolidation or sale of assets and dissolution if, immediately prior to such
merger, consolidation or sale of assets and dissolution the employee optionee
had been the holder of record of the number of shares of Stock as to which such
Option is then exercisable. In the event of a Corporate Change, as described in
the immediately preceding sentence, any then outstanding Options held by
Nonemployee Directors shall become fully exercisable on the fifth day following
the approval by the shareholders of the Company of such Corporate Change.
(d) For the purposes of clause (2) in paragraph (c) above, the "Change of
Control Value" shall equal the amount determined in clause (i), (ii) or (iii),
whichever is applicable, as follows: (i) the per share price offered to
shareholders of the Company in any such merger, consolidation, sale of assets or
dissolution transaction, (ii) the price per share offered to shareholders of the
Company in any tender offer or exchange offer whereby a Corporate Change takes
place, or (iii) if such Corporate Change occurs other than pursuant to a tender
or exchange offer, the fair market value per share of the shares into which such
Options being surrendered are exercisable, as determined by the Committee as of
the date determined by the Committee to be the date of cancellation and
surrender of such Options. In the event that the consideration offered to
shareholders of the Company in any transaction described in this Subparagraph
(d) or Subparagraph (c)
4
<PAGE> 25
above consists of anything other than cash, the Committee shall determine the
fair cash equivalent of the portion of the consideration offered which is other
than cash.
(e) Any adjustment provided for in Subparagraphs (b) or (c) above shall be
subject to any required shareholder action.
(f) Except as hereinbefore expressly provided, the issuance by the Company
of shares of stock of any class or securities convertible into shares of stock
of any class, for cash, property, labor or services, upon direct sale, upon the
exercise of rights or warrants to subscribe therefor, or upon conversion of
shares or obligations of the Company convertible into such shares or other
securities, and in any case whether or not for fair value, shall not affect, and
no adjustment by reason thereof shall be made with respect to, the number of
shares of Stock subject to Options theretofore granted or the purchase price per
share.
X. AMENDMENT OR TERMINATION OF THE PLAN
The Board in its discretion may terminate the Plan at any time with respect
to any shares for which Options have not theretofore been granted. The Board
shall have the right to alter or amend the Plan or any part thereof from time to
time, provided, that no change in any Option theretofore granted may be made
which would impair the rights of the optionee without the consent of such
optionee; and provided, further, that the Board may not make any alteration or
amendment which would materially increase the benefits accruing to participants
under the Plan, increase the aggregate number of shares which may be issued
pursuant to the provisions of the Plan, change the class of individuals eligible
to receive Options under the Plan, change the purchase price of Stock purchased
pursuant to an Option granted to a Nonemployee Director or extend the term of
the Plan, without the approval of the shareholders of the Company.
XI. SECURITIES LAWS
The Company shall not be obligated to issue any Stock pursuant to any
Option granted under the Plan at any time when the shares covered by such Option
have not been registered under the Securities Act of 1933 and such other state
and federal laws, rules or regulations as the Company or the Committee deems
applicable and, in the opinion of legal counsel for the Company, there is no
exemption from the registration requirements of such laws, rules or regulations
available for the issuance and sale of such shares.
5
<PAGE> 26
NONSTATUTORY STOCK OPTION AGREEMENT
FOR NONEMPLOYEE DIRECTORS
AGREEMENT made as of the day of , 19 , between TOM BROWN,
INC., a Delaware corporation (the "Company") and ("Director").
To carry out the purposes of the TOM BROWN, INC. 1989 STOCK OPTION PLAN
(the "Plan"), by affording Director the opportunity to purchase shares of common
stock of the Company ("Stock"), and in consideration of the mutual agreements
and other matters set forth herein and in the Plan, the Company and Director
hereby agree as follows:
1. Grant of Option. The Company hereby irrevocably grants to Director the
right and option ("Option") to purchase all or any part of an aggregate of
25,000 shares of Stock, on the terms and conditions set forth herein and in the
Plan, which Plan is incorporated herein by reference as a part of this
Agreement. This Option shall not be treated as an incentive stock option within
the meaning of section 422A(b) of the Internal Revenue Code of 1986, as amended
(the "Code").
2. Purchase Price. The purchase price of Stock purchased pursuant to the
exercise of this Option shall be $ , which has been determined to be
the fair market value of the Stock at the date of grant of this Option. For all
purposes of this Agreement, fair market value of Stock shall be determined in
accordance with the provisions of the Plan.
3. Exercise of Option. Subject to the earlier expiration of this Option as
herein provided, this Option may be exercised, by written notice to the Company
at its principal executive office addressed to the attention of its Chief
Executive Officer, at any time and from time to time following the expiration of
six months from the date of grant hereof, but, except as otherwise provided
below, this Option shall not be exercisable for more than a percentage of the
aggregate number of shares offered by this Option determined by the number of
full years from the date of grant hereof to the date of such exercise, in
accordance with the following schedule:
<TABLE>
<CAPTION>
PERCENTAGE
OF
SHARES
THAT
MAY
BE
NUMBER OF FULL YEARS PURCHASED
-------------------- ----------
<S> <C>
Less than 1 year................................................... 40%
1 year................................................... 70%
2 years or more.......................................... 100%
</TABLE>
This Option is not transferable by Director otherwise than by will or the
laws of descent and distribution, and may be exercised only by Director during
Director's lifetime and while Director remains a director of the Company, except
that:
(a) If Director ceases to be a director of the Company because of
disability (within the meaning of section 22(e)(3) of the Code), this
Option may be exercised in full by Director (or Director's estate or the
person who acquires this Option by will or the laws of descent and
distribution or otherwise by reason of the death of Director) at any time
during the period of one year following such termination.
(b) If Director dies while he is a director of the Company, Director's
estate, or the person who acquires this Option by will or the laws of
descent and distribution or otherwise by reason of the death of Director,
may exercise this Option in full at any time during the period of one year
following the date of Director's death.
(c) If Director ceases to be a director of the Company for any reason
other than as described in (a) or (b) above, unless Director is removed for
cause, this Option may be exercised by Director at any time during the
period of three months following the date Director ceases to be a director
of the Company, or by Director's estate (or the person who acquires this
Option by will or the laws of descent and distribution or otherwise by
reason of the death of Director) during a period of one year following
Director's death if Director dies during such three-month period, but in
each case only as to the number of shares Director was entitled to purchase
hereunder upon exercise of this Option as of the date Director ceases to be
a director. For purposes of this Agreement, "cause" shall mean Director's
gross negligence or
<PAGE> 27
willful misconduct in the performance of his duties as a director, or
Director's final conviction of a felony or of a misdemeanor involving moral
turpitude.
This Option shall not be exercisable in any event after the expiration of ten
years from the date of grant hereof. The purchase price of shares as to which
this Option is exercised shall be paid in full at the time of exercise (a) in
cash (including check, bank draft or money order payable to the order of the
Company), (b) by delivering to the Company shares of Stock having a fair market
value equal to the purchase price, or (c) any combination of cash or Stock. No
fraction of a share of Stock shall be issued by the Company upon exercise of an
Option or accepted by the Company in payment of the purchase price thereof;
rather, Director shall provide a cash payment for such amount as is necessary to
effect the issuance and acceptance of only whole shares of Stock. Unless and
until a certificate or certificates representing such shares shall have been
issued by the Company to Director, Director (or the person permitted to exercise
this Option in the event of Director's death) shall not be or have any of the
rights or privileges of a shareholder of the Company with respect to shares
acquirable upon an exercise of this Option.
4. Status of Stock. Director understands that at the time of the execution
of this Agreement the shares of Stock to be issued upon exercise of this Option
have not been registered under the Securities Act of 1933, as amended (the
"Act"), or any state securities law. The Company may effect such a registration
in the future; however, until the shares of Stock acquirable upon the exercise
of the Option have been registered for issue under the Act, the Company will not
issue such shares unless the holder of the Option provides the Company with a
written opinion of legal counsel, who shall be satisfactory to the Company,
addressed to the Company and satisfactory in form and substance to the Company's
counsel, to the effect that the proposed issuance of such shares to such Option
holder may be made without registration under the Act. In the event exemption
from registration under the Act is available upon an exercise of this Option,
Director (or the person permitted to exercise this Option in the event of
Director's death), if requested by the Company to do so, will execute and
deliver to the Company in writing an agreement containing such provisions as the
Company may require to assure compliance with applicable securities laws.
Director agrees that the shares of Stock which Director may acquire by
exercising this Option shall be acquired for investment without a view to
distribution, within the meaning of the Act, and shall not be sold, transferred,
assigned, pledged or hypothecated in the absence of an effective registration
statement for the shares under the Act and applicable state securities laws or
an applicable exemption from the registration requirements of the Act and any
applicable state securities laws. Director also agrees that the shares of Stock
which Director may acquire by exercising this Option will not be sold or
otherwise disposed of in any manner which would constitute a violation of any
applicable securities laws, whether federal or state.
In addition, Director agrees (i) that the certificates representing the
shares of Stock purchased under this Option may bear such legend or legends as
the Committee deems appropriate in order to assure compliance with applicable
securities laws, (ii) that the Company may refuse to register the transfer of
the shares of Stock purchased under this Option on the stock transfer records of
the Company if such proposed transfer would in the opinion of counsel
satisfactory to the Company constitute a violation of any applicable securities
law and (iii) that the Company may give related instructions to its transfer
agent, if any, to stop registration of the transfer of the shares of Stock
purchased under this Option.
5. Binding Effect. This Agreement shall be binding upon and inure to the
benefit of any successors to the Company and all persons lawfully claiming under
Director.
6. Governing Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of Texas.
2
<PAGE> 28
IN WITNESS WHEREOF, The Company has caused this Agreement to be duly
executed by its officer thereunto duly authorized, and Director has executed
this Agreement, all as of the day and year first above written.
TOM BROWN, INC.
By:
-------------------------------
----------------------------------
Director
3
<PAGE> 29
- --------------------------------------------------------------------------------
PROXY TOM BROWN, INC. PROXY
FOR ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 17, 1995
The undersigned hereby appoints Donald L. Evans and Edward W.
LeBaron, Jr., and each of them, attorneys and proxies, with power
of substitution, and hereby authorizes them to represent and to
vote, as designated below, all shares of Common Stock of TOM
BROWN, INC. held of record in the name of the undersigned at the
close of business on April 12, 1995, at the Annual Meeting of
Stockholders of Tom Brown, Inc. to be held at 9:00 a.m. on May 17,
1995, in the Wildcatters Room, Midland Petroleum Club, 501 West
Wall, Midland, Texas, and at all adjournments or postponements
thereof.
The Board of Directors recommends a vote FOR Item (1) and Item
(2).
(1) Election of Directors.
<TABLE>
<S> <C>
/ / FOR all nominees listed below (except as / / WITHHOLD AUTHORITY to vote
marked to the contrary by drawing a line through the
name(s) of any nominee(s)).
</TABLE>
Donald L. Evans, Thomas C. Brown, William R. Granberry,
Henry Groppe, Edward W. LeBaron, Jr., James B. Wallace and
Robert H. Whilden, Jr.
(2) Proposal to amend the 1989 Stock Option Plan of the
Company to increase the authorized Common Stock.
/ / FOR / / AGAINST / / ABSTAIN
(3) To transact such other business as may properly come
before the meeting or any adjournments thereof, all as set
forth in the Notice of Annual Meeting and Proxy Statement
dated April 17, 1995, receipt of which is acknowledged.
(CONTINUED, AND TO BE SIGNED ON REVERSE SIDE)
- --------------------------------------------------------------------------------
<PAGE> 30
- --------------------------------------------------------------------------------
THIS PROXY SHALL BE VOTED AS DIRECTED. IN THE ABSENCE OF
SPECIFIC DIRECTIONS, IT SHALL BE VOTED FOR ITEM (1) AND ITEM (2),
AND IN ACCORDANCE WITH THE BEST JUDGMENT OF THE PERSONS NAMED AS
PROXIES UPON SUCH OTHER MATTERS AS MAY PROPERLY COME BEFORE THE
MEETING.
Please date this Proxy and sign exactly as your name appears
on your stock certificate. If stock is held jointly, signature
should include both names. Executors, administrators, trustees,
guardians and others signing in a representative capacity should
give their full titles.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
THE COMPANY.
Please return promptly in the
enclosed postage paid envelope.
Dated -------------------, 1995
--------------------------------
--------------------------------
Signature of Stockholder
- --------------------------------------------------------------------------------
