<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec. 240.14a-11(c) or sec. 240.14a-12
Tom Brown, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(l) and
0-11.
(1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined):
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
(5) Total fee paid:
- --------------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
- --------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
- --------------------------------------------------------------------------------
(3) Filing Party:
- --------------------------------------------------------------------------------
(4) Date Filed:
- --------------------------------------------------------------------------------
<PAGE> 2
[TOM BROWN, INC. LOGO]
TOM BROWN, INC.
508 WEST WALL, SUITE 500
P.O. BOX 2608
MIDLAND, TEXAS 79702
(915) 682-9715
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 21, 1998
Dear Stockholder:
On behalf of the Board of Directors, you are cordially invited to attend
the 1998 Annual Meeting of Stockholders of Tom Brown, Inc., a Delaware
corporation (the "Company"), to be held in the Moulin Rouge Room located on the
first floor of the Hyatt Regency Hotel, 1750 Welton Street, Denver, Colorado at
9:00 a.m., Mountain Time, on Thursday, May 21, 1998, for the following purposes:
- To elect seven directors, by vote of the holders of Common Stock and
the sole holder of the $1.75 Convertible Preferred Stock, Series A
(the "Preferred Stock");
- To elect a special class of two directors pursuant to the terms of
the Preferred Stock, by vote of the sole holder of Preferred Stock;
and
- To transact such other business as may properly come before the
meeting or any adjournment or postponement thereof.
The Board of Directors has fixed the close of business on March 27, 1998 as
the record date for determining stockholders entitled to notice of and to vote
at the meeting. Only stockholders of record at the close of business on that
date are entitled to notice of and to vote at the meeting and any adjournment or
postponement 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 for examination during ordinary business hours by any
stockholder for any purpose germane to the meeting.
Your vote is important regardless of the number of shares you may own. The
Company urges you to date, sign and promptly return your proxy so that your
shares may be voted in accordance with your wishes and in order that the
presence of a quorum may be assured. The prompt return of your signed proxy will
aid the Company in reducing the expense of additional proxy solicitation. The
giving of such proxy does not affect your right to vote in person in the event
you attend the meeting.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ BRUCE R. DEBOER
BRUCE R. DEBOER
Secretary
April 14, 1998
<PAGE> 3
TOM BROWN, INC.
508 WEST WALL, SUITE 500
P.O. BOX 2608
MIDLAND, TEXAS 79702
(915) 682-9715
PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
MAY 21, 1998
PROXY SOLICITATION
This statement is furnished in connection with the solicitation by the
Board of Directors of Tom Brown, Inc., a Delaware corporation (the "Company"),
of proxies to be voted at the Company's Annual Meeting of Stockholders to be
held at the Hyatt Regency Hotel, 1750 Welton Street, Denver, Colorado on May 21,
1998, or at any adjournment or postponement thereof (the "Annual Meeting"). This
Proxy Statement and form of proxy included herewith are dated April 14, 1998,
and are being sent to stockholders on or about April 17, 1998.
If the enclosed proxy is properly executed and returned, the shares
represented by the proxy will be voted at the Annual Meeting. If a stockholder
indicates in the proxy a choice with respect to any matter to be acted upon, the
shares will be voted in accordance with such choice. If no choice is indicated,
the shares will be voted "FOR" the director nominees set forth on the enclosed
proxy. A stockholder giving a proxy may revoke it by giving written notice of
revocation to the Secretary of the Company at any time before it is voted, by
executing another valid proxy bearing a later date and delivering such proxy to
the Secretary of the Company prior to or at the Annual Meeting, or by attending
the Annual Meeting and voting in person.
PERSONS MAKING THE SOLICITATION
This proxy is solicited on behalf of the Board of Directors of the Company
(the "Board of Directors"). The initial solicitation will be by mail. The total
expense of such solicitation will be borne by the Company and will include
reimbursement paid to brokerage firms and others for their expenses in
forwarding solicitation material regarding the Annual Meeting to beneficial
owners of the Company's stock. Further solicitation of proxies may be made by
mail, telephone or oral communication with some stockholders of the Company
following the original solicitation. All such further solicitation will be made
by the Board of Directors or consultants currently retained by the Company or
employees of the Company, who will not be additionally compensated therefor, or
by the Company's transfer agent in which case the cost will be borne by the
Company.
STOCKHOLDERS ENTITLED TO VOTE
Stockholders of record at the close of business on March 27, 1998 (the
"Record Date") will be entitled to vote at the Annual Meeting. As of the Record
Date, there were issued and outstanding 29,247,979 shares of common stock, $.10
par value per share ("Common Stock"), and 1,000,000 shares of preferred stock
designated as $1.75 Convertible Preferred Stock, Series A ("Preferred Stock").
Each share of Common Stock entitles its owner to one vote. Each share of
Preferred Stock entitles its owner to a number of votes per share equivalent to
the number of shares of Common Stock issuable upon conversion of the Preferred
Stock, or 1.666 votes for each share of Preferred Stock, based on the conversion
ratio of the Preferred Stock at March 27, 1998. The Preferred Stock is entitled
to vote on all matters upon which holders of the Common Stock have the right to
vote, together with the holders of the outstanding shares of Common Stock as if
a part of that class. Cumulative voting is not authorized.
<PAGE> 4
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,
constitute a quorum at the Annual Meeting. Abstentions and broker non-votes are
counted for purposes of determining the presence or absence of a quorum for the
transaction of business. A broker non-vote occurs when a nominee holding shares
of the Company's Common Stock for a beneficial owner does not vote on a
particular proposal because the nominee does not have discretionary voting power
with respect to that item and has not received instructions from the beneficial
owner. Abstentions are counted in tabulations of the votes cast on proposals
presented to stockholders, whereas broker non-votes are not counted for purposes
of determining whether a proposal has been approved.
Assuming the presence of a quorum, the affirmative vote of the holders of a
majority of the shares of Common Stock and Preferred Stock voting together as a
class and represented in person or by proxy at the Annual Meeting is required
for the election of the Board of Directors' seven nominees for director. The
affirmative vote of the holder of a majority of the shares of Preferred Stock
represented in person or by proxy at the Annual Meeting is required for the
election of the special class of two directors. See "Election of Directors --
Director Nominees for Holder of Preferred Stock".
ELECTION OF DIRECTORS
THE BOARD 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 from time to
time by resolution of the Board of Directors. The Board of Directors has
established the authorized number of directors at nine, which includes two
directors to be elected by the sole holder of the Preferred Stock.
DIRECTOR NOMINEES FOR HOLDERS OF COMMON STOCK AND PREFERRED STOCK
The Board of Directors is recommending that its seven nominees, all of whom
were elected directors of the Company at the last annual meeting of
stockholders, be re-elected to hold office until the 1999 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 such substitute nominee, unless the Board of Directors
elect to reduce the number of directors. The nominees listed below have
consented to being nominated and to serve if elected. The Board of Directors
recommends voting "FOR" the election of the following nominees for the Board of
Directors:
<TABLE>
<CAPTION>
POSITION WITH COMPANY DIRECTOR
NOMINEE AGE AND PRINCIPAL OCCUPATION SINCE
------- --- ------------------------ -----
<S> <C> <C> <C>
Donald L. Evans...................... 51 Chairman of the Board of Directors and Chief 1980
Executive Officer of the Company; Director of
TMBR/Sharp Drilling, Inc.
Thomas C. Brown...................... 71 Director of the Company; Chairman of the 1968
Board of Directors and Chief Executive
Officer of TMBR/Sharp Drilling, Inc.
William R. Granberry................. 55 Director of the Company; President and Chief 1995
Operating Officer of the Company since
January 1996; Chairman of the Board and Chief
Executive Officer of Mineral Development,
Inc. from August 1994 to December 1995 and
President from October 1994 to December 1995.
Henry Groppe......................... 72 Director of the Company; Oil and gas 1989
consultant with Groppe, Long & Littell.
</TABLE>
2
<PAGE> 5
<TABLE>
<CAPTION>
POSITION WITH COMPANY DIRECTOR
NOMINEE AGE AND PRINCIPAL OCCUPATION SINCE
------- --- ------------------------ -----
<S> <C> <C> <C>
Edward W. LeBaron, Jr................ 68 Director of the Company; Advisory Partner in 1987
the law firm of Pillsbury, Madison and Sutro;
Consultant to Lynx Technology Group; formerly
Chairman of the Board of Pacific Casino
Management, Inc.
James B. Wallace..................... 69 Director of the Company; Partner in Brownlie, 1992
Wallace, Armstrong and Bander Exploration;
Director of Grease Monkey International.
Robert H. Whilden, Jr................ 62 Director of the Company; Partner in the law 1989
firm of Vinson & Elkins L.L.P.
</TABLE>
DIRECTOR NOMINEES FOR HOLDER OF PREFERRED STOCK
In January 1996, the Company issued to KN Energy, Inc. ("KNE") 918,367
shares of Common Stock and 1,000,000 shares of Preferred Stock in connection
with the merger (the "Merger") of a subsidiary of the Company with a subsidiary
of KNE. See "Security Ownership of Certain Beneficial Owners and Management".
The Certificate of Designations, Powers, Preferences and Rights creating the
Preferred Stock provides that KNE shall have the right to elect a special class
of (i) two directors to the Board of Directors of the Company for so long as KNE
owns 80% or more of the voting power of the Common Stock and Preferred Stock
issued to KNE pursuant to the Merger and (ii) one director to the Board of
Directors if KNE owns less than 80% but more than 30% of the voting power of
such securities. Based on KNE's current ownership of Common Stock and Preferred
Stock and the voting power attributable to such shares, KNE is entitled to
nominate and elect two directors to the Board of Directors of the Company.
(Proxies for the election of the two directors nominated by the holder of the
Preferred Stock are not being solicited from the holders of Common Stock.) The
following table sets forth the nominees of the holder of Preferred Stock:
<TABLE>
<CAPTION>
POSITION WITH COMPANY DIRECTOR
NOMINEE AGE AND PRINCIPAL OCCUPATION SINCE
------- --- ------------------------ -----
<S> <C> <C> <C>
David M. Carmichael.................. 59 Director of the Company; Director of KN 1996
Energy, Inc.; formerly Chairman of the Board,
Chief Executive Officer and President of
American Oil and Gas Corporation
Clyde E. McKenzie.................... 50 Director of the Company; Vice President and 1997*
Chief Financial Officer of KN Energy, Inc.;
formerly Vice President and Treasurer of
Apache Corporation
</TABLE>
- ---------------
* Mr. McKenzie was named by KNE in July to replace George M. Simmons, a KNE
representative who resigned on July 10, 1997.
OTHER INFORMATION ABOUT THE BOARD OF DIRECTORS
The Board of Directors has an Audit Committee that 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
3
<PAGE> 6
adequacy of internal control systems. The Audit Committee is composed of
directors who are not salaried employees of the Company. The Audit Committee met
one time during 1997. The members of the Audit Committee in 1997 were James B.
Wallace and Edward W. LeBaron, Jr.
The Board of Directors has a Compensation Committee that 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 eight occasions during 1997. The members of the
Compensation Committee in 1997 were David M. Carmichael, Henry Groppe and Robert
H. Whilden, Jr.
The Board of Directors held four meetings during 1997 and action was also
taken by unanimous written consent on three 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, except that George M. Simmons was not in
attendance at two Directors' meetings prior to his resignation.
The Company does not have a standing nominating committee. The review of
recommendations for nominees for directors is made by the Board of Directors.
Except for the rights of KNE as the holder of the Preferred Stock, there
are no arrangements or understandings between any nominee and any other person
pursuant to which any nominee was selected.
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of March 27, 1998
with respect to the Common Stock beneficially owned by (i) each person or group
known to the Company to be the beneficial owner of more than five percent (5%)
of the outstanding Common Stock, (ii) each director and each executive officer
named in the Summary Compensation Table, and (iii) all directors and executive
officers as a group.
<TABLE>
<CAPTION>
NUMBER OF
SHARES BENEFICIALLY PERCENT
NAME OF BENEFICIAL OWNER OWNED(1) OF CLASS
------------------------ ------------------- --------
<S> <C> <C>
(a) Five Percent (5%) Holders:
Steinberg Asset Management Co., Inc.................... 3,099,250(2) 10.6%
12 East 49th Street
New York, New York 10017
State Farm Mutual Automobile Insurance Company......... 2,620,000(3) 9.0%
One State Farm Plaza
Bloomington, Illinois 61701
K N Energy, Inc........................................ 2,584,367(4) 8.4%
370 Van Gordon Street
Lakewood, Colorado 80228
Austin, Calvert & Flavin, Inc.......................... 2,325,650(5) 8.0%
112 East Pecan, Suite 2800
San Antonio, Texas 78205
State Street Research & Management Company............. 1,505,504(6) 5.2%
One Financial Center, 13th Floor
Boston, Massachusetts 02111
(b) Directors and Named Executive Officers:
Donald L. Evans........................................ 650,236(7) 2.2%
William R. Granberry................................... 170,057(8) *
Thomas C. Brown........................................ 126,942(9) *
</TABLE>
4
<PAGE> 7
<TABLE>
<CAPTION>
NUMBER OF
SHARES BENEFICIALLY PERCENT
NAME OF BENEFICIAL OWNER OWNED(1) OF CLASS
------------------------ ------------------- --------
<S> <C> <C>
Peter R. Scherer....................................... 122,104(10) *
Henry Groppe........................................... 75,900(11) *
Edward W. LeBaron, Jr.................................. 68,260(12) *
Clifford C. Drescher................................... 55,780(13) *
Robert H. Whilden, Jr.................................. 55,000(14) *
James B. Wallace....................................... 49,600(15) *
Christopher S. Mullen.................................. 37,300(14) *
Clyde E. McKenzie...................................... 1,000 *
David M. Carmichael.................................... 0 0
(c) All Directors and Executive Officers as a Group (18
persons).................................................. 1,546,793(16) 5.0%
</TABLE>
- ---------------
* Does not exceed one percent (1%) of the class.
(1) Unless otherwise indicated, all shares of Common Stock are held directly
with sole voting and dispositive powers. Beneficial ownership in respect of
stock options includes shares that may be acquired within sixty (60) days.
(2) As reported in Amendment No. 4 to Schedule 13G dated February 5, 1998, filed
jointly by Steinberg Asset Management Company, Inc. ("SAMC"), Michael A.
Steinberg & Company, Inc. ("S&C"), and Michael A. Steinberg ("MAS"), SAMC
has sole voting power with respect to 2,112,600 shares and sole dispositive
power with respect to 2,967,900 shares; S&C has sole dispositive power with
respect to 41,650 shares; and MAS has sole voting and dispositive powers
with respect to 89,700 shares. MAS may be deemed to have beneficial
ownership of the shares owned by all of the reporting entities.
(3) As reported in Amendment No. 18 to Schedule 13G dated January 20, 1998,
State Farm Mutual Automobile Insurance Company and its Employee Retirement
Trust have sole voting and dispositive power with respect to 2,600,000 and
20,000 shares, respectively.
(4) Includes 1,666,000 shares of Common Stock that may be acquired by KN Energy,
Inc., the sole owner of the Preferred Stock, upon conversion of 1,000,000
shares of Preferred Stock.
(5) As reported in Amendment No. 2 to Schedule 13D, jointly filed on June 17,
1997 with the Securities and Exchange Commission (the "SEC") by a group of
five persons, Austin, Calvert & Flavin, Inc. has shared voting and
dispositive powers with respect to 1,866,750 shares; Encino Partners, L.P.
has shared voting and dispositive powers with respect to 200,000 shares;
Edward H. Austin, Jr., Johnathon C. Calvert and Harry M. Flavin each have
shared voting and dispositive powers with respect to 2,066,750 shares and
sole voting and dispositive powers with respect to 253,900, 5,000 and 0
shares, respectively.
(6) As reported in Amendment No. 2 to Schedule 13G dated February 15, 1998,
State Street Research and Management Company ("State Street") has sole
voting powers with respect to 1,148,204 shares and sole dispositive powers
with respect to 1,505,504 shares. State Street disclaimed beneficial
ownership of all shares.
(7) Includes 650,000 shares issuable upon the exercise of stock options and 236
shares allocated to Mr. Evans' KSOP Plan account (the Company combined its
ESOP Plan with its 401(k) Profit Sharing Plan to form the KSOP Plan).
(8) Includes 170,020 shares issuable upon the exercise of stock options.
(9) Includes (i) 115,000 shares issuable upon the exercise of stock options,
(ii) 5,253 shares allocated to Mr. Brown's KSOP Plan account, (iii) 975
shares held in the name of Mr. Brown's wife, and (iv) 5,714 shares owned by
the C.V. Lyman Testamentary Trust. Mr. Brown serves as a Co-Trustee of such
trust, has shared voting and investment powers with respect to such shares
and disclaims beneficial ownership of such shares.
5
<PAGE> 8
(10) Includes 120,010 shares issuable upon the exercise of stock options and
2,094 shares allocated to Mr. Scherer's KSOP Plan account.
(11) Includes 65,000 shares issuable upon the exercise of stock options and
10,900 shares held by children of Mr. Groppe, the beneficial ownership of
which is disclaimed by Mr. Groppe.
(12) Includes 65,000 shares issuable upon the exercise of stock options.
(13) Includes 55,334 shares issuable upon the exercise of stock options and 446
shares allocated to Mr. Drescher's KSOP Plan account.
(14) All of such shares are issuable upon the exercise of stock options.
(15) Includes 45,000 shares issuable upon the exercise of stock options.
(16) Includes 1,508,174 shares issuable upon the exercise of stock options.
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 three directors, none of
whom are employed by the Company or any of its subsidiaries. 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.
With respect to 1997 compensation, the Compensation Committee has not
adopted a structured salary, stock option or other incentive compensation
program. 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
salaries and cash bonuses, been awarded stock options that reward executives
through the creation of stockholder value. The Compensation Committee takes into
account that corporate performance, especially in the oil and gas industry, 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 consecutive 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 of Directors. 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, oil and gas finding
costs, and the achievement by management of specific goals set by the Board of
Directors from time to time; however, the Compensation Committee has not
established any specific performance levels which would automatically result in
increases in compensation, nor does the Compensation Committee assign relative
weights or rankings to factors considered by it, but instead makes a subjective
determination based upon a consideration of all of such factors. The
Compensation Committee has utilized from time to time various compensation
survey reports as prepared for the oil and gas industry by consultants such as
William M. Mercer, Incorporated, KPMG Peat Marwick LLP and Effective
Compensation Inc. when analyzing current compensation amounts for executive
officers and employees.
In addition to the factors described above, 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 the Company's
relationships with the investment community, generate employee confidence and
morale, and demonstrate other leadership qualities. Under Mr. Evans' leadership
and managerial capabilities, the Company reported net income of $6,860,000 on
revenues of $128,737,000 for the year ended December 31, 1997, as compared to a
net income of $6,263,000 on revenues of $66,720,000 for 1996. The Company also
6
<PAGE> 9
reported a 90% increase in natural gas production and a 112% increase in oil
production in 1997 as compared to 1996. Mr. Evans' base salary was increased in
1997 by 16%, and he was awarded a $162,500 cash bonus. The Committee believes
the salary and bonus paid to Mr. Evans for 1997 are appropriate and consistent
with the Committee's objective of recommending compensation levels and
components based on factors compared over a period of several years and, at the
same time, more closely approximate competition levels. The Compensation
Committee believes that the current mix between the cash and equity incentive
opportunities presently in place for Mr. Evans and the other executive officers
of the Company is adequate to motivate and retain them.
Internal Revenue Code Section 162(m) precludes a publicly held corporation
from taking a deduction for compensation in excess of $1 million for its chief
executive officer or any of its four other highest-paid officers. The tax laws
generally eliminate such deductions unless compensation is awarded under plans
meeting a number of requirements based upon objective performance standards and
advance stockholder approval. Although the Compensation Committee has not
established a policy with respect to qualifying compensation paid to its
executive officers under Section 162(m), the Compensation Committee will
continue to assess the implications of Section 162(m) on executive compensation
and determine what action, if any, will be appropriate.
The foregoing report is made by the Compensation Committee of the Company's
Board of Directors. The members of the Compensation Committee throughout 1997
were David M. Carmichael, Henry Groppe, and Robert H. Whilden, Jr.
SUMMARY OF ANNUAL COMPENSATION
The following table sets forth compensation paid by the Company to its
Chief Executive Officer and the four other most highly compensated executive
officers for fiscal years 1995, 1996 and 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION
COMPENSATION ------------
NAME AND ------------------------ OPTIONS ALL OTHER
PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) AWARDED (#) COMPENSATION ($)
------------------ ---- ---------- --------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
D. L. Evans, 1997 302,130 162,500 -0- 40,698(1)
Chairman and CEO 1996 279,260 100,000 150,000 38,369(1)
1995 279,260 -0- 300,000 33,439(1)
W.R. Granberry, 1997 220,000 84,000 -0- 9,121(3)
President and COO 1996(2) 200,000 65,000 165,000 56,081(3)
P. R. Scherer, 1997 131,250 41,250 -0- 7,683(4)
Executive Vice President 1996 115,000 46,250 35,000 5,439(4)
1995 102,410 -0- 30,000 1,118(4)
C. C. Drescher, 1997 101,000 26,250 -0- 6,338(5)
Vice President - Operations 1996 91,000 24,550 25,000 4,515(5)
1995 82,855 -0- 25,000 1,701(5)
C. S. Mullen, 1997 96,600 20,240 -0- 5,150(7)
Vice President - Exploration 1996 79,333 23,800 30,000 1,780(7)
North 1995(6) 80,000 -0- 10,000 23,996(7)
</TABLE>
- ---------------
(1) Such amounts include: for 1997 -- (i) an allocation of $6,333 to Mr. Evans'
KSOP Plan account, (ii) an award of $800 under the Company's
wellness/physical fitness program, (iii) $4,321 attributable to the
Company's payment for the term portion of a split dollar life insurance
policy issued in 1995 (the "Policy") on behalf of Mr. Evans, and (iv) the
remaining $29,244 represents the net present value of
7
<PAGE> 10
interest savings on the whole life portion of the Policy for a period of
ten years computed at an annual interest savings rate of 8% per annum and
for 1996 -- (i) an allocation of $4,104 to Mr. Evans' KSOP Plan account,
(ii) an award of $850 under the wellness/physical fitness program, (iii)
$4,007 attributable to the Company's payment for the term portion of the
Policy, and (iv) the remaining $29,408 represents the net present value of
the interest savings on the whole life portion of the Policy for a period of
ten years computed at an annual interest savings rate of 8% per annum; and
for 1995 -- (i) an allocation of $1,439 to Mr. Evans' KSOP Plan account,
(ii) $3,706 attributable to the Company's payment for the term portion of
the Policy and (iii) the remaining $28,294 represents the net present value
of the interest savings on the whole life portion of the Policy for a period
of ten years computed at an annual interest savings rate of 9% per annum.
(2) Mr. Granberry became an employee of the Company and was elected President
and Chief Operating Officer effective January 1, 1996.
(3) Such amounts include: for 1997 -- (i) an allocation of $6,070 to Mr.
Granberry's KSOP Plan account, (ii) an award of $750 under the
wellness/physical fitness program, (iii) reimbursement of moving expenses in
the amount of $2,301 and for 1996 -- (i) an allocation of $4,104 to Mr.
Granberry's KSOP Plan account, (ii) reimbursement of moving expenses in the
amount of $51,427 in connection with Mr. Granberry's relocation for
employment by the Company, and (iii) an award of $550 under the
wellness/physical fitness program.
(4) Such amounts include: for 1997 -- (i) an allocation of $6,333 to Mr.
Scherer's KSOP Plan account and (ii) an award of $1,350 under the
wellness/physical fitness program; and for 1996 -- (i) an allocation of
$3,789 to Mr. Scherer's KSOP Plan account, and (ii) an award of $1,650 under
the wellness/physical fitness program; and for 1995 -- an allocation of
$1,118 to Mr. Scherer's KSOP Plan account.
(5) Such amounts include: for 1997 -- (i) an allocation of $4,688 to Mr.
Drescher's KSOP Plan account, and (ii) an award of $1,650 under the
wellness/physical fitness program; and for 1996 -- (i) an allocation of
$3,365 to Mr. Drescher's KSOP Plan account, and (ii) an award of $1,150
under the wellness/physical fitness program; for 1995 -- (i) an allocation
of $1,001 to Mr. Drescher's KSOP Plan account, and (ii) a $700 award under
the wellness/physical fitness program.
(6) Mr. Mullen first became an officer of the Company in September 1995.
(7) Such amounts include: for 1997 -- (i) an allocation of $4,400 to Mr.
Mullen's KSOP Plan account, and (ii) an award of $750 under the
wellness/physical fitness program; and for 1996 -- an award of $1,780 under
the wellness/physical fitness program; and for 1995 -- (i) an award of $280
under the wellness/physical fitness program, and (ii) $23,716 for moving
expenses.
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<PAGE> 11
STOCK OPTION GRANTS
There were no stock options granted during 1997 to any of the named
executive officers.
OPTION EXERCISES AND HOLDINGS
OPTION EXERCISES IN 1997
AND 1997 YEAR - END OPTION VALUES
<TABLE>
<CAPTION>
SHARES VALUE OF UNEXERCISED
ACQUIRED NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS
ON VALUE OPTIONS ON 12/31/97 (#) ON 12/31/97 ($)(2)
EXERCISE REALIZED --------------------------- ---------------------------
NAME (#) ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------- --------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
D.L. Evans.................... 180,000 2,700,000 650,000 100,000 5,325,050 187,500
W.R. Granberry................ -- -- 125,040 64,960 765,785 316,090
P.R. Scherer.................. -- -- 110,020 19,980 845,150 79,920
C.C. Drescher................. 10,000 179,400 55,334 16,666 297,262 31,249
C.E. Mullen................... -- -- 28,975 18,525 167,384 80,428
</TABLE>
- ---------------
(1) The value realized is equal to the fair market value of a share of Common
Stock on the date of exercise less the exercise price.
(2) Value of in-the-money options is equal to the fair market value of a share
of Common Stock at fiscal year-end of $19.25 (based on the last sale price
of the Common Stock) less the exercise price.
LONG-TERM INCENTIVE PLANS AND PENSION PLANS
The Company has no long-term incentive plan or defined benefit or actuarial
plan.
REPORT ON REPRICING OF OPTIONS
The Company has not adjusted or amended the exercise price of stock options
previously awarded to any of the named executive officers other than as reported
in previous proxy statements.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL
ARRANGEMENTS
The Company has entered into an employment agreement with Mr. Evans which
expires on December 31, 2001. 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 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 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 the executive officers named in the
Summary Compensation Table. 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
9
<PAGE> 12
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.
10
<PAGE> 13
PERFORMANCE GRAPH
The following performance graph compares the annual cumulative total
stockholder shareowner return on the 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, 1992 and
ending December 31, 1997. The table assumes that the value of an investment in
the Common Stock and each Index was $100 on December 31, 1992 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>
Measurement Period Tom Brown, Energy S&P 500
(Fiscal Year Covered) Inc. Composite Index
<S> <C> <C> <C>
1992 100 100 100
1993 160.71 115.73 110.08
1994 164.29 120.17 111.53
1995 208.93 157.13 153.45
1996 298.21 197.64 188.68
1997 275.00 247.54 251.63
</TABLE>
COMPENSATION OF DIRECTORS
Directors who are not employees of the Company are entitled, at their
option, to receive a monthly fee of $1,000 or participate in an unfunded
non-qualified deferred compensation arrangement. Under the deferred compensation
arrangement which was implemented in July 1995, a participating director defers
the monthly director's fee that would otherwise be payable to him until the
earlier of (i) his separation from the Board of Directors, or (ii) the date
ending on the fifth anniversary of such director's participation in the
arrangement. The deferred fees are then used by the Company to purchase and make
premium payments on a life insurance policy naming the Company as beneficiary
and covering the life of the director. Upon the retirement or death of the
participating director, such director or his designated beneficiary is entitled
to receive an annual retirement or survivor benefit for a period of ten years.
During 1997, Messrs. LeBaron and Wallace elected to participate in the deferred
compensation arrangement. For the year ended December 31, 1997, the Company paid
director's fees in the amount of $12,000 to each of Messrs. Groppe and Whilden.
The Company also paid insurance premiums under the deferred compensation
arrangement in the amount of $12,000 for each of Messrs. LeBaron and Wallace.
The Company reimburses its directors for actual expenses incurred in attending
meetings of the Board of Directors.
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 1997, the
Company paid $76,260 to Mr. Brown under such arrangement and $30,289 in respect
of a note payment on behalf of Mr. Brown.
11
<PAGE> 14
Directors who are employees of the Company, as well as the directors
elected by the sole holder of the Preferred Stock, receive no compensation for
service on the Board of Directors or its committees.
STOCK OPTION PARTICIPATION OF DIRECTORS
Directors who are also employees of the Company are eligible to participate
in the Company's 1989 Stock Option Plan. In the case of non-employee directors,
the 1989 Stock Option Plan provides for a one-time grant 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 thereafter.
All directors of the Company are also eligible to participate in the
Company's 1993 Stock Option Plan. On July 23, 1997, each of Messrs. Brown,
LaBaron, Groppe, Wallace and Whilden, non-employee directors of the Company,
were granted a nonqualified stock option to purchase 10,000 shares of Common
Stock at an exercise price of $20.125 per share, the fair market value of the
stock on the date of grant. The options expire ten years from the date of grant
and are exercisable in two equal annual increments, commencing July 23, 1998.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Donald L. Evans, the Chairman of the Board of Directors and Chief Executive
Officer of the Company, serves on the Board of Directors and compensation
committee of TMBR/Sharp Drilling, Inc. ("TMBR"). Thomas C. Brown, the Chairman
of the Board of Directors of TMBR, is a Director of the Company. As of April 14,
1998, Mr. Brown and Mr. Evans beneficially owned approximately 11.2% and less
than 1%, respectively, of the outstanding common stock of TMBR. See "Certain
Relationships and Related Transactions" .
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.
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 retains the services of Vinson & Elkins
and Groppe, Long & Littell from time to time.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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 co-trustee 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 1997, the Company
billed the Trust approximately $441,000 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 1997 was approximately $79,000 and, at December 31, 1997,
the Trust was indebted to the Company in the amount of approximately $26,000.
Payments to the Company are due after monthly billings by the Company on the
same basis as all other working interest owners, and the Trust's participation
in the oil and gas properties is on the same basis as all other participants.
During 1997, the Company billed Wind River -- Pavillion, Ltd., a Texas
limited partnership (the "Partnership"), approximately $607,000 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
2,620,000 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 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
12
<PAGE> 15
Partnership owed the Company approximately $352,000 at December 31, 1997, which
was the largest amount owed by the Partnership to the Company at any one time
during 1997. 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 1997, the Company billed BWAB approximately
$960,000 for BWAB's proportionate share of costs associated with the acquisition
of leases under option. The largest amount owed by BWAB to the Company at any
one time during 1997 was approximately $313,000 and BWAB was indebted to the
Company in the approximate amount of $10,000 at December 31, 1997. 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.
Wildhorse Energy Partners LLC, a Delaware limited liability company
("Wildhorse"), provides gas gathering, processing, marketing, field and storage
services to the Company and third parties. Wildhorse, which is owned 55% by KNE
and 45% by the Company, is managed by KNE under the direction of an operating
team consisting of two representatives appointed by the Company and two
representatives appointed by KNE. KNE is the holder of approximately 8.4% of the
Company's voting securities. During 1997, the Company made capital contributions
to Wildhorse of approximately $21,000,000.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires, among other
things, that the Company's directors, officers and beneficial owners of more
than 10% of its equity securities file with the SEC, at specified times, reports
of beneficial ownership and changes in beneficial ownership of the Company's
Common Stock and other equity securities. Based solely on a review of copies of
such reports furnished to the Company, or written representations that no Forms
5 were required, the Company believes that all Section 16(a) filing requirements
for the fiscal year ending December 31, 1997 have been complied with in a timely
manner, except that a Form 3 for Mr. McKenzie and a Form 4 covering one
transaction for each of Messrs. Brown, Groppe, LeBaron, Wallace, Whilden and
DeBoer (secretary of the Company) were filed late.
ACCOUNTANTS
Arthur Andersen LLP has served as the Company's independent auditors since
March 1990, and currently serves the Company as independent auditors. A
representative of Arthur Andersen LLP 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.
STOCKHOLDER PROPOSALS
In accordance with rules of the SEC, stockholders of the Company may
present proposals to the Company for inclusion in the Company's Proxy Statement
prepared in connection with its next regular annual meeting of stockholders.
Such proposals must be received by the Company no later than December 14, 1998,
in order to be considered for inclusion in the Proxy Statement for the 1999
annual meeting.
13
<PAGE> 16
OTHER MATTERS
The Board of Directors knows of no matters other than those discussed in
this Proxy Statement that properly may be, or are likely to be, brought before
the meeting. In the event any other matters are properly brought before the
meeting, however, the proxy holders or their substitutes will vote in accordance
with their best judgment on such matters.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ BRUCE R. DEBOER
BRUCE R. DEBOER
Secretary
April 14, 1998
A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR
ENDED DECEMBER 31, 1997, EXCLUSIVE OF EXHIBITS, IS AVAILABLE TO EACH BENEFICIAL
OWNER OF THE COMPANY'S SECURITIES WITHOUT CHARGE UPON WRITTEN REQUEST SETTING
FORTH A GOOD FAITH REPRESENTATION THAT AS OF THE RECORD DATE, SUCH PERSON WAS A
BENEFICIAL OWNER OF THE COMPANY'S SECURITIES ENTITLED TO VOTE AT THE ANNUAL
MEETING, TO: SECRETARY, TOM BROWN, INC., 508 WEST WALL, SUITE 500, P.O. BOX
2608, MIDLAND, TEXAS 79702.
14
<PAGE> 17
PROXY
TOM BROWN, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
OF THE COMPANY
For Annual Meeting of Stockholders
To Be Held May 21, 1998
The undersigned hereby appoints Donald L. Evans and William R. Granberry,
and each of them, attorneys and proxies, with power of substitution, and hereby
authorizes them to represent and to vote, as designated on the reverse side of
this proxy, all shares of Common Stock and Preferred Stock of TOM BROWN, INC.
held of record in the name of the undersigned at the close of business on
March 27, 1998, at the Annual Meeting of Stockholders of Tom Brown, Inc., to be
held at 9:00 a.m. on May 21, 1998, in the Hyatt Regency Hotel, 1750 Welton
Street, Denver, Colorado, and at all adjournments or postponements thereof.
(Continued, and to be signed on reverse side)
<PAGE> 18
[X] Please mark
votes as in
this example.
THIS PROXY SHALL BE VOTED AS DIRECTED. IN THE ABSENCE OF SPECIFIC DIRECTIONS,
IT SHALL BE VOTED FOR ITEM (1), AND IN ACCORDANCE WITH THE BEST JUDGMENT OF THE
PERSONS NAMED AS PROXIES UPON SUCH OTHER MATTERS AS MAY PROPERLY COME BEFORE
THE MEETING.
1. Election of Seven Directors.
Nominees: Donald L. Evans, Thomas C. Brown, William R. Granberry, Henry Groppe,
Edward W. LeBaron, Jr., James B. Wallace and Robert H. Whilden, Jr.
FOR WITHHELD
[ ] [ ]
[ ]___________________________________________________________________________
For all nominees except as noted above
2. 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 14, 1998, receipt of which is acknowledged.
MARK HERE
FOR ADDRESS
CHANGE AND [ ]
NOTE AT LEFT
Please return promptly in the enclosed postage paid envelope.
Please date this Proxy and sign exactly as your name appears on your stock
certificate. If stock is held jointly, the signature should include both names.
Executors, administrators, trustees, guardians and others signing in a
representative capacity should give their full titles.
Dated____________________,1998
______________________________
______________________________
Signature of Stockholder
