<PAGE>
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 Section 240.14a-11(c) or Section
240.14a-12
Basin Exploration, 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)(1)
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:
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<PAGE>
BASIN EXPLORATION, INC.
370 17TH STREET, SUITE 3400
DENVER, COLORADO 80202
(303) 685-8000
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 5, 1998
TO THE STOCKHOLDERS:
The Annual Meeting of the Stockholders of BASIN EXPLORATION, INC. will
be held in Governor's Square No. 10 of the Adam's Mark Hotel, 1550 Court
Place, Denver, Colorado, on May 5, 1998 at 8:30 a.m. for the following
purposes:
1. To re-elect Class III directors to the Board of Directors.
2. To consider and vote upon a proposal to amend the Company's
Equity Incentive Plan to increase by 600,000 shares, from 1,475,334 to
2,075,334, the number of shares of the Company's Common Stock currently
available for issuance under the Equity Incentive Plan, and correspondingly
to increase by 600,000 shares, from 1,150,000 to 1,750,000, the number of
shares of the Company's Common Stock which are cumulatively available under
the Equity Incentive Plan for the grant of incentive stock options, and to
amend in certain particulars stock option grants to non-employee directors as
further described in the Proxy Statement;
3. To approve the appointment of Arthur Andersen LLP as
independent auditors for the current fiscal year.
4. To transact such other business as may properly come before
the meeting or any adjournment(s) thereof.
Only stockholders of record as of the close of business on March 12,
1998 (the "Record Date") will be entitled to notice of or to vote at this
meeting or any postponement or adjournment(s) thereof. A copy of the Annual
Report to Stockholders for the Fiscal Year Ended December 31, 1997 is
enclosed with this Notice and Proxy Statement.
WE HOPE YOU WILL BE ABLE TO ATTEND THE MEETING IN PERSON. WHETHER OR NOT
YOU PLAN TO ATTEND, PLEASE DATE AND SIGN THE ENCLOSED PROXY AND RETURN IT
PROMPTLY IN THE ACCOMPANYING ADDRESSED ENVELOPE WHICH REQUIRES NO POSTAGE IF
MAILED IN THE UNITED STATES. STOCKHOLDERS WHO ATTEND THE MEETING MAY REVOKE
THEIR PROXIES AND VOTE IN PERSON IF THEY SO DESIRE.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ HOWARD L. BOIGON
Howard L. Boigon
Secretary
April 3, 1998
<PAGE>
BASIN EXPLORATION, INC.
PROXY STATEMENT
FOR THE
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 5, 1998
This Proxy Statement is furnished to stockholders in connection with the
solicitation of proxies by the Board of Directors of Basin Exploration, Inc.
(the "Company") for use at the Annual Meeting of Stockholders of the Company
(the "Meeting") to be held in Governor's Square No. 10 at the Adam's Mark
Hotel, 1550 Court Place, Denver, Colorado, on May 5, 1998, at 8:30 a.m. or at
any adjournment or postponement thereof. This Proxy Statement and Proxy are
being mailed to Stockholders on or about April 3, 1998.
The cost of soliciting Proxies is being paid by the Company. In addition
to the mailings, the Company's officers, directors and other regular
employees, without additional compensation, may solicit Proxies personally or
by other appropriate means.
ELECTION OF DIRECTORS
(PROPOSAL NO. 1)
There are currently eight members of the Board of Directors. All
directors of the Company serve staggered terms of three years. Donald H.
Anderson was elected to the Board of Directors on November 20, 1997 as a
Class III Director at a special meeting of the Board of Directors. Because
this created a disproportionate grouping of four Class III directors, the
Board has voted to change Michael A. Nicolais, formerly a Class III director,
to a Class I director, to stand for re-election at the Annual Meeting of
Stockholders in 1999. Accordingly, only the terms of the remaining Class III
directors, Messrs. Donald H. Anderson, Michael S. Smith, and Larry Unruh
expire at the Annual Meeting of Stockholders in 1998. The Board of Directors
recommends that Messrs. Anderson, Smith and Unruh be re-elected as Class III
Directors for three-year terms to expire at the annual meeting in 2001.
Directors are elected by the affirmative vote of a majority of the
shares of Common Stock of the Company represented in person or by proxy at
the Annual Meeting. All of the nominees have expressed their willingness to
serve, but if because of circumstances not contemplated, either of the
nominees is not available for election, the Proxy holders named in the
enclosed Proxy form intend to vote for such other person or persons as the
Board of Directors may nominate. Information with respect to each nominee is
set forth under the heading entitled "Management -- Directors and Executive
Officers."
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR" THE
ELECTION AS DIRECTORS OF THE PERSONS NOMINATED.
AMENDMENTS TO EQUITY INCENTIVE PLAN
(PROPOSAL NO. 2)
The Board has unanimously approved and recommended to the Stockholders
for approval an amendment to the Company's Equity Incentive Plan ("Incentive
Plan") that, if approved by the Stockholders, would (i) increase by 600,000
shares the number of shares of the Company's Common Stock currently available
for issuance under the Incentive Plan, and (ii) increase by 600,000 shares
the maximum number of such shares that are cumulatively available for the
grant of incentive stock options. All full-time employees of the Company and
its subsidiaries whose judgment, initiative and efforts are, or will be,
important to the successful conduct of the Company's business are eligible to
participate in the Incentive Plan.
The Incentive Plan is administered by the Compensation and Incentive
Committee of the Board, pursuant to the terms of the Incentive Plan
permitting the Board to delegate such authority. Subject to the terms of the
Incentive
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Plan, the Compensation and Incentive Committee determines the persons to whom
awards are granted, the type of award granted, the number of shares granted,
the vesting schedule, the type of consideration to be paid to the Company
upon exercise of options and the terms of any option. Under the Incentive
Plan, the Company may grant to officers, employees and consultants awards of
restricted stock, stock options and performance awards or any combination
thereof.
Under the Incentive Plan, the Company may grant both incentive stock
options ("incentive stock options") intended to qualify under Section 422 of
the Internal Revenue Code of 1986, as amended (the "Code"), and options that
are not qualified as incentive stock options ("non-statutory stock options").
Incentive stock options may be granted only to persons who are employees of
the Company, while non-statutory stock options may also be granted to persons
who are consultants to the Company. The exercise price of incentive stock
options may not be less than 100% of the fair market value of a share of
Common Stock on the option grant date (and not less than 110% of such fair
market value in the case of options granted to persons who own more than 10%
of the outstanding Common Stock). The terms of options granted under the
Incentive Plan may not exceed 10 years (or five years in the case of
incentive stock options granted to persons owning more than 10% of the
outstanding Common Stock). As of the date of this Proxy Statement, the
Company had issued 1,240,167 stock options to key personnel of the Company
(net of those forfeited), of which 134,667 have been exercised.
Under the performance award component of the Incentive Plan,
participants may be granted an award denominated in shares of Common Stock or
in dollars. Achievement of the performance targets, or multiple performance
targets established by the Compensation and Incentive Committee relating to
corporate, group, unit or individual performance, shall entitle the
participant to payment at the full amount specified with respect to the
award, subject to adjustment at the discretion of the Committee in the event
of performance exceeding the minimum performance target, but below the
maximum performance target applicable to such award. Payment may be made in
cash, Common Stock or any combination thereof, as determined by the
Committee, and shall be adjusted in the event the participant ceases to be an
employee of the Company before the end of a performance cycle by reason of
death, disability or retirement. As of the date of this Proxy Statement, the
Company had issued 105,000 performance shares to key personnel, for
performance cycles covering 1997-99 and 1998-2000.
Under the restricted stock component of the Incentive Plan, the Company
may issue shares of stock that are restricted as to sale pending fulfillment
of such vesting schedule and employment requirements as the Compensation and
Incentive Committee shall determine. Prior to the lifting of the
restrictions, the participant will nevertheless be entitled to receive
distributions in liquidation and dividends on, and to vote the shares of, the
restricted stock. The Incentive Plan provides for forfeiture of restricted
stock for breach of conditions of grant. As of the date of this Proxy
Statement, the Company had issued 118,797 shares of restricted stock (net of
grants forfeited or withheld for tax purposes) to employees of the Company,
78,117 of which shares are still subject to forfeiture.
The Incentive Plan currently provides for a current authorization of
1,475,334 shares of Common Stock for issuance thereunder, which is increased
automatically on each succeeding annual anniversary of July 1, 1997, by a
number of shares equal to one-half of one percent of the Company's then
outstanding shares of Common Stock. For more information regarding the grant
of options under the Incentive Plan, see "Executive Compensation" and
"Compensation and Incentive Committee Report."
If the Incentive Plan Proposal is adopted, the Incentive Plan would be
amended to authorize the Company to issue up to 2,075,334 shares of Common
Stock under the plan, which number would be increased automatically on each
succeeding annual anniversary of May 5, 1998 by a number of shares equal to
one-half of one percent of the Company's then outstanding shares of Common
Stock. The Incentive Plan would also be amended to provide that no more than
1,750,000 of such shares authorized for issuance under the Incentive Plan
shall be issued pursuant to incentive stock options.
Through the date of this Proxy Statement, the total of outstanding stock
options, performance shares and restricted stock awards issued under the
Incentive Plan (plus 4,000 shares issued to non-employee directors in 1997 as
a one-time award for past services) was 1,467,694 leaving only 7,370 shares
available for grant. Except for 25,000 shares of incentive stock options to
be granted to Mr. Smith upon approval of this proposal, the Company does not
presently have any plans to grant any specific number of options or issue any
specific number of shares of restricted stock to any particular employee upon
the approval of this Incentive Plan proposal. However, the Board believes
that the ability to provide incentive compensation in the form of stock
options, performance awards and restricted stock awards is important in
attracting and retaining key employees, and the increase in available shares
is
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<PAGE>
necessary to preserve the effectiveness of the Incentive Plan as an equity
compensation vehicle for the Company's employees. The total amount of shares
available for issuance under the Incentive Plan, if the stockholders approve
this proposal, would constitute 15% of the Company's total issued and
outstanding shares.
In addition to the foregoing amendments to increase the number of shares
available under the Incentive Plan, the Board has unanimously approved and
recommended to the Stockholders for approval amendments to the Incentive Plan
that, if approved by the Stockholders, would (i) increase the number of
shares of Common Stock available for issuance to non-employee directors by
25,000 shares, from 150,000 to 175,000, and (ii) increase the number of
shares of Common Stock to be issued to non-employee directors annually during
their service as directors, after their first year of service, from 2,500 to
3,000 shares. The Company currently has five non-employee directors.
The Board, or a committee consisting of such Board members or other
persons as may be appointed by the Board, administers the Incentive Plan
insofar as grants to non-employee directors are concerned. Under the
Incentive Plan, non-employee directors receive options to purchase 10,000
shares that vest in equal installments over a three-year period upon being
named to the Board, and options to purchase an additional 2,500 shares each
succeeding fiscal year following election to the Board that vest one year
after the date of grant. In 1997, the Company granted options on 20,000
shares to non-employee directors at exercise prices ranging from $6.781 to
$20.375 per share.
Each option granted under the Incentive Plan to non-employee directors
expires ten years from the date of grant. The option exercise must be equal
to 100% of the fair market value of a share of Common Stock on the option
grant date. The price may be paid in cash or by surrendering to the Company
outstanding Common Stock already owned by the optionee, valued at fair market
value, or by a combination of such means of payment, as may be determined by
the Board. Options granted pursuant to the Incentive Plan to non-employee
directors may not be exercised more than three months after the option holder
ceases to be a director of the Company, except that in the event of the death
or permanent and total disability of the option holder, the option may be
exercised by the holder (or his estate, as the case may be), for a period of
up to one year after the date of death or permanent or total disability.
Options granted to non-employee directors under the Incentive Plan are
treated as non-statutory stock options under the Code.
Through March 25, 1998, there were 44,000 shares available for grant to
non-employee directors under the Incentive Plan. The employee members of the
Board believe that the ability to provide incentives for non-employee
directors in the form of stock options is important in attracting and
retaining experienced members of the Board, and that the increase in
available shares is necessary to preserve the Company's ability to continue
to compensate its existing directors over the next few years while retaining
the flexibility to expand the Board by adding new members as opportunities
arise.
Similarly, if this proposal is approved, the Incentive Plan would be
amended to direct the Company to issue to each non-employee director options
to purchase 3,000 shares of Common Stock (an increase of 500 shares) each
fiscal year during such director's service as director, vesting one year from
the date of grant, following the first year of service as director. The
employee members of the Board believe that the increase in annual awards is
necessary to keep the Company's compensation package for its non-employee
directors competitive with those offered by its peer group.
The full text of the proposed amendments to the Incentive Plan is
attached to this Proxy Statement as Appendix A and should be read in its
entirety.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE AMENDMENTS OF THE
EQUITY INCENTIVE PLAN.
APPROVAL OF APPOINTMENT OF INDEPENDENT AUDITORS
(PROPOSAL NO. 3)
Action is to be taken by the stockholders at the Meeting with respect to
the approval of the selection by the Company's Board of Directors of Arthur
Andersen LLP to be the independent auditor for the current fiscal year.
Arthur Andersen LLP has served as the Company's independent auditor since
January 1992. Arthur Andersen LLP does not have and has not had at any time
any direct or indirect financial interest in the Company and does not have
and has not had
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<PAGE>
at any time any connection with the Company in the capacity of promoter,
underwriter, voting trustee, director, officer or employee. Neither the
Company, nor any officer, director, or associate of the Company, has any
interest in Arthur Andersen LLP.
A representative of Arthur Andersen LLP will be present at the Meeting
and will have the opportunity to make a statement if he or she so desires and
will be available to respond to appropriate questions.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE APPROVAL OF SUCH
APPOINTMENT.
ACTION TO BE TAKEN UNDER THE PROXY
If the enclosed Proxy is properly executed and returned, the shares
represented thereby will be voted in the manner specified. If no
specification is made on the Proxy, then the shares shall be voted in
accordance with the recommendations of the Board of Directors. A Proxy may be
revoked by a stockholder at any time prior to the exercise thereof by written
notice to the Secretary of the Company, by submission of another Proxy
bearing a later date or by attending the Meeting and voting in person.
The accompanying Proxy will also be voted in connection with the
transaction of such other business as may properly come before the Meeting or
any adjournment or adjournments thereof. Management knows of no matters other
than the matters set forth above to be considered at the Meeting. If,
however, any other matter properly comes before the Meeting or any
adjournment or adjournments thereof, the persons named in the accompanying
Proxy will vote such Proxy in accordance with their best judgment on any such
matter. The persons named in the accompanying Proxy will also, if in their
judgment it is deemed to be advisable, vote to adjourn the Meeting from time
to time.
RECORD DATE AND VOTING SECURITIES
Only holders of the Company's $0.01 par value common stock ("Common
Stock") of record as of the close of business on March 12, 1998 (the "Record
Date"), will be entitled to vote on matters presented at the Meeting. On
March 12, 1998 there were outstanding 13,819,000 shares of Common Stock,
which constituted all the outstanding voting securities of the Company. Each
share of Common Stock will be entitled to one vote on all matters presented
at the Meeting, and there is no cumulative voting. The affirmative vote of a
majority of the total number of shares represented and voted at the Meeting,
assuming a quorum is present, is necessary for the approval of each of the
matters being voted upon.
With respect to the proposal for amending the Incentive Plan,
abstentions will be counted as votes against and broker non-votes will be
treated as not voting on the proposal. "Broker non-votes" are proxies with
respect to shares held in record name by brokers or nominees, as to which (i)
instructions have not been received from beneficial owners or persons
entitled to vote and (ii) the broker or nominee does not have discretionary
voting power under applicable national securities exchange rules or the
instrument under which it serves in such a capacity.
The Company will request banks, brokerage houses, and other institutions,
which act as nominees or fiduciaries for owners of Common Stock, to forward this
proxy material to persons for whom they hold shares and to obtain authorization
for the execution of proxies.
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<PAGE>
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as to the number of
shares of Common Stock of the Company beneficially owned as of March 31,
1998, by (i) each person who is known to the Company to be the beneficial
owner of more than 5% of the Common Stock of the Company; (ii) each of the
Company's directors; (iii) the five most highly compensated executive
officers, including the Chief Executive Officer; and (iv) all of the
executive officers and directors of the Company as a group. Except as
otherwise indicated, the Company believes that the beneficial owners of the
Common Stock listed below, based on information furnished by such holders,
have sole investment and voting power with respect to such shares, subject to
community property laws, where applicable.
<TABLE>
PERCENTAGE
NUMBER OF BENEFICIALLY
NAME AND ADDRESS SHARES OWNED
---------------- ------ -----
<S> <C> <C>
Michael S. Smith . . . . . . . . . . . . . . . . 3,194,432(a) 22.97%
Suite 3400
370 17th Street
Denver, Colorado 80202
State Street Research & Management Company . . . 1,053,500(b) 7.62%
One Financial Center, 30th Floor
Boston, MA 02111-2690
The Guardian Life Insurance Company of America . 932,000(c) 6.74%
Guardian Investor Services Corporation
The Guardian Park Avenue Fund
The Guardian Stock Fund, Inc.
The Guardian Park Avenue Small Cap Fund
The Guardian Small Cap Fund, Inc.
The Guardian Employees' Incentive Savings Plan
The Guardian Life Insurance Company of America
Master Pension Trust
201 Park Avenue South
New York, NY 10003
Neil L. Stenbuck. . . . . . . . . . . . . . . . 84,667(d) *
Suite 3400
370 17th Street
Denver, Colorado 80202
Howard L. Boigon . . . . . . . . . . . . . . . . 95,000(e) *
Suite 3400
370 17th Street
Denver, Colorado 80202
Thomas J. Corley . . . . . . . . . . . . . . . . 64,680(f) *
Suite 3400
370 17th Street
Denver, Colorado 80202
Samuel D. Winegrad . . . . . . . . . . . . . . . 69,500(g) *
Suite 3400
370 17th Street
Denver, Colorado 80202
Donald H. Anderson . . . . . . . . . . . . . . . 2,000 *
Suite 2750
370 17th Street
Denver, Colorado 80202
</TABLE>
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<TABLE>
<S> <C> <C>
John F. Greene . . . . . . . . . . . . . . . . . 25,167(h) *
P.O. Box 10,000 #217
Silverthorne, Colorado 80498
J. Paul Hellstrom. . . . . . . . . . . . . . . . 36,784(i) *
75 Overlook Rd.
Morristown, NJ 07960
Michael A. Nicolais. . . . . . . . . . . . . . . 33,500(j) *
40 East 52nd Street, 9th Floor
New York, NY 10022
Larry D. Unruh . . . . . . . . . . . . . . . . . 23,500(k) *
717 17th Street, Suite 1600
Denver, Colorado 80202
All directors and executive officers
as a group (12 persons). . . . . . . . . . . . . 3,754,005(l) 26.38%
</TABLE>
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* Less than 1%
(a) Includes 2,577,433 shares held by Mr. Smith, 304,300 shares held by Mr.
Smith's wife, 96,000 shares held by trusts for Mr. Smith's children, of
which Mr. Smith is trustee, 2,000 shares held by Mr. Smith's daughters, and
90,700 shares held by KaiTar Foundation, a nonprofit charitable foundation
of which Mr. Smith's wife is president and Mr. Smith is vice president. Mr.
Smith has no voting or investment power with respect to the shares held by
his wife and disclaims beneficial ownership of such shares. Mr. Smith in
his capacity as the trustee of the trusts for his children and as vice
president of KaiTar Foundation has voting and investment power with respect
to the shares held in such capacity and may be deemed to be the beneficial
owner of such shares but disclaims beneficial ownership of such shares.
Also includes stock options for 73,333 shares exercisable within 60 days,
10,666 shares of restricted stock, the restrictions on which lapse on
February 3, 2000, and 40,000 performance shares, the restrictions on which
lapse December 31, 1999 and December 31, 2000 in two equal increments.
(b) According to a Schedule 13G filed with the Securities and Exchange
Commission, State Street Research & Management Company beneficially owns
722,400 shares with sole voting power and 1,053,500 shares with sole
dispositive power. These shares are stated to be in fact owned by clients
of State Street Research & Management Company, and it disclaims any
beneficial interest in them. Metropolitan Life Insurance Company, an
affiliate of State Street Research & Management Company, has also filed a
Schedule 13G with respect to 407,100 of these shares, as to which it claims
to hold sole voting and dispositive power.
(c) According to a Schedule 13G filed with the Securities and Exchange
Commission, The Guardian Life Insurance Company of America, Guardian
Investor Services Corporation, The Guardian Park Avenue Fund, The Guardian
Stock Fund, Inc.,The Guardian Park Avenue Small Cap Fund, The Guardian
Small Cap Fund, Inc., and The Guardian Employees' Incentive Savings Plan
beneficially own as a group 932,000 shares, of which The Guardian Life
Insurance Company of America has sole voting and dispositive power over
305,900 shares and the members of the group in the aggregate have shared
voting and dispositive power over 626,000 shares.
(d) Includes stock options for 56,667 shares exercisable within 60 days, 5,000
shares of restricted stock, the restrictions on which lapse on February 3,
2000, and 10,000 performance shares, the restrictions on which lapse
December 31, 1999 and December 31, 2000 in two equal increments.
(e) Includes stock options for 79,000 shares exercisable within 60 days, 5,000
shares of restricted stock, the restrictions on which lapse on February 3,
2000, and 10,000 performance shares, the restrictions on which lapse
December 31, 1999 and December 31, 2000 in two equal increments.
(f) Includes stock options for 45,000 shares exercisable within 60 days, 5,000
shares of restricted stock, the
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restrictions on which lapse on February 3, 2000, and 10,000 performance
shares, the restrictions on which lapse December 31, 1999 and December
31, 2000 in two equal increments.
(g) Includes stock options for 45,000 shares exercisable within 60 days, 5,000
shares of restricted stock, the restrictions on which lapse on February 3,
2000, and 10,000 performance shares, the restrictions on which lapse
December 31, 1999 and December 31, 2000 in two equal increments.
(h) Includes stock options for 9,167 shares exercisable within 60 days.
(i) Includes stock options for 22,500 shares and a warrant for the purchase of
3,284 shares exercisable within 60 days.
(j) Includes stock options for 22,500 shares exercisable within 60 days.
(k) Includes stock options for 22,500 shares exercisable within 60 days.
(l) Includes stock options for 399,000 shares exercisable within 60 days,
39,833 shares of restricted stock, the restrictions on which lapse on
February 3, 2000, 105,000 performance shares, the restrictions on
which lapse December 31, 1999 as to 55,000 shares and December 31,
2000 as to 50,000 shares, and a warrant for the purchase of 3,284
shares exercisable within 60 days.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names, ages and titles of the
executive officers and the members of the Board of Directors of the Company.
<TABLE>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Michael S. Smith(1) . . . . . 42 Chairman of the Board, President and
Chief Executive Officer
Neil L. Stenbuck(1) . . . . . 44 Chief Financial Officer, Vice President
and Director
Howard L. Boigon(1) . . . . . 51 Vice President-General Counsel,
Secretary and Director
Thomas J. Corley . . . . . . 38 Vice President-Engineering and
Production
Dalton F. Polasek . . . . . . 46 Vice President-Gulf Coast Engineering
David A. Pustka . . . . . . . 44 Vice President Gulf Coast Exploration
Samuel D. Winegrad . . . . . 39 Vice President-Corporate Development
Donald H. Anderson(2)(3) . . 49 Director
John F. Greene(2) . . . . . . 57 Director
J. Paul Hellstrom(2)(3) . . . 57 Director
Michael A. Nicolais(2)(3) . . 72 Director
Larry D. Unruh(2)(3). . . . . 47 Director
</TABLE>
- ------------
(1) Member of the Executive Committee.
(2) Member of the Compensation and Incentive Committee.
(3) Member of the Audit Committee.
MICHAEL S. SMITH is Chairman of the Board, President, Chief Executive
Officer, a director and a founder of the Company. Mr. Smith has been Chairman
of the Board since 1983 and has been a director since inception. Mr. Smith
was elected President and Chief Executive Officer in 1988. Mr. Smith is past
president and a director of the Colorado Oil and Gas Association and served
on the State of Colorado Governor's Minerals, Energy & Geology Policy
Advisory Board.
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<PAGE>
NEIL L. STENBUCK is Vice President-Finance, Chief Financial Officer,
Treasurer and a director of the Company. He joined the Company in 1995. He was
previously with United Meridian Corporation where he served as vice
president-capital via the 1994 merger between UMC and General Atlantic
Resources, Inc., where he held the same position beginning in 1989. He
joined General Atlantic in 1987 as vice president-finance and accounting.
Mr. Stenbuck is a certified public accountant.
HOWARD L. BOIGON is Vice President-General Counsel, Secretary and a
director of the Company. Mr. Boigon joined the Company in March 1992.
Previously, he had been a partner in the Denver office of Davis, Graham & Stubbs
since 1978, having been with the firm since 1973 specializing in the practice of
oil and gas law. Mr. Boigon began representing the Company as outside counsel
in 1989. He is past president of the Colorado Oil and Gas Association and is a
member of the Advisory Board of the International Oil and Gas Educational Center
of the Southwestern Legal Foundation. He has served as Chair of the Mineral Law
Section of the Colorado Bar Association, and Trustee of the Rocky Mountain
Mineral Law Foundation. He has lectured and written on various topics of oil
and gas law.
THOMAS J. CORLEY is Vice President-Engineering and Production of the
Company. He joined the Company in March 1996. For the previous three years he
was vice president-manager of engineering at St. Mary Land & Exploration Company
where he was responsible for the acquisition efforts and engineering functions
of the company. From 1983 to 1993 he held various positions of increasing
responsibility at General Atlantic Resources, Inc., involving operations,
acquisitions and reservoir engineering and served there last as director of
acquisitions. Mr. Corley is a member of the Society of Petroleum Engineers and
served as a distinguished panel member at the 1995 SPE Annual Meeting.
DALTON F. POLASEK, JR. is Vice President-Gulf Coast Engineering of the
Company. Mr. Polasek has been employed in that position since February 1996.
From 1994 to 1996, he was employed by SMR Energy Income Funds, as vice president
of engineering. From 1991 to 1994, Mr. Polasek served as the director of Gulf
Coast acquisitions/engineering for General Atlantic Resources. Prior to joining
General Atlantic, Mr. Polasek served as manager of planning and business
development for Mark Producing Company from 1983 to 1991.
DAVID A. PUSTKA is Vice President-Gulf Coast Exploration and Gulf Coast
Division Manager of the Company. He joined the Company in November 1995. From
1992 to 1995 he was vice president in charge of United States exploration for
British-Borneo Exploration, Inc., a wholly-owned subsidiary of British-Borneo
Petroleum Syndicate, PLC. From 1983 to 1992, he was responsible for exploration
activities at Walter Oil & Gas Corporation, a privately held Gulf of Mexico
exploration company, becoming a vice president in 1990. Mr. Pustka is a member
of the American Association of Petroleum Geologists and the Houston Geological
Society.
SAM D. WINEGRAD is Vice President-Corporate Development of the Company. He
joined the Company in August 1995. Mr. Winegrad was previously with United
Meridian Corporation where he was vice president-land, the same position he
occupied at General Atlantic Resources, Inc. at the time of its merger in 1994
with UMC. He joined General Atlantic in 1987 and became vice president-land the
same year.
DONALD H. ANDERSON is a director of the Company. He was elected to that
position in November 1997. He is the executive director and a principal of
Western Growth Capital LLC, a Colorado-based private equity investment and
consulting firm. He joined WGC in March 1997 and has assumed responsibility for
the firm's private equity and consulting services activities. Prior to joining
WGC, Mr. Anderson was chairman, president and chief executive officer of
PanEnergy Services, PanEnergy's non-jurisdictional operating subsidiary, from
December 1994 until PanEnergy's announced merger with Duke Energy in March 1997.
In that capacity, he was responsible for PanEnergy's natural gas and electric
marketing, natural gas gathering and processing, and crude oil and natural gas
liquids trading and pipeline transportation activities. Mr. Anderson was
previously president, chief operating officer and director of Associated Natural
Gas Corporation, the primary purchaser of the Company's production in the
Denver-Julesburg Basin, from 1989 until its merger with PanEnergy in 1994. He
is a director of Genesis Energy, LLC.
JOHN F. GREENE is a director of the Company. He was elected to that
position in February 1996. From 1985 until his retirement in 1995, he served as
executive vice president of exploration and production for the Louisiana Land
and Exploration Company, where he served on the board of directors from 1989
until his retirement. From 1981 to 1985, Mr. Greene was president and chief
executive officer for Milestone Petroleum and then executive vice president of
exploration for Meridian Oil and Gas Company via its merger with Milestone. He
began his career at Continental Oil
9
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Company holding various positions including director of exploratory projects
for onshore and offshore offices and division exploration manager for the
western United States.
J. PAUL HELLSTROM is a director of the Company. He was elected to that
position in March 1992. Mr. Hellstrom was employed by The First Boston
Corporation from 1975 to 1989. At the time of his retirement in 1989, Mr.
Hellstrom was co-head of First Boston's Real Estate Group, earlier having served
as head of its Energy and Project Finance Groups. Prior to joining First Boston,
he was a first vice president in charge of the Project Finance Group at Blyth
Eastman Dillon & Co., Inc. and an Assistant Treasurer with Manufacturers Hanover
Trust Company. Mr. Hellstrom currently serves as a director of First Reserve
Corporation. First Reserve is a direct investor in natural resource and
energy-related industries.
MICHAEL A. NICOLAIS is a director of the Company. He was elected to that
position in March 1992. Since April 1993 he has been employed by Carret & Co.,
Inc. as Senior Managing Director. From June 1991 to April 1993, he was employed
by Goldman Capital Management, Inc. as Managing Director. From 1949 to 1991,
Mr. Nicolais was employed by The Clark Estates, Inc., serving as president from
1968 to 1990. Mr. Nicolais served as a director of Mesa Petroleum Company from
1969 until 1984. He serves as a director of Hitox Corp. of America.
LARRY D. UNRUH is a director of the Company. He was elected to that
position in March 1992. Since 1982 he has been the managing tax partner at Hein
+ Associates, certified public accountants. During 1980 and 1981, he was chief
financial officer of Otis Energy Inc. Prior to 1980, Mr. Unruh held tax and
accounting positions with Hein + Associates, Coopers & Lybrand and Peat, Marwick
Mitchell & Co. Mr. Unruh is a certified public accountant and is a member of the
Federal Tax Division of American Institute of Certified Public Accountants. Mr.
Unruh serves as a director of Alpharel Inc., an electronic imaging company.
All directors of the Company serve staggered terms of three years and hold
office until the annual meeting in the year in which their respective terms
expire or until their respective successors are duly elected and qualified.
Assuming they are re-elected, the terms of Messrs. Anderson, Smith and Unruh are
scheduled to expire in 2001; the terms of Messrs. Stenbuck and Greene are
scheduled to expire in 1999; and the terms of Messrs. Boigon, Hellstrom and
Nicolais are scheduled to expire in 2000. All officers of the Company serve at
the discretion of the Board of Directors. There are no family relationships
between any director, officer or person nominated or chosen to become a director
or officer and any other such persons.
COMMITTEES AND MEETINGS
The Board of Directors of the Company has established an Audit Committee
and a Compensation and Incentive Plan Committee. The Audit Committee's
functions include recommending to the Board of Directors the engagement of the
Company's independent public accountants and reviewing with such accountants the
plans for and the results and scope of their auditing engagement, their
discoveries, and certain other matters relating to their services provided the
Company, including the independence of such accountants. The Audit Committee met
3 times in 1997. The Compensation and Incentive Committee reviewed on behalf of,
and made recommendations to, the Board of Directors with respect to compensation
of directors, executive officers and key employees and administered the
Company's Equity Incentive Plan. The Compensation and Incentive Committee met 5
times in 1997.
The Board of Directors met 9 times in 1997 by conference call or in person.
No director attended fewer than 75 percent of the total meetings of the Board
and all committees of the Board of which such director was a member.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The Company's directors and executive officers and persons who are
beneficial owners of more than 10% of the Company's Common Stock ("10%
beneficial owners") are required to file reports of their holdings and
transactions in Common Stock with the Commission and furnish the Company with
such reports. Based solely upon its review of the copies the Company has
received or upon written representations it has obtained from certain of these
persons, the Company believes that, as of March 31, 1998, all of the Company's
directors, executive officers and 10% beneficial owners had complied with all
applicable Section 16(a) filing requirements with the following exceptions.
In November 1994, the Company acquired Sterling Energy Corporation through
a merger. A director of the Company, J. Paul Hellstrom, was a shareholder of
Sterling and in exchange for his stock in the merger received (as did
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<PAGE>
other stockholders of Sterling) a warrant to purchase 3,284 shares of Common
Stock of the Company at $14.00 per share. Mr. Hellstrom continues to hold
that warrant but in reliance on the absence of customary filing advice from
the Company failed to file a Form 4 with the Commission describing that
ownership until November 8, 1997 rather than in December 1994, the month
following the merger.
Donald H. Anderson was elected to the Board of Directors of the Company on
November 21, 1997. Under the Company's Incentive Plan, he received a
non-discretionary grant of options to purchase 10,000 shares of the Company's
Common Stock effective on the date of his election. In response to delayed
notification from the Company, he filed a Form 3 with the Commission on
December 13, 1997, which was 12 days after the date on which it was due.
EXECUTIVE COMPENSATION
The following table sets forth the aggregate compensation paid by the
Company to the chief executive officer and the next four most highly compensated
executive officers of the Company for each of the Company's last three fiscal
years:
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION
-----------------------
RESTRICTED SECURITIES
ANNUAL COMPENSATION STOCK UNDERLYING ALL
---------------------------------- AWARDS OPTIONS OTHER
NAME YEAR SALARY($) BONUS($) OTHER($)(1) ($)(4) (#) COMPENSATION($)(2)
---- ---- --------- -------- ----------- ------- ---------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Michael S. Smith 1997 355,000 160,000 (3) 140,000 40,000 8,975
Chairman of the Board 1996 320,980 213,000 (3) -- 0 8,616
President and Chief 1995 355,000 0 53,750 -- 30,000 4,784
Executive Officer
Neil L. Stenbuck 1997 225,000 75,000 (3) 35,000 20,000 9,581
Vice President and 1996 225,000 150,000 (3) -- 0 10,063
Chief Financial Officer
Howard L. Boigon 1997 189,150 75,000 (3) 35,000 10,000 7,680
Vice President and 1996 171,023 113,490 (3) -- 25,000 7,987
General Counsel 1995 183,750 0 (3) -- 0 2,869
Thomas J. Corley 1997 143,750 75,000 (3) 35,000 15,000 7,203
Vice President - 1996 132,065 11,666 (3) -- 60,000 2,100
Engineering and Production
Samuel D. Winegrad 1997 145,000 75,000 (3) 35,000 15,000 7,250
Vice President - 1996 125,000 83,333 (3) -- 20,000 7,983
Corporate Development
</TABLE>
- --------------------
(1) The amounts reported in this column represent personal benefits consisting
primarily of disability insurance premiums and payments made by the Company
for vehicles. Mr. Smith received $31,735 in payments for company-provided
vehicles and $20,000 in tax and estate planning services as specified in
his Employment Contract for 1995.
(2) These amounts reflect contributions made on behalf of the respective
individual under the Company's 401(k) Plan.
(3) The aggregate amount of perquisites and other personal benefits,
securities, or property is less than the lesser of $50,000 or 10% of the
total of annual salary and bonus for this executive officer for the
indicated year.
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<PAGE>
(4) The amounts reported in this column represent the value at the date of
grant (February 4, 1997) of performance shares to be released to the
grantee if the Company attains certain performance goals by the end of a
three-year performance cycle which begins with the year of award. The
number of unvested performance shares and the value calculated at the
December 31, 1997 closing price for the Company's common stock were as
follows: Mr. Smith, 20,000 shares and $355,000; Messrs. Stenbuck, Boigon,
Corley and Winegrad, 5,000 shares and $88,750, respectively.
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<PAGE>
The following table sets forth information concerning individual grants of
stock options made during the fiscal year ended December 31, 1997 to the
Company's chief executive officer and the four named executive officers:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
% of Total
Options
Granted Exercise Grant Date
Options to Employees or Base Present
Granted in Fiscal Price Expiration Value (4)
Name #(1) Year(2) ($/Sh)(3) Date ($)
---- -------- ------------ --------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Michael S. Smith 40,000 21.9% 10.00 2-04-02 130,026
Neil L. Stenbuck 20,000 11.0% 7.00 2-04-07 77,804
Howard L. Boigon 10,000 5.5% 7.00 2-04-07 38,902
Thomas J. Corley 15,000 8.2% 7.00 2-04-07 58,353
Samuel D. Winegrad 15,000 8.2% 7.00 2-04-07 58,353
</TABLE>
- --------------------
(1) The options become fully exercisable in three years, vesting in equal
installments over the 3-year period from the date of grant, with a 10-year
term, except for those granted to Mr. Smith, which have a 5-year term. The
plan pursuant to which the options were granted provides for tax
withholding rights at the discretion of the Compensation and Incentive
Committee.
(2) The Company granted options representing 182,500 shares to employees in
fiscal 1997.
(3) The exercise price may be paid in cash, in shares of Common Stock (valued
at fair market value at time of exercise), or by a combination of such
means of payment, as may be determined by the Compensation and
Incentive Committee.
(4) The grant date present value was estimated using the Black-Sholes option
pricing model with the following weighted average assumptions: risk free
rate of 5.75%; expected dividend yield of 0%; expected life of 5 years; and
expected volatility of 58%. The Company does not believe that the values
estimated by the Black-Sholes model, or any other model, are necessarily
indicative of the values to be realized. Actual gains, if any, on stock
option exercises and Common Stock holdings are dependent on the future
performance of the Common Stock. There can be no assurances that the
amounts reflected in this table will be achieved.
The following table shows the number of shares covered by all exercisable
and unexercisable stock options held by the named executive officers as of
December 31, 1997, as well as the value of unexercised "in the money" options at
such date. No named executive officer exercised stock options during 1997.
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<PAGE>
FISCAL YEAR-END OPTION VALUES
<TABLE>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY
OPTIONS AT 12/31/97 OPTIONS AT 12/31/97($) (1)
-------------------------- --------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Michael S. Smith 60,000 40,000 348,750 310,000
Neil L. Stenbuck 50,000 45,000 593,750 511,875
Howard L. Boigon 67,333 26,667 526,958 324,167
Thomas J. Corley 20,000 55,000 277,500 716,250
Samuel D. Winegrad 33,333 41,667 437,500 506,250
</TABLE>
- -------------
(1) Amounts shown represent aggregated fair market value at the share price on
December 31, 1997 of $17.75 per share less aggregate exercise price of the
unexercised in-the-money options held. These values, have not been, and
may never be, realized. Actual gains, if any, on exercise will depend on
the value of the Common Stock on the date of exercise.
EMPLOYMENT CONTRACTS
The Company has entered into a three-year, automatically renewable
management contract with Mr. Smith providing for his services as President and
Chief Executive Officer. The agreement includes provisions relating to non-
competition during employment by the Company, the right to compete following
termination (except with respect to corporate opportunities known to him prior
to termination in the event of a voluntary termination by Mr. Smith), a base
salary of $300,000 subject to annual increase by the Board of Directors, annual
bonus compensation, reimbursement for financial and tax planning, an automobile
allowance, and other perquisites, compensation equal to three years base salary
and bonus compensation payable over time or in a lump sum in the event of a
change of control of the Company, disability payments to Mr. Smith at 75% of
base salary, $1,000,000 of term life insurance, participation in the Company's
benefit plans, confidentiality and related matters.
The Company has entered into an employment agreement with Mr. Boigon, and
has agreed to execute similar agreements with Messrs. Stenbuck and Winegrad,
providing that in the event of a change in control of the Company (as defined in
the agreement) and either the subsequent termination of their employment without
cause or their resignation for "good reason" as defined in the agreement, they
will receive compensation equal to three times their salary and bonus plus the
accelerated vesting of all stock options and other incentive awards. "Good
reason" for purposes of the agreement is defined to include, among others,
alteration of duties, responsibilities or title, reduction in salary, relocation
of principal office, or termination of Mr. Smith's service as chief executive
officer.
The Company has entered into employment agreements with Messrs. Corley and
Pustka containing change of control, termination, salary and bonus provisions.
Mr. Pustka is also entitled to participate in the Company's Gulf Coast
Geoscientist Overriding Royalty Plan, pursuant to which the Company grants
overriding royalty interests in certain Gulf Coast properties.
COMPENSATION OF DIRECTORS
Each director who is not an employee of the Company (the "Non-Employee
Directors") is paid an annual retainer of $20,000 and is reimbursed for expenses
incurred in attending meetings of the Board of Directors and committee meetings
of the Board of Directors.
In addition, the Company has adopted the Equity Incentive Plan which
contains provisions for incentive awards in which only Non-Employee Directors
will be eligible to participate. A total of 150,000 shares of Common Stock has
been authorized and reserved for issuance under the plan, subject to adjustments
to reflect changes in the Company's capitalization resulting from stock splits,
stock dividends and similar events. Non-employee directors are granted options
14
<PAGE>
to purchase 10,000 shares which vest in equal installments over a three-year
period upon being named to the Board of Directors, and options to purchase an
additional 2,500 shares (3,000 if a favorable stockholder vote is received on
Proposal No. 2 in this Proxy Statement) which vest in one year are granted to
each non-employee director once during each fiscal year following election to
the Board. The Equity Incentive Plan is administered by the Board of Directors.
Each option granted to Non-Employee Directors expires ten years from the
date of grant. The option exercise price must be equal to 100% of the fair
market value on the date of grant of the option. The option price may be paid in
cash or by surrendering to the Company outstanding Common Stock already owned by
the optionee, valued at fair market value, or by a combination of such means of
payment, as may be determined by the Board. Options granted to Non-Employee
Directors pursuant to the Equity Incentive Plan may not be exercised more than
three months after the option holder ceases to be a director of the Company,
except that in the event of the death or permanent and total disability of the
option holder, the option may be exercised by the holder (or his estate, as the
case may be), for a period of up to one year after the date of death or
permanent or total disability. Options granted to directors under the Equity
Incentive Plan will be treated as non-statutory stock options under the Internal
Revenue Code.
COMPENSATION AND INCENTIVE COMMITTEE REPORT
COMPENSATION PHILOSOPHY
The Compensation and Incentive Committee (the "Committee") is comprised of
the non-employee directors of the Company. The Committee recommends to the
Board of Directors payment amounts and award levels for executive officers of
the Company and makes the decisions regarding grants of stock-based compensation
under the Company's Equity Incentive Plan. With regard to compensation actions
affecting Messrs. Smith, Boigon, and Stenbuck, all of the non-employee members
of the Board of Directors acted as the approving body.
At present, the executive compensation program is comprised of salary, cash
bonus, long-term incentive opportunities in the form of stock options,
performance shares (discussed below) and restricted stock and benefits typically
offered.
The past year was a significant and very successful year for the Company.
The compensation decisions made by the Committee reflect the Company's success
in implementing its new business strategy to focus its exploration efforts in
the Gulf Coast and in building the financial strength to fuel future growth.
The Company's first two offshore discoveries at Eugene Island Block 65 began
producing in August, causing earnings to increase from approximately break-even
in the first quarter of 1997 to $2.1 million in the fourth quarter of the year
and cash flow to increase by more than 600% during the same time frame. In
addition to its Eugene Island 65 discoveries, the Company participated in seven
other discoveries offshore in 1997, four of which were originated and drilled by
the Company, and the Company had an over-all success rate of nine out of eleven
exploratory wells in which it participated in the Gulf for the year. These
discoveries, plus the reserves added by three acquisitions accomplished by the
Company in the Gulf during the year, resulted in an increase in the Company's
reserves to 138 bcfe at year-end, representing an 80% increase over year-end
1996, notwithstanding significantly lower commodity prices at year-end 1997 than
the year before. The Company continued to build a foundation for future growth
in the Gulf by building an inventory of approximately 30 prospects in the Gulf
by year-end, compared to eight at year-end 1996. Also in 1997, the Company
completed a secondary offering of 2.875 million shares of Common Stock at a
price of $18.50 per share, generating net proceeds to the Company of
approximately $50 million and leaving the Company with liquidity and balance
sheet strength at year-end permitting continued execution of the Company's
growth plan. The Company's stock increased 184% at year-end over year-end 1996,
making it the top performing stock in its industry sector among all companies
with a market capitalization above $50 million and significantly outperforming
broad market indices. By all measures, the Company experienced a successful,
highly productive year, creating significant value for its stockholders, and the
Committee's compensation decisions for senior management reflected and rewarded
that performance.
In constructing appropriate compensation awards, the Committee's objectives
were to reward performance, foster a spirit of teamwork and group
responsibility, conserve cash, promote executive retention, and tie individual
rewards to corporate success. The Company's goals continue to be to attract and
retain the most talented and proven executives available. At the same time, the
Committee continues to believes that the Company's senior management should be
willing to link a significant portion of their compensation to their own
success. Accordingly, in addition to awards intended to reward senior
management for their efforts in achieving considerable success in 1997, the
Committee
15
<PAGE>
approved several executive compensation decisions for 1997 that were intended
to generate appropriate incentives for senior management to accomplish the
Company's short-term strategic and long-term growth objectives.
SALARIES
The salary of Mr. Smith was initially established by the employment
contract he signed with the Company upon consummation of the Company's initial
public stock offering in May 1992. Under that contract, the Committee can
determine to increase Mr. Smith's salary but cannot decrease it below 1992
levels, i.e., $300,000. The salaries of the remaining executive officers are
established by the Committee to the extent not specified in employment
agreements. Messrs. Corley, Pustka, Stenbuck, and Winegrad had such agreements
and their salaries for 1997 were accordingly negotiated when they joined the
Company. However, the Committee continues to monitor the Company's executive
compensation in comparison to compensation for executive officers paid by the
companies in its peer group so that the Company can remain competitive. On that
basis, the Company increased the salaries of two executive officers in 1997.
The Committee also approved restoration of the 10% salary reductions that
Messrs. Smith and Boigon had accepted for 1996 to reflect the Company's
disappointing performance in 1995.
The Committee will continue to evaluate the salaries of the executive
officers in relation to salaries in the industry to assure that the Company's
salary levels are competitive. At the same time, the Committee believes that
salary increases are not necessarily the preferred method of rewarding
individual and/or corporate performance. Except for increases necessary to
reflect increases in an officer's responsibility or to reflect salaries paid by
the Company's competitors, the Committee expects to continue to focus more
heavily on incentive-based compensation for executive officers rather than
salary increases.
As indicated above, for 1997 Mr. Smith received a salary increase
equivalent to the 10% salary reduction he had accepted for 1996. The Committee
intends to continue to evaluate Mr. Smith's salary in comparison to the CEO's
and chairmen of the Company's peer group but intends to continue to emphasize
compensation for Mr. Smith based on Company success rather than salary
increases.
BONUSES
In 1996, other than mid-year bonuses to executive officers involved in
negotiating and consummating the sale of the Company's D-J Basin assets and
modest year-end bonuses to executive officers having responsibility for the
Company's operations, the Committee did not approve bonuses to executive
officers for the Company's performance. The Committee thought that bonuses were
not appropriate because management's efforts to refocus the Company in the Gulf
had not yet generated growth in stock price, cash flow and earnings.
In 1997, the Company had significant success in implementing its strategy,
including the development of its operations and building its asset base in the
Gulf of Mexico and meeting its business objectives. As summarized above, the
Company outperformed its peer group in stockholder return and significantly
increased its performance on all measures, including revenues, cash flow,
earnings and reserves. The Company ended 1997 in a significantly stronger
position than it ended 1996. Especially in view of the absence of bonuses at
year-end 1996, the Committee believed that such achievements warranted
recognition. In determining the appropriate scope of that recognition, the
Committee analyzed information from the Company's peer group from their proxy
statements for 1996 (the latest available public information). On the basis of
this analysis and consideration of the value created for stockholders in 1997,
the Committee awarded bonuses in equal parts cash and restricted stock to
executive officers other than Mr. Smith valued in the aggregate at approximately
$150,000 per officer. This amount exceeded by approximately $20,000 the average
cash awards granted in 1996 as a group to the four most highly compensated
executive officers other than the CEO for the Company's entire peer group, which
averaged a 64% return to stockholders for 1996, compared to the Company's return
to shareholders during the past year of 184%. In dividing these awards between
cash and stock the Committee determined that it was appropriate to conserve cash
and to continue to emphasize incentive rewards which align the interests of
senior management with those of stockholders and promote retention of senior
management.
The Committee believes in the importance of fostering teamwork and
collegiality in its compensation decisions, but also will continue to consider
individual awards on the basis of its view of factors such as degree of
management responsibility, performance of the department managed, excellence of
work product, and commitment to accomplishment of the Company's goals as
reflected by time committed, constructiveness of working relationships with
other executive
16
<PAGE>
officers and staff, and assumption of responsibility and initiative.
The Committee did award a larger bonus to Mr. Smith, in the amount of
approximately $320,000 in cash and restricted stock, to reflect his larger
responsibility for the Company's performance and the effectiveness of his
leadership. In determining the amount of this award, the Committee did
consider, as one relevant factor, the bonuses awarded to the CEO's of the
Company's peer group. The award to Mr. Smith for 1997 was approximately $25,000
below the average award for the most highly compensated executive officer of the
top four performing members of the Company's peer group for 1996, which averaged
147% annual return in 1996 in comparison to the Company's 184% annual return for
1997. This award was approximately $60,000 greater than the average bonus
awarded to the most highly compensated executive officer by all the companies in
the 1996 peer group, which averaged 64% annual return for that year. The
Committee regards this peer group analysis as a guide but not controlling, and
the size of the award to Mr. Smith ultimately reflects the Committee's judgment
regarding fair recognition of Mr. Smith's role in the Company's significant
success over the past year as well as a realistic appraisal of the Company's
available resources and the long-term best interests of stockholders.
INCENTIVE AWARDS
The Company's Equity Incentive Plan is designed to align a significant
portion of the executive compensation program with stockholder interests. The
Equity Incentive Plan permits the granting of several different types of
stock-based awards. The Committee believes that it is important to use stock
options and performance shares for its executive officers as a cornerstone of
incentive compensation to tie their success directly to the growth of
stockholder value and the accomplishment of corporate goals. The Committee
generally intends to use restricted stock for other management and key employees
in order to maximize the value of awards to these employees by reducing their
cost and at the same time minimize dilution by reducing the number of shares
necessary to reach the desired compensation level. However, as indicated above
for 1997 the Committee decided to use restricted stock awards to compensate
executive officers as well. In part this reflected the Committee's judgment
that it was appropriate to conserve cash and thus reduce cash bonuses
notwithstanding the Company's outstanding 1997 performance, and in part it
reflected the Committee's ongoing effort to tie executive compensation more
closely to value creation and to create disincentives for key management to
leave the Company for other opportunities. Conversely, the Committee also
intends to use stock options and other types of performance awards for
management other than executive officers where appropriate.
The Company has taken two important steps in the strengthening of its
equity incentive program for executive officers. The first was to approve,
subject to stockholder approval, an increase in the availability of shares under
the Equity Incentive Plan from 1,475,334 to 2,075,334, which is 15% of the
Company's issued and outstanding shares after its recent stock offering. The
Committee agrees with senior management that this increase is critical if the
Company is to continue to be able to recruit the high level of management talent
required to execute the Company's business plan. Stock options were a
significant factor in the Company's ability to attract the new executive
officers, other officers, key managers, and Gulf Coast geoscientists in 1995,
1996 and 1997. The Committee expects them to be equally as important in
attracting additional management and technical expertise to support the
Company's future growth and to retain existing key personnel. Availability of
shares has been reduced by previous grants to the point where no new significant
grants could be made without an increase in shares authorized for issuance under
the Equity Incentive Plan.
The second important move was the Committee's implementation in February
1997 of a performance share plan under the Equity Incentive Plan. Under the
plan, performance shares of the Company's common stock may be granted to key
employees. Awards are based on the Company's success in meeting specific
performance goals over a designated performance cycle, generally intended to be
three years. The Company must reach a minimum threshold of performance as to
each stated performance goal for the performance cycle before any performance
shares are actually earned. The actual percentage earned by participating
employees can range from 0 to 150% of the amounts awarded, depending upon the
results obtained for each of the performance goals. No award is actually earned
until the end of the performance cycle, when achievement of the performance
goals is determined. The purpose of this plan is to establish a strong
incentive for key employees to remain with the Company (since they receive no
partial vesting during the performance cycle unless the Committee so authorizes
but must generally remain employed for the entire cycle to qualify for an
award), and to tie that incentive specifically and tangibly to objective
corporate performance goals so that the employees do not benefit if the Company
does not achieve stipulated goals designed to benefit stockholders. The
Committee does
17
<PAGE>
not intend that performance shares will replace stock options as incentives
for key employees, but these shares will constitute an important component of
incentive compensation that may reduce the number of stock options that would
otherwise have been granted.
The Committee awarded a total of 55,000 performance shares in the aggregate
to all executive officers for the 1997-99 performance cycle, based upon the
following performance criteria:
1. One-third based upon the Company's three-year average working capital
return on total capital employed.
2. One-third based upon the Company's three-year average increase in
value of proved reserves (excluding effects of price changes).
3. One-third based upon the Company's three-year average total
stockholder return (stock appreciation plus dividend yield) relative
to the peer performance group of companies used for annual comparison
of the Company's stock performance in its proxy statements.
In addition to performance shares, in 1997 the Committee approved awards of
stock options covering a total of 70,000 shares to certain executive officers
other than Mr. Smith to complement the performance share awards in promoting
executive retention and alignment of the interests of executive officers with
those of stockholders and remain competitive with peers. The awards ranged
between 10,000 and 20,000 shares per officer. Prior to these grants, the
executive officers as a group held a total of 384,000 stock options (not
including those held by Mr. Smith), or an average of 64,000 per officer. In
considering these new awards, the Committee reviewed analyses (based on data for
1995, the last year for which information was available at the time these awards
were made in February 1997) of the stock ownership of executive officers of the
Company's peer group companies and determined that the Company's executive
officers as a group ranked below the median of their peer group. (Review of
1996 data for the Company's peer group has subsequently confirmed that each of
the Company's five most highly compensated executive officers was below the
average of his peer group counterparts in stock option ownership even after the
Committee's 1997 grants. The 339,000 stock options owned by the Company's top
five executive officers after the 1997 grants equaled approximately 40% of the
average of 838,951 stock options held in 1996 by the five most highly
compensated executive officers of the top four performing companies for 1996 in
the peer group.) As with bonuses, the Committee views such peer group analysis
as helpful but not controlling in its long-term compensation awards and intends
to continue to exercise its subjective judgment as to the appropriate level and
type of awards to serve as performance incentives and maximize stockholder
return.
In 1997, the Committee awarded 20,000 performance shares to Mr. Smith for
the 1997-99 performance cycle under the newly adopted performance share plan and
awarded him 40,000 stock options priced at $10 per share, approximately 45%
above the Company's then-current stock price. The Committee expects to continue
to award performance shares and stock options to Mr. Smith to reflect his
critical importance to the growth of the Company and to align his interests with
those of other stockholders. Although the Committee reviewed incentive awards
for CEO's in the Company's peer group, the Committee based Mr. Smith's award on
what it believed to be an effective and appropriate level of inducement to
foster the growth in Company performance that would benefit stockholders.
SECTION 162(m) POLICY
The Committee has not adopted a policy with respect to qualification of
executive compensation in excess of $1 million per individual for deduction
under Section 162(m) of the Internal Revenue Code of 1986, as amended, and the
regulations thereunder. Under that section, public companies are precluded from
deducting for tax purposes compensation paid to executive officers in excess of
$1 million unless the compensation is performance-based within the requirements
of the regulations. The Company's Incentive Plan awards are intended to
constitute "qualified performance-based compensation" within the meaning of
Section 162(m) so that the deduction disallowance should not be applicable to
compensation paid to executive officers in the form of stock options and
performance shares. The Committee currently does not anticipate that the
compensation of any executive officer during 1998 will exceed the limits on
deductibility for 1998. In determining a policy for future periods, the
Committee would expect to consider a number of factors, including the tax
position of the Company, the materiality of amounts likely to be involved, and
any
18
<PAGE>
potential ramifications of the loss of flexibility to respond to unforeseeable
changes in circumstances.
Donald H. Anderson
John F. Greene
J. Paul Hellstrom
Michael A. Nicolais
Larry D. Unruh
19
<PAGE>
PERFORMANCE GRAPH
The following graph compares total shareholder return on the Company's
Common Stock for the five years ended December 31, 1997 with the total return on
three indices, including: the Nasdaq Composite Index; the industry peer group
index used by the Company in its 1997 Proxy Statement; and the S&P SmallCap 600
Oil & Gas Exploration and Production (O&G E&P) Index, which the Company intends
to use in the future as its industry peer group index.
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN*
AMONG BASIN IN EXPLORATION, INC., THE NASDAQ STOCK MARKET-US INDEX,
THE S&P SMALLCAP 600 - O&G E&P INDEX AND BASIN'S FORMER PEER GROUP
<TABLE>
- --------------------------------------------------------------------------------------------
12/31/92 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
- - Basin Exploration, Inc. 100 90 87 39 50 141
- - Nasdaq Stock Market-US 100 115 112 151 195 240
- - Former Peer Group 100 124 125 159 276 225
* S&P SmallCap 600 O&G E&P 100 132 125 149 259 233
- --------------------------------------------------------------------------------------------
</TABLE>
* ASSUMES INITIAL INVESTMENT OF $100 AND REINVESTMENT OF DIVIDENDS.
For reasons of increased objectivity and convenience, the Company has
elected to replace its self-maintained industry peer group index with the S&P
600 SmallCap O&G E&P published index. The Company believes that this index is
comprised of companies whose operating activities are comparable to those of the
Company and that it reflects historical performance that closely mirrors that of
the Company's former self-maintained peer group index. For 1997, the S&P
SmallCap 600 O&G E&P Index included 17 components, seven of which were also
included in the Company's former self-maintained peer group index.
For purposes of the above graph, the former self-maintained peer group is
weighted based on the market capitalization of each individual company within
the peer group at the beginning of the comparison period and is the same peer
group that was used in the Company's proxy statement dated April 1, 1997, except
that American Exploration Company and Cairn Energy USA, Inc. are excluded since
both ceased to exist as independent entities during 1997 as the result of
mergers. The fifteen companies included in this peer group index are as
follows: Cabot Oil & Gas Corporation, Chesapeake Energy Corporation, Cross
Timbers Oil Company, HS Resources, Inc., Hugoton Energy Corporation, The
Meridian Resource Corporation, Newfield Exploration Company, Nuevo Energy
Company, Ocean Energy, Inc., Plains Resources, Inc., Snyder Oil Corporation, St.
Mary Land & Exploration Company, Stone Energy Corporation, Tom Brown, Inc., and
The Wiser Oil Company.
20
<PAGE>
CERTAIN RELATIONSHIPS AND OTHER TRANSACTIONS
Set forth below is a description of transactions entered into between the
Company and certain of its officers, directors, and/or employees during the last
fiscal year.
STOCKHOLDER BORROWING. Prior to the Company's initial public offering, Mr.
Smith borrowed funds from the Company and in connection therewith in 1992 Mr.
Smith signed a promissory note to the Company which provided for the repayment
of $559,000 in December 1996, with interest payments due quarterly. The note
bore interest at a rate of 9% per year. During 1996, the note was amended to
extend the due date one year and to secure the note with 150,000 shares of the
Company's Common Stock. Under the terms of the note, Mr. Smith had the option
of repaying the loan with shares of Common Stock, valued at the average closing
sale price of the Common Stock on the NASDAQ Stock Market over the 20 trading
days prior to repayment. Mr. Smith exercised that option in December 1997 and
extinguished the loan by surrendering to the Company 28,217 shares of Common
Stock and paying cash for accrued interest.
OVERRIDING ROYALTY PLAN. David Pustka, vice president and general manager
of the Company's Gulf Coast Division, participates in the Company's Gulf Coast
Geoscientist Overriding Royalty Plan. Pursuant to that Plan, in 1997 Mr. Pustka
received overriding royalties averaging 0.6% burdening the Company's initial
interests in 19 leases with exploratory prospects situated in waters offshore
the Gulf of Mexico.
DATE OF RECEIPT OF STOCKHOLDER PROPOSALS
Stockholder proposals for inclusion in the Proxy Statement for the 1999
Annual Meeting of Stockholders must be received at the principal executive
offices of the Company on or before December 1, 1998.
21
<PAGE>
ANNUAL REPORT
1997 ANNUAL REPORT TO STOCKHOLDERS. The Annual Report to Stockholders of
the Company for the fiscal year ended December 31, 1997, is enclosed. The Annual
Report, which includes audited financial statements, does not form any part of
the materials for the solicitation of Proxies.
PLEASE DATE, SIGN AND RETURN THE ENCLOSED PROXY AT YOUR EARLIEST
CONVENIENCE IN THE ENCLOSED ENVELOPE. NO POSTAGE IS REQUIRED FOR MAILING IN THE
UNITED STATES. A PROMPT RETURN OF YOUR PROXY WILL BE APPRECIATED, AS IT WILL
SAVE THE EXPENSE OF FURTHER MAILING.
BY ORDER OF THE BOARD OF DIRECTORS
HOWARD L. BOIGON
SECRETARY
April 3, 1998
22
<PAGE>
APPENDIX A
Proposed Resolution of the
Stockholders of
BASIN EXPLORATION, INC.
1998 Annual Meeting of Stockholders
RESOLVED, that the proposed amendments to the Company's Equity Incentive
Plan (the "Plan") to increase the number of shares of common stock of the
Company par value $.01 per share ("Common Stock"), authorized for issuance under
the Plan to 2,075,334 shares of Common Stock, to increase the maximum number of
such shares which are cumulatively available under the Plan for the grant of
incentive stock options to 1,750,000, to increase the maximum number of
shares of non-discretionary grants of stock options available for issuance to
non-employee directors from 150,000 to 175,000 shares and to increase the
number of shares of non-discretionary grants of stock options to non-employee
directors after their first year of service on the Company's Board of
Directors to 3,000, as described in the Proxy Statement, are hereby ratified,
adopted and approved in all respects.
23
<PAGE>
PROXY BASIN EXPLORATION, INC.
370 17TH STREET, SUITE 3400
DENVER, COLORADO 80202
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS. The undersigned
hereby appoints Michael S. Smith and Howard L. Boigon and each of them, as
Proxies, each with the power to appoint his substitute, and hereby authorizes
them to represent and to vote, as designated below, all the shares of Common
Stock of Basin Exploration, Inc. held of record by the undersigned on March 12,
1998, or with respect to which the undersigned is otherwise entitled to vote or
act, at the Annual Meeting of Stockholders to be held on May 5, 1998 or any
adjournment thereof.
1. Election of Directors
<TABLE>
<S> <C> <C>
/ / FOR all nominees listed below (except as marked to the / /
contrary below, see instructions)
<CAPTION>
/ / WITHHOLD AUTHORITY to vote for all nominees listed below
<CAPTION>
</TABLE>
Donald H. Anderson, Michael S. Smith and Larry D. Unruh
INSTRUCTIONS: To withhold authority to vote for any individual nominee, strike a
line through the nominee's name in the list.
2. Proposal to amend the Company's Equity Incentive Plan to increase the number
of shares of Common Stock authorized for issuance from 1,475,334 to
2,075,334, and to increase the number of shares of the Company's Common
Stock cumulatively available under the Equity Incentive Plan for the grant
of incentive stock options from 1,150,000 to 1,750,000 and to amend in
certain particulars stock option grants to non-employee directors.
FOR / / / / AGAINST / / ABSTAIN
3. Proposal to approve the appointment of Arthur Andersen LLP as independent
auditors for the current fiscal year.
FOR / / / / AGAINST / / ABSTAIN
4. In their discretion, the Proxies are authorized to vote upon such business
as may properly come before the meeting or any adjournment thereof, upon
matters incident to the conduct of the meeting and upon the election of
substituted nominees for Director designated by the Board of Directors if
one or more of the persons named in Proposal 1 above is unable to serve as a
Director.
<PAGE>
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR PROPOSALS
1, 2 AND 3.
THIS PROXY WILL BE VOTED IN ACCORDANCE WITH THE INSTRUCTIONS GIVEN. IN THE
ABSENCE OF INSTRUCTIONS, THIS PROXY WILL BE VOTED FOR ITEMS 1, 2 AND 3.
Dated:
- -----------------, 1998.
Receipt of Notice of the Annual Meeting
of Stockholders and the accompanying
Proxy Statement is hereby acknowledged.
Please sign exactly as name appears
below. When shares are held by joint
tenants, both should sign. When signing
as attorney, as executor, administrator,
trustee, or guardian, please give full
title as such. If a corporation, please
sign in full corporate name by President
or other authorized officer. If a
partnership, please sign in partnership
name by authorized person.
-----------------------------------------
Signature of Stockholder
-----------------------------------------
Signature if held jointly
PLEASE MARK, SIGN, DATE, AND RETURN THE
PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
