-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Kq7QzesVHtYTXDrZoe99/H7U8dyz199rkgEihDFRZoO9W6DKqEE8DBbVB9uOS0Y6 94xqso41TW0xfF6UNlXxCQ== 0000950129-99-001679.txt : 19990421 0000950129-99-001679.hdr.sgml : 19990421 ACCESSION NUMBER: 0000950129-99-001679 CONFORMED SUBMISSION TYPE: PRE 14A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19990525 FILED AS OF DATE: 19990420 FILER: COMPANY DATA: COMPANY CONFORMED NAME: OCEAN ENERGY INC /TX/ CENTRAL INDEX KEY: 0000320321 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 741764876 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: PRE 14A SEC ACT: SEC FILE NUMBER: 001-08094 FILM NUMBER: 99597733 BUSINESS ADDRESS: STREET 1: 1001 FANNIN STE 1700 STREET 2: 1001 FIRST CITY TOWER CITY: HOUSTON STATE: TX ZIP: 77002-6714 BUSINESS PHONE: 7139514700 MAIL ADDRESS: STREET 1: 1001 FANNIN, SUITE 1700 STREET 2: 1001 FIRST CITY TOWER CITY: HOUSTON STATE: TX ZIP: 77002-6714 FORMER COMPANY: FORMER CONFORMED NAME: SEAGULL ENERGY CORP DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: SEAGULL PIPELINE CORP DATE OF NAME CHANGE: 19830815 PRE 14A 1 OCEAN EERGY, INC. 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: [X] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) [ ] Definitive Proxy Statement [ ] Definitive Additional Materials [ ] Soliciting Material Pursuant to sec. 240.14a-11(c) or sec. 240.14a-12 OCEAN ENERGY, 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: - -------------------------------------------------------------------------------- 2 [OCEAN ENERGY LOGO] OCEAN ENERGY, INC. HOUSTON, TEXAS NOTICE OF ANNUAL MEETING OF SHAREHOLDERS TO BE HELD TUESDAY, MAY 25, 1999 To the Shareholders: The 1999 Annual Meeting of Shareholders (the "Annual Meeting") of Ocean Energy, Inc., a Texas corporation (the "Company"), will be held on Tuesday, May 25, 1999 at 10:00 a.m., local time, at the George R. Brown Convention Center, 1001 Avenida de las Americas (formerly Convention Center Blvd.), Houston, Texas, for the following purposes: 1. To elect five directors to serve until the 2002 Annual Meeting of Shareholders; 2. To amend the Company's Articles of Incorporation to reduce the number of authorized shares of common stock from 450,000,000 shares to 230,000,000 shares and to reduce the number of authorized shares of preferred stock from 50,000,000 shares to 10,000,000 shares; 3. To approve the Ocean Energy, Inc. 1999 Long-Term Incentive Plan; 4. To ratify the appointment of __________________ as independent auditors of the Company for the fiscal year ending December 31, 1999; and 5. To transact such other business as may properly come before such meeting or any adjournment(s) or postponement(s) thereof. The close of business on April 26, 1999, has been fixed as the record date for the determination of shareholders entitled to receive notice of and to vote at the Annual Meeting or any adjournment(s) or postponement(s) thereof. YOU ARE CORDIALLY INVITED TO ATTEND THE ANNUAL MEETING. WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING, WE ASK THAT YOU SIGN AND RETURN THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE. A SELF-ADDRESSED, POSTPAID ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE. By Order of the Board of Directors, ROBERT K. REEVES April __, 1999 Secretary 3 OCEAN ENERGY, INC. 1001 FANNIN, SUITE 1600 HOUSTON, TEXAS 77002 (713) 265-6000 ------------------------- PROXY STATEMENT ------------------------- SOLICITATION AND REVOCABILITY OF PROXIES The enclosed proxy is solicited by and on behalf of the Board of Directors (the "Board of Directors" or the "Board") of Ocean Energy, Inc., a Texas corporation (the "Company"), for use at the 1999 Annual Meeting of Shareholders (the "Annual Meeting") to be held on Tuesday, May 25, 1999 at 10:00 a.m., local time, at George R. Brown Convention Center, 1001 Avenida de las Americas (formerly Convention Center Blvd.), Houston, Texas, or at any adjournment(s) or postponement(s) thereof. The solicitation of proxies by the Board of Directors will be conducted primarily by mail. Georgeson & Company Inc. has been retained to assist the Company in the solicitation of proxies in connection with the Annual Meeting for a fee of $[______], plus out-of-pocket expenses. In addition, officers, directors and employees of the Company may solicit proxies personally or by telephone, telegram or other forms of wire or facsimile communication. The Company will reimburse brokers, custodians, nominees and fiduciaries for reasonable expenses incurred by them in forwarding proxy material to beneficial owners of common stock of the Company ("Common Stock"). The costs of the solicitation will be borne by the Company. This proxy statement and the form of proxy were first mailed to shareholders of the Company on or about April __, 1999. The enclosed proxy, even though executed and returned, may be revoked at any time prior to the voting of the proxy (a) by the execution and submission of a revised proxy, (b) by written notice to the Secretary of the Company or (c) by voting in person at the Annual Meeting. In the absence of such revocation, shares represented by the proxies will be voted at the Annual Meeting. At the close of business on April 26, 1999, the record date for the determination of shareholders entitled to notice of and to vote at the Annual Meeting, there were outstanding [____________] shares of Common Stock and 50,000 shares of the Company's Series C Convertible Preferred Stock (the "Convertible Preferred Stock"). Each shareholder is entitled to one vote for each share of Common Stock, and [___] votes for each share of Convertible Preferred Stock. Holders of Common Stock and Convertible Preferred Stock will vote together as a single class on the matters to be voted on at the Annual Meeting. The Common Stock and 2 4 Convertible Preferred Stock are the only classes of outstanding securities of the Company entitled to notice of and to vote at the Annual Meeting. The Company's annual report to shareholders for the year ended December 31, 1998, including financial statements, is being mailed herewith to all shareholders entitled to vote at the Annual Meeting. The annual report does not constitute a part of the proxy soliciting material. ELECTION OF DIRECTORS (Item 1 on Proxy Card) Five directors are to be elected at the Annual Meeting. The Company's Bylaws provide for a classified Board of Directors, divided into Classes I, II and III, the terms of office of which are currently scheduled to expire, respectively, on the dates of the Company's Annual Meetings of Shareholders in 1999, 2000 and 2001. The five nominees are to be elected to Class I for a three-year term expiring at the Company's annual meeting of shareholders in 2002. As described below, certain of the nominees and directors named below were elected initially by the shareholders of Seagull Energy Corporation, a Texas corporation ("Seagull"), at the special meeting held on March 30, 1999, at which meeting the Seagull shareholders also approved the merger (the "Merger") of Ocean Energy, Inc., a Delaware corporation ("OEI"), with and into Seagull. In connection with the Merger, Seagull was renamed "Ocean Energy, Inc." THE BOARD OF DIRECTORS RECOMMENDS VOTING "FOR" THE ELECTION OF EACH OF THE NOMINEES. A plurality of the votes cast in person or by proxy by the holders of Common Stock and Convertible Preferred Stock is required to elect a director. Accordingly, under the Texas Business Corporation Act and the Company's Bylaws, abstentions and broker non-votes would have no effect on the election of directors. A broker non-vote occurs if a broker or other nominee does not have discretionary authority and has not received instructions with respect to a particular item. Shareholders may not cumulate their votes in the election of directors. Unless otherwise instructed or unless authority to vote is withheld, the enclosed proxy will be voted FOR the election of the nominees listed below. Although the Board of Directors does not contemplate that any of the nominees will be unable to serve, if such a situation arises prior to the Annual Meeting, the persons named in the enclosed proxy will vote for the election of such other person(s) as may be nominated by the Board of Directors. The following table sets forth information regarding the names, ages and principal occupations of the nominees and directors, directorships in other companies held by them and the length of continuous service as a director of either OEI or the Company: 3 5
PRINCIPAL OCCUPATION AND DIRECTORSHIPS AGE -------------------------------------- --- CLASS I NOMINEES NOMINEES FOR ELECTION AT THE ANNUAL MEETING - ---------------- Milton Carroll............. Chairman of the Board, President and Chief Executive Officer, 48 Instrument Products, Inc.; Director, Blue Cross Blue Shield of Texas, Houston Industries, Inc. and Texas Eastern Products Pipeline Co. Director of the Company since 1997. Thomas D. Clark, Jr........ Our so Distinguished Professor of Business and Dean of College 58 of Business Administration at Louisiana State University. Director of OEI from 1997 until election as a director of the Company in March 1999. Peter J. Fluor............. President and Chief Executive Officer, Texas Crude Energy, 51 Inc. (independent oil and gas company); Director, Fluor Corporation. Director of the Company since 1980. Robert L. Howard........... Retired Vice President of Domestic Operations, Exploration 62 and Production, Shell Oil Company. Director, Southwestern Energy Company, McDermott International Inc. and J. Ray McDermott, S.A. Director of OEI from 1998 until election as a director of the Company in March 1999. Charles F. Mitchell, M.D... Otolaryngologist and facial plastic surgeon. Director of OEI 50 from 1995 until election as a director of the Company in March 1999. CLASS II DIRECTORS CONTINUING DIRECTORS - ------------------ -------------------- J. Evans Attwell........... Attorney, Vinson & Elkins L.L.P. Director, American General 68 Corporation and Dain Rauscher Corporation. Director of the Company since 1974. Barry J. Galt.............. Director, Standard Insurance Company, Trinity Industries, 64 Inc. and Halter Marine Group, Inc. Director of the Company since 1983. Elvis L. Mason............. Chairman and Chief Executive Officer, Safeguard Business 65 Systems, Inc.; Director, San Jacinto Holdings, Inc.; Director of OEI from 1998 until election as a director of the Company in March 1999. David K. Newbigging........ Chairman, Friends' Provident Life; Director, Merrill Lynch & 65 Co., Inc. and PACCAR Inc. Director of OEI from 1998 until election as a director of the Company in March 1999. Dee S. Osborne............. President, Crest Investment Company (investments); Director, 68 EOTT Energy Corp. (the general partner of EOTT Energy Partners, L.P.). Director of the Company since 1983. CLASS III DIRECTORS CONTINUING DIRECTORS - ------------------- -------------------- John B. Brock.............. Director, Southwest Bank of Texas, Southwest Bank corporation 66 of Texas Inc. Director of OEI from 1998 until election as a director of the Company in March 1999. James L. Dunlap............ Vice Chairman of the Company; Director, Massachusetts Mutual 61 Life Insurance Company. Director of OEI from 1998 until election as a director of the Company in March 1999. James C. Flores............ Chairman of the Board of the Company. Director of OEI from 39 1992 until election as a director of the Company in March 1999.
4 6
PRINCIPAL OCCUPATION AND DIRECTORSHIPS AGE -------------------------------------- --- James T. Hackett........... President and Chief Executive Officer of the Company. 45 Director, New Jersey Resources Corporation. Director of the Company since 1998. R. A. Walker............... Senior Managing Director, Prudential Capital Group; Director, 42 YPF/Maxus Energy and Coca-Cola Bottling Group (Southwest). Director of the Company since 1996.
Each of the nominees and directors named above has been engaged in the principal occupation set forth opposite his name for the past five years except as follows: Mr. Clark was employed with Florida State University until 1995 in a variety of positions including Professor and Chairman of the Department of Information and Management Sciences and Director of the Center for Information Systems Research. Mr. Mason has served as Chairman of the Board of Directors and Chief Executive Officer of San Jacinto Holdings, Inc. since December 1991 and Managing Partner of Mason Best Company, L.P., a merchant banking firm, since August 1984. He has served as Chief Executive Officer of Safeguard Business Systems Inc. since August 1997 and from December 1992 to October 1996. Mr. Newbigging served as Chairman of Faupel Trading Group P.L.C., Equitas Holdings Limited, Equitas Reinsurance Limited and Equitas Limited. Mr. Brock served as Chairman of the Board of United Meridian Corporation ("UMC") from 1995 to March 1998 at which time UMC was merged into OEI. From 1989 to 1998 Mr. Brock held a variety of positions with UMC, including as Chief Executive Officer of UMC from May 1995 to March 1998. Mr. Dunlap served as President and Chief Operating Officer of UMC from October 1996 to March 1998. Prior to that time Mr. Dunlap spent 33 years with Texaco, Inc., most recently as Senior Vice President. Mr. Flores was a founder of OEI and has served in various capacities with OEI since its inception, most recently as President and Chief Executive Officer from July 1995 until March 1999. Mr. Hackett served as Group President of the Energy Services division of Duke Energy from June 1997 through September 1998, following the merger of Duke Power Company and PanEnergy Corporation. From January 1996 until the merger, Mr. Hackett served as PanEnergy's Executive Vice President. Prior to his employment with PanEnergy, Mr. Hackett was employed by NGC Corporation from June 1990 through December 1995. He served as a Senior Vice President of NGC and the President of its Trident Division from March 1995 through December 1995, an Executive Vice President of NGC from January 1994 through March 1995 and as Senior Vice President of NGC from June 1990 through December 1993. Mr. Hackett also served as a director of NGC from January 1993 through March 1995. 5 7 SECURITY OWNERSHIP OF DIRECTORS AND MANAGEMENT The following table sets forth the number of shares of Common Stock beneficially owned by (i) each person know by the Company to own beneficially five percent or more of the Common Stock of the Company, (ii) each nonemployee director, (iii) the Chief Executive Officer and each of the other four most highly compensated individuals for 1998 who were serving as executive officers of the Company as of December 31, 1998 (the "Named Officers") and (iv) the directors, the Named Officers and the executive officers of the Company as of the date of this Proxy Statement as a group:
COMMON STOCK BENEFICIALLY OWNED(1) --------------------- PERCENT Number OF SHARES OF CLASS ---------------- -------- NONEMPLOYEE DIRECTORS: J. Evans Attwell......................... 76,000 (2) * John B. Brock............................ 1,130,682 (2) * Milton Carroll........................... 19,000 (2) * Thomas D. Clark, Jr...................... 30,382 (2) * Peter J. Fluor........................... 57,998 (2)(3) * Robert L. Howard......................... 33,800 (2) * Elvis L. Mason........................... 55,547 (2) * Charles F. Mitchell, M.D................. 36,700 (2) * David K. Newbigging...................... - * Dee S. Osborne........................... 74,800 (2) * R.A. Walker.............................. 18,000 (2)(4) * NAMED OFFICERS: James T. Hackett......................... 691,996 (2) Barry J. Galt............................ 1,554,169 (2)(5)(6)(7) * William L. Transier...................... 385,096 (2)(6)(7) * Richard F. Barnes........................ 171,339 (2)(6) * Gerald R. Colley......................... 146,478 (2)(6)(7) * DIRECTORS AND EXECUTIVE OFFICERS AS A GROUP (23 PERSONS)............................. 19,313,572 (8) 11.0%
* Less than 1%. (1) Unless otherwise indicated, beneficial owners have sole voting and investment power with respect to the shares listed. Amounts shown are as of April 26, 1999, except for amounts held by the trustees of the Company's thrift plans and Employee Stock Ownership Plan, which are as of December 31, 1998. (2) Includes a portion of the 10,453,504 shares that the nonemployee directors and the above Named Officers have a right to purchase within 60 days pursuant to stock options ("Options") granted under the Company's stock option plans. Such shares are allocated as follows: Messrs. Attwell, Fluor and Osborne -- each 36,000, Mr. Brock -- 836,563, Messrs. Carroll and Walker -- each 18,000, Mr. Clark -- 29,680, Mr. Howard -- 32,800, Mr. Mason -- 40,600, Mr. Mitchell -- 34,360, Mr. Hackett -- 391,996, Mr. Galt -- 1,148,000, Mr. Transier -- 200,000, Mr. Barnes -- 147,000, and Mr. Colley -- 128,900. Prior to exercising these Options, the directors and officers will have no voting or investment power with respect to said shares. 6 8 (3) Includes 4,000 shares held by certain trusts with respect to which Mr. Fluor is the sole trustee but for which he disclaims any beneficial ownership. (4) Does not include 5,562,261 shares held by The Prudential Insurance Company of America ("Prudential"). Mr. Walker is a Senior Managing Director of Prudential Capital Group, an affiliate of Prudential. See "Principal Shareholders." (5) Includes 30,000 shares held by certain trusts for his daughters for which Mr. Galt disclaims beneficial ownership because he is not the trustee and has neither voting nor dispositive power with respect to such shares. (6) Includes a portion of the 87,689 shares held by the trustees of the Company's thrift plans for which the above Named Officers have sole voting power and no investment power. Shares held are as follows: Mr. Galt -- 12,690, Mr. Transier -- 69,785, Mr. Barnes -- 3,944 and Mr. Colley -- 1,270. (7) Includes a portion of the 17,866 shares held by the trustee of the Company's Employee Stock Ownership Plan for which the above Named Officers have sole voting power and no investment power. Shares held are as follows: Mr. Galt -- 10,479, Mr. Transier -- 3,912 and Mr. Colley -- 3,475. (8) Includes 121,219 shares held for directors and executive officers as a group in the Company's thrift plans and Employee Stock Ownership Plan for which such persons have sole voting power and no investment power. Also, includes 10,195,704 shares for directors and executive officers as a group that said persons have the right to purchase within 60 days pursuant to Options granted under the Company's stock option plans. Prior to exercising these Options, said persons will have no voting or investment power with respect to said shares. PRINCIPAL SHAREHOLDERS To the knowledge of the management of the Company and based upon filings with the Securities and Exchange Commission ("SEC"), the only persons who may be deemed to own beneficially more than 5% of the outstanding Common Stock (including any "group" as that term is used in Section 13(d)(3) of the Exchange Act), as of April 26, 1999, are named in the following table:
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER OF SHARES PERCENT OF CLASS ------------------------------------- -------------------- -------------------- James C. Flores...................... 12,354,262(1)(2) 7.2% 1001 Fannin, Suite 1600 Houston, TX 77002
(1) Includes 3,305,016 shares held by a family limited partnership. Also, includes 16,956 shares held by certain trusts for his children with respect to which Mr. Flores disclaims beneficial ownership because he is not the trustee and has neither voting nor dispositive power with respect to such shares. Also includes 6,555 shares held by the trustees of the Company's thrift plans for which Mr. Flores has sole voting power and no investment power. (2) Includes 1,260,500 shares for Mr. Flores that he has the right to purchase within 60 days pursuant to Options granted under the Company's stock option plans and 3,744,000 shares subject to a currently exercisable call option and irrevocable proxy from Mr. William W. Rucks IV. DIRECTORS' MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS The Company's Board of Directors held thirteen meetings during 1998. Each director attended at least 75% of the aggregate total meetings of the Board of Directors and the committees on which such director served. The Board has the following standing committees, the current members of which were appointed by the Board on March 30, 1999: Audit Committee. The Audit Committee currently consists of Messrs. Osborne (Chairman), Attwell, Carroll, Howard and Newbigging. The Committee's principal functions are to confirm the existence of effective accounting and internal control systems and to oversee the entire audit function, both independent and internal. During 1998, the Audit Committee held three meetings. Compensation Committee. The Compensation Committee currently consists of Messrs. Mason (Chairman), Carroll, Clark, Mitchell and Walker. The Committee's principal functions 7 9 are to study, advise and consult with the Company's management respecting the compensation of officers and other key employees of the Company. During 1998, the Compensation Committee held six meetings. Executive Committee. The Executive Committee currently consists of Messrs. Fluor (Chairman), Attwell, Brock, Galt and Mason. The Committee's principal function is to aid and assist the Company's management in the day-to-day operation of the Company. During 1998, the Executive Committee held three meetings. Nominating Committee. The Nominating Committee currently consists of Messrs. Clark (Chairman), Carroll, Fluor, Howard and Mitchell. The Committee's principal function is to make proposals to the full Board of Directors for candidates to be nominated by the Board to fill vacancies or for new directorship positions, if any, which may be created from time to time. The Nominating Committee will consider suggestions from any source, particularly shareholders, regarding possible candidates for director. With respect to the procedures that must be followed in order for nominations from shareholders to be considered, see "Shareholder Proposals and Director Nominations." During 1998, the Nominating Committee held one meeting. COMPENSATION OF DIRECTORS During 1998 (and during 1999 prior to the effectiveness of the Merger on March 30, 1999), each director of the Company who was not a full-time employee was paid an annual director's fee of $24,000 plus $1,000 for each Board of Directors and Committee meeting attended. A nonemployee director who attended a meeting of a committee of which he was not a member was entitled to an attendance fee of $1,000. Each nonemployee director who served as a committee chairman received an additional $1,000 per year. Following the effectiveness of the Merger, each director of the Company who is not a full-time employee will be paid an annual director's fee of $35,000 plus $1,000 for each Board of Directors and Committee meeting attended. Each nonemployee director who serves as a committee chairman receives an additional $5,000 per year. Stock Options. The 1993 Nonemployee Directors Stock Option Plan (the "Directors Option Plan") provides for the grant of options to acquire Common Stock to each director who is not and never has been an employee of the Company (an "Eligible Director"). On the date of any annual meeting of shareholders prior to the termination of the Directors Option Plan, each Eligible Director who is continuing in office will automatically receive an option to purchase 6,000 shares of Common Stock at an exercise price equal to the fair market value of the Common Stock on the date of grant. In addition, each Eligible Director who is elected or appointed to the Board of Directors for the first time will receive on the date of such director's election or appointment an option to purchase 6,000 shares of Common Stock at an exercise price equal to the fair market value of the Common Stock on the date of grant. All outstanding options have terms of ten years and vest 20% per year over the initial five years of their terms. 8 10 If the 1999 Long-Term Incentive Plan is approved, option grants to directors under all other plans will be frozen and grants to directors will only be made from the 1999 Long-Term Incentive Plan. Under this plan, each director will receive an option to purchase 10,000 shares of Common Stock upon approval of the Plan with 50% immediately vested and the remaining 50% vested on the next annual meeting of shareholders of the Company. On the date of any annual meeting of shareholders of the Company, each director who is continuing in office will automatically receive an option to purchase 6,000 shares of Common Stock with one-third vested at each of the next three annual meeting dates. All options are granted at an exercise price equal to the fair market value of the Common Stock on the date of grant and have terms of ten years. See "Proposal to Adopt the Ocean Energy, Inc. 1999 Long-Term Incentive Plan." If the 1999 Long-Term Incentive Plan is not approved, each nonemployee director will receive an option to purchase 6,000 shares of Common Stock pursuant to the Directors' Option Plan and an option to purchase 3,000 shares of Common Stock pursuant to the 1998 Long-Term Incentive Plan (the "1998 Plan"). Under the 1998 Plan, each non-employee director is awarded, at the time of election or reelection as a director, options to purchase 3,000 shares of Common Stock at the fair market value on the date of such grant, if available. Each director in office immediately following each annual meeting of stockholders, not otherwise entitled to receive an option pursuant to the discretionary provisions of the 1998 Plan, receives options to purchase 3,000 shares of Common Stock. Deferred Fee Plan. The Company has an Outside Directors Deferred Fee Plan (the "Deferred Fee Plan"), a non-qualified deferred compensation plan. In addition, all directors who are not employees of the Company ("Outside Directors") may elect to defer all or a portion of their directors' fees under the Deferred Fee Plan. Prior to the effectiveness of the Merger, the Deferred Fee Plan required deferral of one-half of the annual retainer fee for Outside Directors to be automatically deferred into "phantom stock" units. These phantom stock units have the same value as Common Stock, and increase or decrease in value to the full extent of any increase or decrease in the value of Common Stock and receive credit for any cash or stock dividends paid with respect to Common Stock. Following the effectiveness of the Merger, Outside Directors are permitted to make quarterly elections regarding the method of income crediting for these deferrals, which may be credited either based upon "phantom stock" units or with interest equivalents based upon the prime rate of interest as published in The Wall Street Journal on the last day of the quarter, plus a bonus rate of interest of up to 2% depending on the number of years the Outside Director has served on the Board. All "phantom stock" units credited to Outside Directors' accounts must remain so credited until distribution or, if distribution is to be in a form other than lump sum, the effective date of a final income crediting election made after Board of Directors membership has ceased. Distributions under the Deferred Fee Plan can be made only in cash. As of April 26, 1999, all Outside Directors except Messrs. Brock, Mitchell and Newbigging were participants in the Deferred Fee Plan. CERTAIN TRANSACTIONS Simultaneously with OEI's acquisition of its Main Pass 69, South Pass 24 and South Pass 27 fields, and in consideration of its efforts in consummating the acquisition of such fields, Sable 9 11 Minerals, Inc. ("Sable"),was granted a non-cost bearing overriding royalty averaging 0.9% net revenue interest in the fields by the owner of a minority interest in such fields. Sable is a corporation owned by James C. Flores as a holding company with other Flores family oil and gas, security and ranching assets. The royalty interest was reserved out of and burdens only such minority interest, which was acquired by OEI in December 1994. During 1998, $837,277 was paid to Sable with respect to such interest. During 1998, OEI paid the father of Mr. Flores $134,823 for various geological consulting services. During 1998, the Company retained the law firm of Vinson & Elkins L.L.P., of which Mr. Attwell, a director of the Company, is of counsel, to perform various legal services for the Company. Vinson & Elkins L.L.P. has been retained to perform similar services in 1999. During 1998, the Company retained the law firm of Moyers, Martin, Santee, Imel & Tetrick ("Moyers, Martin"), of Tulsa, Oklahoma, with respect to matters of Oklahoma law. Moyers, Martin has been retained to perform similar services with respect to matters of Oklahoma law in 1999. Mr. D. Stanley Tacker, Mr. Galt's son-in-law, is a partner in Moyers, Martin. Mr. Galt was a Director of the Company during 1998. During 1998, three executive officers received loans from the Company to exercise stock options as follows:
Amount of Loan Outstanding as of Name April 26, 1999 Maturity Date Interest Rate ---- -------------- ------------- ------------- Barry J. Galt..................... $1,409,040 5/31/2002 6.5% William L. Transier............... $ 384,948 12/17/2002 4.8% John D. Schiller, Jr.............. $ 486,220 12/17/2002 4.8%
During 1998, no payments of principal or interest were made. The loan to Mr. Galt was made pursuant to his employment and consulting agreement to allow for the exercise of 192,000 options. The loans to Mr. Transier and Mr. Schiller were made to allow for the exercise of 60,982 and 77,025 stock options, respectively, pursuant to the Company's Equity Ownership Program. Each of these loans is secured by the shares of Common Stock acquired upon exercise of the stock options described above. SECTION 16 COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 requires the Company's officers, directors and persons who own more than 10% of the Common Stock to file reports of ownership and changes in ownership concerning the Common Stock with the SEC and to furnish the Company with copies of all Section 16(a) forms they file. Based upon the Company's review of the Section 16(a) filings that have been received by the Company, the Company believes that all filings required to be made under Section 16(a) during 1998 were timely made, except that 10 12 certain exercises of options to purchase Common Stock were inadvertently not reported on the Form 4 filed in January 1999 by John D. Schiller, Jr. and William L. Transier. The Form 4 for both of these individuals was promptly amended to reflect the ownership of these shares of Common Stock. EXECUTIVE COMPENSATION The following table sets forth the annual and long-term compensation for services in all capacities to the Company for the fiscal years ended December 31, 1996, 1997 and 1998, of those persons who were, at December 31, 1998, the Chief Executive Officer and the other four most highly compensated executive officers of the Company (the "Named Officers"): SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ANNUAL ------------------------- COMPENSATION AWARDS ---------------------------------------------------- ------------------------- OTHER RESTRICTED SECURITIES ANNUAL STOCK UNDERLYING ALL OTHER BONUS COMPENSATION AWARD(S) OPTIONS/SARS COMPENSATION NAME & PRINCIPAL POSITION YEAR SALARY($) ($) ($)(1) ($)(2) (#)(3) ($)(4) - -------------------------------- ----- ------------- ---------- ------------ --------- ------------ ------------ James T. Hackett (5) ........... 1998 $ 875(6) $ 500,000 $ -- $ 677,922 391,996 $ 22,015(7) President and Chief 1997 $ -- $ -- $ -- $ -- -- $ -- Executive Officer 1996 $ -- $ -- $ -- $ -- -- $ -- Barry J. Galt (8) .............. 1998 $ 590,000 $ 295,000 $ -- $ -- 250,000 $1,908,493(9) Vice Chairman of the Board 1997 $ 550,000 $ 300,000 $ 51,573 $ -- 100,000 $ 85,592(9) 1996 $ 516,000 $ 290,440 $ 51,229 $ -- 100,000 $ 73,600(9) William L. Transier (10) ....... 1998 $ 290,500 $ 300,000 $ -- $ 554,186 130,982 $ 53,586 Executive Vice President 1997 $ 260,000 $ 120,000 $ -- $ -- 40,000 $ 32,972 and Chief Financial Officer 1996 $ 168,561 $ 72,000 $ -- $ 71,250 90,000 $ 18,958 Richard F. Barnes .............. 1998 $ 275,000 $ 40,000 $ -- $ 51,133 15,000 $ 9,600 President, 1997 $ 262,000 $ 36,000 $ -- $ -- 14,000 $ 9,600 ENSTAR Alaska 1996 $ 250,000 $ 36,000 $ -- $ -- 15,000 $ 11,000 Gerald R. Colley (11) .......... 1998 $ 242,000 $ 24,036 $ -- $ 149,986 44,000 $ 45,583 Senior Vice President, 1997 $ 210,000 $ 88,000 $ -- $ -- 47,500 $ 24,722 International Exploration 1996 $ 163,000 $ 91,400 $ -- $ -- 37,400 $ 9,000 and Production
(1) Includes "Perquisites and Other Personal Benefits" if value is greater than the lesser of $50,000 or 10% of reported salary and bonus. Mr. Galt's personal use of company car amounted to $20,750 in each 1997 and 1996 and club usage amounted to $30,823 and $30,479 in 1997 and 1996, respectively. (2) The restricted stock included in the table represents the fair market value of the entire restricted stock award on the date of grant. The Company does not currently pay dividends on Common Stock; however, it would pay dividends on the restricted stock should the Company change its dividend policy. The following is the market value of the restricted stock held by the Named Officers at December 31, 1998: Mr. Hackett -- 33,004 shares, $208,338, Mr. Transier -- 47,417 shares, $299,320, Mr. Barnes -- 4,375 shares, $27,617, and Mr. Colley -- 12,833 shares, $81,008. Twenty-five thousand (25,000) shares of the restricted stock granted to Mr. Hackett became fully vested at December 31, 1998. All other restricted stock was scheduled to have vested on various dates through September 16, 2001. However, as a result of the Merger, all remaining restricted stock became fully vested in March 1999. (3) No grants of stock appreciation rights have been made. (4) All amounts reported under "All Other Compensation," except for Mr. Galt, represent contributions by the Company to defined contribution plans. (5) Mr. Hackett was elected President and Chief Executive Officer of the Company on September 16, 1998. (6) Under Mr. Hackett's employment agreement, Mr. Hackett receives his annual compensation of $500,000 for 1998 and 1999 in the form of stock options. During 1998, Mr. Hackett received an option to purchase 200,000 shares of Common Stock in 11 13 lieu of his salary through December 31, 1999. The terms of the options are discussed in "Option/SAR Grants in Last Fiscal Year." (7) Includes annual premium payments paid by the Company for Mr. Hackett's Flexible Premium Adjustable Life Insurance policy of $1,390 for 1998. The remaining amounts represent contributions by the Company to the Company's defined contribution plans. (8) Mr. Galt resigned as Vice Chairman upon the effective date of the Merger. (9) Includes a cash payment of $1.8 million in 1998 received upon entering a new employment contract and annual premium payments paid by the Company for Mr. Galt's Flexible Premium Adjustable Life Insurance policy of $5,490, $4,770 and $4,190 for the years 1998, 1997 and 1996, respectively. The remaining amounts represent contributions by the Company to the Company's defined contribution plans. (10) Mr. Transier became an employee and executive officer of the Company on May 14, 1996. (11) Mr. Colley resigned as an executive officer of the Company in March 1999. Under the rules of the SEC, the Summary Compensation Table requires disclosure of the compensation relating to the Chief Executive Officer and the four other most highly compensated persons who served as executive officers of the Company (i.e., Seagull) as of December 31, 1998. As a result of the Merger, the management teams of Seagull and OEI were combined. Set forth below, as of March 31, 1999, are the Chief Executive Officer and the other four most highly compensated executive officers of the post-Merger Company (based on projected salary):
Projected 1999 Annual Salary -------------- James C. Flores, Chairman of the Board ..................... $ 600,000 James T. Hackett, President and Chief Executive Officer .... $ 600,000(1) James L. Dunlap, Vice Chairman of the Board ................ $ 350,000 William L. Transier, Executive Vice President and Chief Financial Officer ........................... $ 350,000 Robert K. Reeves, Executive Vice President, General Counsel and Secretary ......................... $ 350,000
(1) As discussed in the "Compensation Committee Report on Executive Compensation, Mr. Hackett received an option to purchase 200,000 shares of Common Stock in lieu of his 1998 and 1999 base salary of $500,000 per year. At its March 29, 1999 meeting, the Compensation Committee increased Mr. Hackett's salary to $600,000 per year. The additional base salary in 1999 will be deferred under the Supplemental Benefit Plan. COMPENSATION ARRANGEMENTS Employment Agreements. Barry J. Galt entered into an employment and consulting agreement with the Company effective August 24, 1998. This agreement replaced the employment agreement Mr. Galt entered into with the Company in December 1983. The agreement terminates on May 31, 2002, although some events may cause it to be terminated earlier. James T. Hackett entered into a three-year employment agreement with the Company effective September 16, 1998. The term of Mr. Hackett's employment agreement will be extended automatically for an additional year on each anniversary of the employment agreement, unless terminated prior to such renewal by either Mr. Hackett or the Company. Consequently, the remaining term of Mr. Hackett's employment agreement will always range from two to three 12 14 years. However, if the Company terminates Mr. Hackett's employment because of gross negligence or willful misconduct in the performance of his duties, a felony or misdemeanor conviction involving moral turpitude or because of Mr. Hackett's breach of his employment agreement, the employment agreement will terminate. Similarly, if Mr. Hackett voluntarily terminates his employment for reasons other than the Company's breach of the agreement, his failure to be re-elected to the positions specified in the employment agreement, including as a director, the assignment of duties materially inconsistent with his position, or the relocation of the principal place of his employment by more than 50 miles, the employment agreement will terminate. The employment agreement provided for Mr. Hackett to serve as the Company's President and Chief Executive Officer and as a member of the Company's Board of Directors beginning September 16, 1998. The employment agreement includes noncompetition provisions that apply while Mr. Hackett is employed by the Company and for two years following a termination of Mr. Hackett's employment by reason of disability or, in the event of a voluntary termination by Mr. Hackett prior to September 16, 2000. Executive Severance Agreements. Messrs. Hackett, Galt, Transier, Barnes and Colley have entered into agreements with the Company (the "Agreements") that provide certain severance benefits in the event their employment is subject to an involuntary termination (as defined therein) within two years following a change of control (as defined therein) of the Company. The merger with OEI is deemed a change in control. The initial term of the Agreements is two years. This term may be extended for successive two-year terms following the initial term; however, if a change of control occurs during the term of the Agreements, the Agreements cannot terminate until two years after the change of control. The Agreements generally provide for (a) the payment of 2.99 times the sum of annual salary and targeted incentive bonus at the time of the change of control or the involuntary termination, whichever is greater, and, where applicable, reduced by the present value of any salary continuation, bonus or severance payments payable under any other Company plan, policy or agreement, other than a plan within the meaning of section 3(3) of the Employee Retirement Income Security Act of 1974, as amended, (b) the payment of the remaining portion of prior year's incentive bonus and, if the involuntary termination occurs after an incentive bonus is earned but before it is paid, targeted incentive bonus, (c) the continuation of health and insurance benefit coverage at active employee cost for up to thirty-six months, and (d) outplacement services up to a maximum cost of $6,000. Additionally, the severance agreements provide that if any payments to an executive by the Company would be subject to any excise tax imposed by section 4999 of the Code, a "gross-up" payment will be made to place such executive in the same net after-tax position as would have been the case if no excise tax had been imposed. 13 15 AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION/SAR VALUES The following is information with respect to the unexercised Options to purchase Common Stock under the Company's stock option plans granted to the Named Officers and held by them at December 31, 1998.
NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED OPTIONS/SARS AT IN-THE-MONEY OPTIONS/SARS AT SHARES DECEMBER 31, 1998 (#) DECEMBER 31, 1998($)(1) ACQUIRED ------------------------------- -------------------------------- ON VALUE EXERCISE REALIZED (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ------------ ------------ --------------- --------------- -------------- ---------------- James T. Hackett...... -- $ -- 200,000 191,996 $ -- $ -- Barry J. Galt......... 192,000 $ 480,000 603,000 495,000 $ -- $ -- William L. Transier... 60,982 $ -- 55,000 145,000 $ -- $ -- Richard F. Barnes..... 4,020 $ 25,376 95,400 51,600 $ -- $ -- Gerald R. Colley...... -- $ -- 40,475 88,425 $ -- $ --
(1) Value based on the closing price on the NYSE Composite Tape for Common Stock on December 31, 1998 ($6.3125 per share). OPTION/SAR GRANTS IN LAST FISCAL YEAR The following is information with respect to grants of Options in fiscal 1998 pursuant to the Company's stock option plans to the Named Officers reflected in the Summary Compensation Table on page 11. No stock appreciation rights were granted under those plans in fiscal 1998.
INDIVIDUAL GRANTS -------------------------------------------------------------- POTENTIAL REALIZABLE VALUE AT NUMBER OF PERCENT OF ASSUMED ANNUAL RATES OF STOCK SECURITIES TOTAL PRICE APPRECIATION FOR OPTION UNDERLYING OPTIONS/SARS TERM (2) OPTIONS/SARS GRANTED TO EXERCISE OR --------------------------------- GRANTED EMPLOYEES IN BASE PRICE EXPIRATION (#)(1) FISCAL YEAR ($/SH) DATE 5% 10% ---------------- ---------------- ------------ ------------ --------------- ---------------- James T. Hackett...... 391,996 14.8% $ 11.6875 9/16/2008 $ 2,881,251 $ 7,301,657 Barry J. Galt......... 150,000 5.6% $ 16.50 7/15/2008 $ 1,556,514 $ 3,944,513 100,000 3.8% $ 12.6875 5/31/2004 $ 412,512 $ 930,154 William L. Transier... 70,000 2.6% $ 16.50 7/15/2008 $ 726,373 $ 1,840,773 60,982 2.3% $ 6.3125 12/18/1998 $ -- $ -- (3) Richard F. Barnes..... 15,000 0.6% $ 16.50 7/15/2008 $ 155,651 $ 394,451 Gerald R. Colley...... 44,000 1.6% $ 16.50 7/15/2008 $ 456,578 $ 1,157,057
(1) All options were granted to the Named Officers on July 15, 1998, except for the following: (i) 391,996 options were granted to Mr. Hackett on September 16, 1998, 100,000 options were granted to Mr. Galt on August 24, 1998 and 60,982 options were granted to Mr. Transier on December 17, 1998. The exercise price per share is equal to the closing price of Common Stock on the NYSE Composite Tape on the date of grant. Initially, all options granted, other than those granted to Mr. Hackett and 60,982 granted to Mr. Transier, would have vested in four equal annual increments beginning one year from date of grant. However, upon the completion of the Merger in March 1999, all options were immediately vested. The options granted to Mr. Hackett and the 60,982 options granted to Mr. Transier were fully vested upon the grant date. (2) The dollar amounts under these columns represent the potential realizable value of each grant of Options assuming that the market price of Common Stock appreciates in value from the date of grant at the 5% and 10% annual rates of return 14 16 prescribed by the SEC. These calculations are not intended to forecast possible future appreciation, if any, of the price of Common Stock. (3) Mr. Transier was granted options to acquire 60,982 shares of Common Stock pursuant to the Company's Equity Ownership Program. These options had a term of one day and were fully exercised by Mr. Transier on the date of grant. See "Compensation Committee Report on Executive Compensation" below for additional information with respect to the Equity Ownership Program. COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION The Company's executive compensation program is designed to help the Company attract, motivate and retain the talent that the Company needs in order to maximize its return to shareholders. The fundamental philosophy is to relate the amount of compensation "at risk" for an executive directly to his or her contribution to the Company's success in achieving superior performance objectives. The Company's executive compensation program, as structured and implemented by the Compensation Committee (the "Committee"), consists of three main components: (1) base salary; (2) potential for an annual bonus based on overall Company performance as well as individual performance; and (3) the opportunity to earn long-term stock-based incentives that are intended to encourage the achievement of superior results over time and to align executive and shareholder interests. The compensation program is structured to provide executives with a total compensation package that -- at expected levels of performance -- is competitive with those provided to executives who hold comparable positions or have similar qualifications in other similarly situated organizations. A peer group of companies (the "Peer Group") substantially similar to the peer group named under the heading "Shareholder Return Performance Presentation" is the only group of companies specifically utilized by the Committee in evaluating executive compensation levels of the Company's executive officers; however, the Committee receives advice regarding compensation levels from the compensation and benefits practice of William M. Mercer, Incorporated ("Mercer"), an outside compensation consulting firm, which utilizes a number of other sources, including information from other companies depending upon the job content of the executive officer whose salary is being reviewed. Base Salary Program. The Company's base salary program is designed to provide base salaries for executives that approximate the 50th percentile of those provided by other companies in the Peer Group. The base salaries for the Company's executives are generally targeted by the Committee to fall at the 50th percentile for the Peer Group, although salaries for certain key managers may be above the 50th percentile. The Committee believes that the Company's ability to provide salaries that are competitive with market alternatives, which vary depending upon the nature and level of the position in question, is critical to attracting and maintaining talented executives. The Committee reviews information obtained from proxy statements, special surveys and other sources and employs the services of Mercer to analyze the competitive level of executive compensation. Based upon this review, the Committee believes that the percentile target described above has been met. The Committee reviews and adjusts executive base salaries annually based on each individual employee's performance over time, general competitive market salary levels and the Company's market capitalization and cash flow generated from operations. No specific weight or emphasis is placed on any one of these factors. 15 17 Grant of Options in Lieu of Mr. Hackett's Salary. Under the terms of his original employment agreement with the Company, Mr. Hackett's base salary was set at $500,000 per year. However, in order to align his compensation more closely with the interests of the shareholders, Mr. Hackett agreed upon commencement of his employment to receive an option to purchase 200,000 shares of Common Stock in lieu of his 1998 and 1999 salary. Mr. Hackett's salary is subject to review by the Committee for possible increases each year. At its March 29, 1999 meeting, the Committee increased Mr. Hackett's salary to $600,000 per year. The additional base salary in 1999 will be deferred under the Supplemental Benefit Plan. Short-Term Incentive Compensation. The impact of the Committee's linking compensation to performance can also be illustrated by the operation of the Company's Executive Incentive Plan for 1998 (the "1998 Plan"). Under the Company's Executive Incentive Plan, the Committee grants annual cash incentive awards that are dependent upon the Company's achievement of previously established objectives for the fiscal year and an evaluation of each individual participant's contributions to those achievements. Targeted awards are intended by the Committee to approximate the 55th to 60th percentile for the Peer Group. The Committee utilizes data obtained from Mercer to determine the targeted annual incentive award levels for plan eligible positions. Annual incentive award targets are expressed as a percentage of total salary earned during a given year ranging from 15% to 60%. Annual incentive award payments can increase to a maximum of two times the targeted percentage or decrease to zero for any year, based upon the achievement of predetermined objective and subjective performance goals. The 1998 Plan contained both objective and subjective performance criteria. Each of the four objective components is measured independently. The objective components are: (i) pre-tax cash flow from operations compared to the Company's Operating Plan (20% of the total award target); (ii) reserve additions (15% of the total award target); (iii) production replacement costs (15% of the total award target); and the Company's stock performance in relation to Peer Group companies (10% of the total award target). The pre-tax cash flow from operations ("PCFO") calculation, reserve additions calculation and production replacement cost calculation were based on the Company's 1998 actual earnings and operating results. Because the Company did not meet its PCFO, reserve additions or production replacement costs targets, no awards were paid for these performance measures. The Company stock performance assessment is based on the Company's ranking with the Peer Group companies based on the (i) percentage change in the average daily stock price for the year ended December 31, 1998 over the year ended December 31, 1997 and (ii) the percentage change in the closing stock price for December 31, 1998 versus December 31, 1997. The Company ranked in the 32nd percentile in the Company stock performance assessment resulting in an award of 18.7% of the Company stock performance assessment target or 1.87% of the total target. As indicated above, the remaining 40% of the award is the subjective portion which is based upon the individual's contribution to the Company's annual success in his or her area of 16 18 responsibility, measured by both quantitative and qualitative factors. No specific formula is utilized for weighing individual performance. Under the 1998 Plan, the cash awards for individual performance averaged 21% of the targeted amount for this component. As a result of his individual performance in positioning the Company for longer term strategic successes, the Committee awarded Mr. Hackett a bonus award under the 1998 Plan of $300,000, which is 100% of his 60% target. At its March 29, 1999 meeting, the Committee awarded Mr. Hackett a discretionary bonus award of $200,000 in recognition of his efforts in bringing the Merger between Seagull and OEI to fruition. Long-Term Incentive Compensation. The Company currently grants long-term incentive compensation in the form of stock options. The Committee emphasizes incentive compensation in the form of stock options because they tend to align the interests of employees and shareholders by rewarding performance that increases shareholder value. Option holders will only recognize value when the stock price increases over the exercise price established on the date of grant. The Committee does not utilize the number of options or shares held by any individual as a factor to limit option grants to that individual in subsequent years. The Committee establishes the overall level of stock options by considering the stock option grant levels of companies included in the Peer Group. Stock option awards by the Company are targeted by the Committee to fall at or above the 65th percentile among the Peer Group. The Committee bases individual option grants on individual performance and level of responsibility of the optionee. All outstanding options have terms of ten years. All options granted in 1996 through 1998 would vest in four equal annual installments beginning one year from the date of grant. All options have been granted at 100% of the market value of the Common Stock on the date of grant. The exercise price is payable in cash, shares of Common Stock, or any combination thereof. The Company's philosophy is to provide stock option awards at or above the 65th percentile. In accordance with his employment agreement, on September 16, 1998, Mr. Hackett was granted a nonqualified stock option covering 200,000 shares in lieu of his base salary for the period beginning September 16, 1998 and ending December 31, 1999. This option was fully vested on the grant date. Mr. Hackett was also granted an incentive stock option covering 34,224 shares, a nonqualified stock option covering 157,772 shares and a restricted stock grant covering 58,004 shares. Each of these grants was made on September 16, 1998, Mr. Hackett's date of employment. The stock options have an exercise price of $11.6875, which was the fair market value on the date of grant. The stock options were scheduled to vest in 25% increments on the first four anniversaries of his date of employment. The options will not produce gain for Mr. Hackett unless the Company's share price rises over the exercise price established on the date of grant and therefore emphasize pay-for-performance in the form of enhanced shareholder value. Twenty-five thousand (25,000) shares of the restricted stock vested on December 31, 1998, with the remainder scheduled to vest in 33 1/3 increments on the first three anniversaries of his date of employment. Also in accordance with Mr. Hackett's employment 17 19 agreement, he was granted a restricted stock grant covering 241,996 shares on January 1, 1999. This grant was scheduled to vest in 33 1/3 increments on the first three anniversaries of his date of employment. However, as a result of the Merger, all remaining restricted stock and stock options became fully vested in March 1999. The Committee periodically reviews the Company's executive compensation package to ensure that the Company provides an appropriate mix of base salary and short-term and long-term compensation opportunities that are competitive with market alternatives. The Company intends to reevaluate its total compensation strategy during 1999 in view of the Merger between the Company and OEI. Equity Ownership Program. In furtherance of the Committee's desire that the compensation of the Company's executives be "at risk" and therefore aligned with the interests of shareholders, the Committee also implemented an equity ownership program (the "Equity Ownership Program"). Under the terms of the Equity Ownership Program, each member of the Company's Management Committee was required to own Common Stock having a value equal to a specified multiple of his or her annual salary. The requisite multiples ranged from [___] times annual salary for Mr. Hackett to [____] times annual salary for certain other executive officers. In order to facilitate compliance with the Equity Ownership Program by its executive officers, the Company granted one-day stock options to Mr. Transier and Mr. Schiller, which were exercised on the date of grant. As required under the applicable stock option plans, the exercise price of these options was the fair market value of the Common Stock on the date of grant. The Company extended loans to Mr. Transier and Mr. Schiller in order to fund the exercise. Section 162(m). Section 162(m) of the Code, which was enacted in 1993, precludes a public corporation from taking a deduction in 1994 or subsequent taxable years for compensation in excess of $1 million paid to its chief executive officer or any of its four other highest-paid officers. However, compensation that qualified under Section 162(m) of the Code as "performance-based" is specifically exempt from the deduction limit. The Committee has been advised that the Company's ability to deduct compensation income generated in connection with the exercise of stock options granted under the Company's stock option plans should not be limited by Section 162(m) of the Code. During 1999, no executive of the Company is expected to receive compensation that is subject to the limitation of Section 162(m) in excess of $1 million. 18 20 Compensation Committee Elvis L. Mason, Chairman (Member since March 1999) Milton Carroll (Member since ) Thomas D. Clark, Jr. (Member since March 1999) Thomas H. Cruikshank (Member until his resignation from Board in March 1999) Peter J. Fluor (Member until his appointment as Chairman of the Executive Committee in March 1999) Charles F. Mitchell (Member since March 1999) Dee S. Osborne (Member until his appointment as Chairman of the Audit Committee in March 1999) Sam F. Segnar (Member until his resignation from Board in March 1999) R. A. Walker (Member since March 1999) SHAREHOLDER RETURN PERFORMANCE PRESENTATION The performance graph shown below was prepared by using data from the Standard and Poor's Compustat Database for use in this Proxy Statement. As required by applicable rules of the SEC, the graph was prepared based upon the following assumptions: 1. $100 was invested in Common Stock, Peer Group (as defined below) and the S&P 500 on December 31, 1993. 2. Peer Group investment is weighted based on the market capitalization of each individual company within the Peer Group at the beginning of each year. 3. Dividends are reinvested on the ex-dividend dates. The industry peer group is comprised of the following: Anadarko Petroleum Corporation, Apache Corporation, Burlington Resources Inc., Enron Oil & Gas Company, EEX Corporation, Equitable Resources, Inc., Noble Affiliates, Inc., Nuevo Energy Company, Oryx Energy Company, Pioneer Natural Resources Company, Pogo Producing Company, Santa Fe Energy Resources, Inc., Union Pacific Resources Group Inc. and Vastar Resources, Inc. 19 21 OCEAN ENERGY, INC. COMPARATIVE TOTAL RETURNS DECEMBER 1993-DECEMBER 1998 COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN AMONG THE COMPANY, PEER GROUP AND S&P 500 INDEX
12/31/93 12/31/94 12/31/95 12/31/96 12/31/97 12/31/98 -------- -------- -------- -------- -------- -------- The Company......... $100.00 $ 75.37 $ 87.68 $ 86.70 $ 81.28 $ 24.88 Peer Group.......... $100.00 $ 87.84 $109.44 $136.76 $122.97 $ 86.97 S&P 500............. $100.00 $101.32 $139.40 $171.41 $228.59 $293.92
EXECUTIVE SUPPLEMENTAL RETIREMENT PLAN The Company has an Executive Supplemental Retirement Plan (the "Retirement Plan") in which James. T. Hackett and Barry J. Galt participate. The Retirement Plan was established to provide supplemental retirement benefits for those employees who are designated by the Compensation Committee as participants and who complete the required period of employment with the Company. Benefits under the Retirement Plan constitute unfunded, unsecured obligations of the Company. The Retirement Plan provides a benefit for the surviving spouse of a participant who dies before retirement with a vested benefit. Subject to specified vesting requirements, a participant is entitled to receive commencing upon termination of his or her employment by the Company or upon his or her normal retirement date, whichever is later, a pension equal to the applicable percentage of average monthly compensation less 50% of his or her social security benefit. Mr. Hackett is 50% vested in his benefit under the Retirement Plan. Mr. Galt is fully vested in his benefit under the Retirement Plan. For Mr. Hackett, the applicable percentage is 50%, and the average monthly base salary is determined based on the last three consecutive calendar years of employment with the Company. For Mr. Galt, the applicable percentage is 50% and his average monthly compensation (which does not include bonuses) is determined based on the last three consecutive calender years of employment with the Company. Based upon the average of Mr. Hackett's deemed annual salary for 1998 ($500,000) and bonus for 1998 ($300,000), the estimated annual benefit for Mr. Hackett is $199,603 with such payment continuing to the survivor for life upon the death of either Mr. Hackett or his spouse. Based upon the average of Mr. Galt's annual salary for 1998 ($590,000), the estimated annual benefit for Mr. Galt is $267,846 with such payment continuing to the survivor for life upon the death of either Mr. Galt or his spouse. Pursuant to his employment and consulting agreement, the Company will establish a "rabbi" trust and contribute the actuarial present value of Mr. Galt's accrued benefits under the Retirement Plan to the trust prior to May 31, 1999. 20 22 ENSTAR NATURAL GAS COMPANY SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN Richard F. Barnes is the only Named Officer eligible to participate in the ENSTAR Natural Gas Company Supplemental Executive Retirement Plan (the "ENSTAR SERP"). On November 7, 1994, the Board of Directors adopted the ENSTAR SERP to restore retirement benefits lost by certain employees under certain ENSTAR Natural Gas Company qualified plans, including the ENSTAR Retirement Plan, as a result of the limits on qualified plan compensation ($160,000 for 1999) under Section 401(a)(17) of the Code. Eligible employees become participants of the ENSTAR SERP upon designation by the Compensation Committee. Benefits under the ENSTAR SERP constitute unfunded, unsecured obligations of the Company. Subject to specified vesting requirements, a participant in the ENSTAR SERP (or his beneficiary or beneficiaries) is entitled to receive a lump sum benefit upon termination of employment. Mr. Barnes is fully vested in his benefit under the ENSTAR SERP. The ENSTAR SERP provides a supplemental retirement benefit equal to the excess, if any, of the present value of the benefit that would have been payable under the ENSTAR Retirement Plan if such participant's average monthly compensation was based on his "Plan Compensation" (without regard to the limitation on compensation under Section 401(a)(17) of the Code), over the present value of the benefit actually payable under the ENSTAR Retirement Plan. "Plan Compensation" is defined as 5/6ths of the sum of a participant's annual base salary as of January 1 of each year and any cash bonus paid during the year. Each present value is determined based on the UP-1984 Mortality Table and the Pension Benefit Guaranty Corporation interest rates in effect at the time of the participant's termination of employment. Based on Mr. Barnes' current compensation level of $328,750, the estimated supplemental retirement benefit for Mr. Barnes, assuming retirement at age 65 and an interest rate of 6%, is a lump sum payment of $376,200. ENSTAR NATURAL GAS COMPANY RETIREMENT PLAN Richard F. Barnes is the only Named Officer eligible to participate in the ENSTAR Natural Gas Company Retirement Plan for Salaried Employees (the "ENSTAR Retirement Plan"). The salaried employees of ENSTAR Natural Gas Company, a division of the Company, are eligible to participate in the ENSTAR Retirement Plan. Under the non-contributory plan, a participant who retires at or after the age of 65 with four years of plan participation is eligible for a monthly retirement benefit equal to 2% of the participant's average monthly compensation multiplied by his or her years of benefit service not to exceed ten full years, added to an amount equal to 1% of the participant's average monthly compensation multiplied by his or her years of benefit service exceeding ten full years. Benefits under the ENSTAR Retirement Plan are not subject to reduction because of social security benefits but are reduced by benefits payable under another defined benefit plan to the extent that there is a duplication of benefits for the same period of service. 21 23 The ENSTAR Retirement Plan provides that a participant's benefit will be determined pursuant to the above formula as of the date of termination of employment, but also provides that such benefit will be at least equal to (1) the participant's accrued benefit as of December 31, 1988 or if greater, (2) the sum of the participant's accrued benefit as of December 31, 1993 and his or her accrued benefit determined under the benefit formula applicable for plan years beginning on and after January 1, 1994 based on years of accrual service credited on and after January 1, 1994. A participant (or his or her beneficiary) may also be entitled to the foregoing benefit under the ENSTAR Retirement Plan if the participant terminates employment by reason of early retirement (i.e., after the participant has attained the age of 55 and completed five years of vesting service), by reason of total and permanent disability, by reason of death or if the participant terminates employment after the participant has attained at least five years of vesting service. The following table shows estimated annual benefits payable upon normal retirement at age 65 based on certain salary assumptions and years of service. PENSION PLAN TABLE*
YEARS OF SERVICE RANGE OF ---------------------------------------------------------- COMPENSATION 15 20 25 30 35 -------------- ---------- ---------- ---------- ---------- --------- $ 50,000...... $ 12,500 $15,000 $17,500 $20,000 $22,500 $ 75,000...... $ 18,750 $22,500 $26,250 $30,000 $33,750 $100,000...... $ 25,000 $30,000 $35,000 $40,000 $45,000 $125,000...... $ 31,250 $37,500 $43,750 $50,000 $56,250 $150,000...... $ 37,500 $45,000 $52,500 $60,000 $67,500 $160,000...... $ 40,000 $48,000 $56,000 $64,000 $72,000
* Effective January 1, 1994, Section 401(a)(17) of the Code limits qualified plan compensation to $150,000, as adjusted for changes in the cost of living. Effective January 1, 1997, the Section 401(a)(17) limitation was increased to $160,000. For purposes of determining the benefits shown above, plan compensation for all years of service has been limited in accordance with the current limits on qualified plan compensation under Section 401(a)(17) of the Code, without regard to any future adjustments to these limits that may result from changes in the cost of living. Furthermore, benefits accrued prior to the imposition of these limits in 1994 with respect to plan compensation in excess of $150,000 have been disregarded. The following table sets forth the estimated annual benefits payable under normal retirement at age 65, assuming current remuneration levels and participation until normal retirement at age 65, with respect to Mr. Barnes under the provisions of the ENSTAR Retirement Plan. 22 24
ESTIMATED CURRENT CREDITED CURRENT ESTIMATED CREDITED YEARS OF CURRENT COMPENSATION ANNUAL BENEFIT YEARS OF SERVICE COMPENSATION ADJUSTED FOR PLAN PAYABLE UPON SERVICE AT AGE 65 COVERED BY PLAN COMPENSATION LIMIT RETIREMENT -------- ----------- --------------- ------------------ -------------- Richard F. Barnes..... 32 42 $ 328,750 $ 160,000 $77,100*
* This benefit assumes the current limit on plan compensation, $160,000, will remain at $160,000 (with no inflationary adjustments). Mr. Barnes' service from 1967 through 1985 has been recognized under this plan and another retirement plan. Accordingly, his benefit under the ENSTAR Retirement Plan formula has been reduced by $24,657 per year, which is his accrued benefit under the other plan. PROPOSAL TO AMEND COMPANY'S ARTICLES OF INCORPORATION TO REDUCE THE NUMBER OF AUTHORIZED COMMON AND PREFERRED SHARES (Item 2 on Proxy Card) Change in Authorized Capital Stock. The Board of Directors of the Company has approved and recommends that the shareholders of the Company adopt an amendment to Article Four of the Company's Articles of Incorporation that would decrease the number of authorized shares of Common Stock from 450,000,000 to 230,000,000 and decrease the number of authorized shares of Convertible Preferred Stock from 50,000,000 to 10,000,000 (the "Amendment"). The Board of Directors has proposed the Amendment in response to certain concerns raised by Institutional Shareholder Services, a shareholder advisory firm, in connection with the increase in the Company's authorized capital stock pursuant to the terms of the Merger. Pursuant to the Amendment, the first paragraph of Article Four is proposed to be amended to read in its entirety as follows: The total number of shares of stock that the corporation shall have authority to issue is 240,000,000 shares, divided into 10,000,000 shares of Preferred Stock of the par value of $1.00 per share, and 230,000,000 shares of Common Stock of the par value of $.10 per share. Each share of Common Stock shall be entitled to one vote. Vote Required for Approval. Approval of the Amendment will require the affirmative vote of the holders of at least two-thirds of the outstanding shares of Common Stock and Convertible Preferred Stock entitled to vote. Under the Texas Business Corporation Act and the Company's Bylaws, an abstention or a broker non-vote would have the same legal effect as a vote against this proposal. THE BOARD OF DIRECTORS RECOMMENDS VOTING "FOR" THE AMENDMENT. 23 25 PROPOSAL TO ADOPT THE OCEAN ENERGY, INC. 1999 LONG-TERM INCENTIVE PLAN (Item 3 on Proxy Card) The Board of Directors has approved, subject to shareholder approval, the Company's 1999 Long-Term Incentive Plan (the "1999 Plan"). The following summary is qualified in its entirety by reference to the text of the 1999 Plan, which is attached as Annex A. The 1999 Plan is designed to consolidate the approximately 3,000,000 shares of the Company's common stock, par value $.10 per share ("Common Stock") that remain currently available for grant under the Company's existing shareholder-approved stock plans (the "Existing Plans"). Effective with the approval of the 1999 Plan, the Existing Plans will be "frozen" such that no further options or awards may be granted thereunder. If the 1999 Plan is not approved, the Existing Plans will remain in effect, and the Existing Plans will no longer qualify under section 162(m) of the Internal Revenue Code. The 1999 Plan is designed, in part, to consolidate the approximately 460,000 shares of Common Stock that remain available for grant under the Company's various stock plans that have previously been approved by shareholders of the Company or its predecessors. The number of additional shares authorized for awards under the 1999 Plan also takes into account that underwater options to purchase approximately ____ shares will lapse without having been exercised on January 1, 2000, assuming a stock price of $__ per share. GENERAL The Board believes that by providing employees and directors with an opportunity to acquire a proprietary interest in the Company and additional incentive and reward opportunities based on the profitable growth of the Company, the 1999 Plan will give employees and directors a stronger incentive to work for the continued success of the Company. The Board also believes that the 1999 Plan will aid the Company in attracting and retaining outstanding personnel. TYPES OF AWARDS The 1999 Plan provides for the granting of options (either incentive stock options within the meaning of Section 422(b) of the Internal Revenue Code of 1986, as amended (the "Code"), or nonqualified stock options), restricted stock awards, stock appreciation rights, performance awards, bonus shares, phantom shares, cash awards, or any combination thereof (collectively, "Awards"). As of April ___, 1999, the closing price of Common Stock on the New York Stock Exchange was $____ per share. EFFECTIVE DATE The 1999 Plan became effective on ____________, 1999, subject to shareholder approval. The 1999 Plan will remain in effect until all Awards granted under the 1999 Plan have been satisfied or expired, unless earlier terminated; provided, however, that no Awards may be granted under the 1999 Plan after the expiration of ten years from the adoption date by the Board. The Board may, however, terminate the 1999 Plan at any time without prejudice to the holders of any then outstanding Awards. 24 26 ADMINISTRATION The 1999 Plan will be administered by the Compensation Committee. The Compensation Committee has full authority, subject to the terms of the 1999 Plan, to establish rules and regulations for the proper administration of the 1999 Plan, to determine which participants will receive an Award (other than nonqualified stock options automatically granted to nonemployee directors of the Company ("nonemployee directors") under the 1999 Plan), the time or times when such Award will be made, the type of the Award and the number of shares of Common Stock to be issued under the Award or the value or amount of the Award. ELIGIBILITY All employees of the Company and its affiliates (including an employee who may also be a director of the Company) are eligible to receive Awards under the 1999 Plan. Further, nonemployee directors of the Company are eligible to receive certain automatic grants of nonqualified stock options under the 1999 Plan. As of ______________________, 1999, the Company and its subsidiaries had approximately ________ employees. NUMBER OF SHARES SUBJECT TO THE 1999 PLAN The aggregate number of shares that may be subject to Awards under the 1999 Plan is 3,000,000 shares of Common Stock. This limit may be adjusted by the Compensation Committee in its sole discretion in the event of stock dividends, stock splits and certain other events as specified in the 1999 Plan ("Adjustments"). During the term of the 1999 Plan, no employee may be granted Awards denominated in shares of Common Stock with respect to more than 33-1/3% of the shares of Common Stock that may be subject to Awards under the 1999 Plan. The maximum amount of compensation (including the fair market value of any shares of Common Stock) that may be paid to any employee with respect to a single performance award or cash award in any calendar year is $1.5 million. Further, the maximum payment with respect any restricted stock award, phantom stock award or cash award granted in tandem with, and expressed as a percentage of, an Award denominated in shares of Common Stock that is intended to qualify as "performance-based" compensation for purposes of Section 162(m) of the Code in any calendar year is an amount (in cash and/or in shares of Common Stock) equal to the fair market value of the number of shares of Common Stock subject to such Award. The limitations set forth in the preceding sentences will be applied in a manner which permits compensation generated in connection with the exercise of options, stock appreciation rights, performance awards, and, if determined by the Compensation Committee, restricted stock awards, phantom shares and cash awards to constitute "performance-based" compensation for purposes of Section 162(m) of the Code. Finally, restricted stock, performance awards, phantom shares and bonus shares paid in shares of Common Stock may not, in the aggregate, exceed 20% of all shares of Common Stock that may be subject to Awards under the 1999 Plan. If an Award lapses or the rights of a participant in an Award terminate, any shares of Common Stock subject to the Award will again be available for grant under the 1999 Plan. Any shares of Common Stock that remain unissued 25 27 and are not subject to outstanding Awards at the termination of the 1999 Plan will cease to be subject to the 1999 Plan. CORPORATE CHANGE The 1999 Plan provides that, upon a Change in Control (as defined therein), all outstanding Awards granted automatically become fully vested, any restrictions with respect to such Awards lapse and any performance goals with respect to such Awards are deemed to have been met in full (at the maximum performance level). ACQUISITIONS Options may be granted in substitution for options held by officers and employees of other corporations who are about to, or who have, become employees of the Company or an affiliate as a result of a merger, consolidation, acquisition of assets, or similar transaction by the Company or an affiliate. The terms, including the option price, of the substitute options so granted may vary from the terms set forth in the 1999 Plan to such extent as the Compensation Committee may deem appropriate to conform, in whole or in part, to the provisions of the options in substitution for which they are granted. AMENDMENTS The Board may from time to time amend the 1999 Plan; however, no amendment that modifies the class of eligible participants, modifies the eligibility requirements for Awards under the 1999 Plan, or increases the number of shares of Common Stock authorized or available under the 1999 Plan (subject to adjustments), may be adopted without the prior approval of the shareholders of the Company. FEDERAL INCOME TAX CONSEQUENCES Incentive Stock Options. Options that constitute incentive stock options within the meaning of Section 422(b) of the Code are subject to special federal income tax treatment. An employee who has been granted an incentive stock option will not realize taxable income at the time of the grant or exercise of such option, and the Company will not be entitled to a deduction at either such time, if the employee makes no disposition of shares acquired pursuant to such incentive stock option (a) within two years after the option was granted or (b) within one year after exercising such option (collectively, the "Holding Periods"). However, the employee must include the difference between the exercise price and the fair market value of the Common Stock on the date of exercise in alternative minimum taxable income. If the employee exercises an incentive stock option and disposes of the stock in the same year and the amount realized is less than the fair market value on the exercise date, only the difference between the amount realized and the adjusted basis of the stock will be included in alternative minimum taxable income. Upon disposition of the shares of Common Stock received upon exercise of an incentive stock option after the Holding Periods, the difference between the amount realized and the exercise 26 28 price should constitute a long-term capital gain or loss. Under such circumstances, however, the Company will not be entitled to any deduction for federal income tax purposes. If an employee disposes of shares acquired pursuant to the exercise of an incentive stock option prior to the end of the Holding Periods, the disposition would be treated as a disqualifying disposition. The employee will be treated as having received, at the time of disposition, compensation taxable as ordinary income equal to the excess of the fair market value of the shares at the time of exercise (or in the case of a sale in which a loss would be recognized, the amount realized on the sale, if less) over the exercise price and any amount realized in excess of the fair market value of the shares at the time of exercise would be treated as a short-term or long-term capital gain, depending on the holding period of the shares of Common Stock. In the event of a disqualifying disposition, and subject to the application of Section 162(m) of the Code as discussed below, the Company may claim a deduction for compensation paid at the same time and in the same amount as taxable compensation is treated as received by the employee. However, the Company will not be entitled to any deduction in connection with any loss to the employee or a portion of any gain that is taxable to the employee as short-term or long-term capital gain. Nonqualified Stock Options. Nonqualified stock options (options that are not incentive stock options within the meaning of Section 422(b) of the Code) will not qualify for special federal income tax treatment. As a general rule, no federal income tax is imposed on the optionee upon the grant of a nonqualified stock option and the Company is not entitled to a tax deduction by reason of such grant. Upon exercise of a nonqualified stock option, the optionee will realize ordinary income in an amount equal to the excess, if any, of the fair market value of the shares on the date of exercise over the option exercise price, and, subject to the application of Section 162(m) of the Code as discussed below, the Company will entitled to a corresponding deduction assuming any federal income tax reporting requirements are satisfied. Ordinary income realized upon the exercise of a nonqualified stock option is not an adjustment for alternative minimum tax purposes. In the case of an option holder subject to Section 16(b) of the Exchange Act, subject to certain exceptions, ordinary income will be recognized by the optionee (and, subject to the application of Section 162(m) of the Code, and assuming any federal income tax reporting requirements are satisfied, a deduction by the Company) upon the exercise of the nonqualified stock option if the exercise occurs more than six months after the date of grant of the nonqualified stock option. Upon a subsequent disposition of shares received upon exercise of a nonqualified stock option, the optionee will realize a short-term or long-term capital gain or loss to the extent of any intervening appreciation or depreciation. However, the Company will not be entitled to any further deduction at that time. Section 162(m) of the Code. Section 162(m) of the Code precludes a public corporation from taking a deduction for annual compensation in excess of $1 million paid to its chief executive officer or any of its four other highest-paid officers. However, compensation that qualifies under Section 162(m) of the Code as "performance-based" is specifically exempt from the deduction limit. Based on Section 162(m) of the Code and the regulations thereunder, the Company's ability to deduct compensation income generated in connection with the exercise of stock options or stock appreciation rights granted under the 1999 Plan should not be limited by Section 162(m) of the Code. Further, the Company believes that compensation income generated in connection with performance awards granted under the 1999 Plan should not be limited by 27 29 Section 162(m) of the Code. The 1999 Plan has been designed to provide flexibility with respect to whether restricted stock awards, phantom shares or certain cash awards will qualify as performance-based compensation under Section 162(m) of the Code and, therefore, be exempt from the deduction limit. If the forfeiture restrictions relating to a such awards are based solely upon the satisfaction of one of the performance goals set forth in the 1999 Plan, then the Company believes that the compensation expense relating to such an award will be deductible by the Company if the awards become vested. However, compensation expense deductions relating to such awards will be subject to the Section 162(m) deduction limitation if such awards become vested based upon any other criteria set forth in such award (such as the occurrence of a Change in Control or vesting based upon continued employment with the Company). Withholding. The Company has the right to deduct from any or all awards any taxes required by law to be withheld and to require any payments necessary to enable it to satisfy its withholding obligations The 1999 Plan is not qualified under section 401(a) of the Code. The comments set forth in the above paragraphs are only a summary of certain of the Federal income tax consequences relating to the 1999 Plan. No consideration has been given to the effects of state, local, or other tax laws on the 1999 Plan or award recipients. INAPPLICABILITY OF ERISA Based upon current law and published interpretations, the Company does not believe the 1999 Plan is subject to any of the provisions of the Employee Retirement Income Security Act of 1974, as amended. INITIAL GRANTS In March 1999, the Compensation Committee approved the grants of options to purchase an aggregate of 465,000 shares of Common Stock under the Company's various stock plans, including the 1999 Plan if approved by the shareholders. The grant of these options would be effective on the date of the Annual Meeting with an exercise price equal to the closing market price of the Company's common stock on that date to the following executive officers:
Number of Name of Executive Officer Options Granted ------------------------------------------------ ------------------ Named Officers: James T. Hackett............................. 100,000 William L. Transier.......................... 50,000 Richard F. Barnes............................ 25,000 Executive Officers as a Group................... 465,000 Non-Executive Director Group.................... 0 Non-Executive Officer Employee Group............ 0
28 30 BOARD RECOMMENDATION The affirmative vote of a majority of the shares of Common Stock and Convertible Preferred Stock represented at the Annual Meeting of Stockholders in person or by proxy and entitled to vote is required for approval of the 1999 Plan. Under the Texas Business Corporation Act and the Company's Bylaws, an abstention would have the same legal effect as a vote against this proposal, but a broker non-vote would not be counted for purposes of determining whether a majority had been achieved. Shareholder approval of the 1999 Plan is required for listing of the shares for trading on the New York Stock Exchange and as a condition to the effectiveness of the 1999 Stock Plan. In addition, approval of the 1999 Plan will serve to qualify certain transactions under the 1999 Plan for applicable exemptions pursuant to Rule 16b-3 under the Exchange Act. Rule 16b-3 provides an exemption from the operation of the "short-swing profit" recovery provisions of Section 16(b) of the Exchange Act with respect to acquisitions of stock options, transactions relating to certain stock appreciation rights, restricted stock awards and the use of already owned shares as payment for the exercise price of stock options. Shareholder approval is also required so that incentive stock options under the 1999 Plan will qualify under Section 422 of the Code and so that certain awards under the 1999 Plan will qualify as performance-based compensation under Section 162(m) of the Code. The Board believes that such approval is essential to enable the Company to continue to attract and retain key employees in an extremely competitive industry. THE BOARD OF DIRECTORS RECOMMENDS VOTING "FOR" THE 1999 PLAN. RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS (ITEM 4 ON PROXY CARD) The Board of Directors has appointed the firm of _______, as independent auditors of the Company for the fiscal year ending December 31, 1999, and recommends ratification by the shareholders of such appointment. Such ratification requires the affirmative vote of the holders of a majority of the shares of Common Stock and Convertible Preferred Stock present or represented by proxy and entitled to vote at the Annual Meeting. Under the Texas Business Corporation Act and the Company's Bylaws, an abstention would have the same legal effect as a vote against this proposal, but a broker non-vote would not be counted for purposes of determining whether a majority has been achieved. The persons named in the accompanying proxy intend to vote for ratification of such appointment unless instructed otherwise on the proxy. THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THIS PROPOSAL. 29 31 In the event the appointment is not ratified, the Board of Directors will consider the appointment of other independent auditors. The Board of Directors may terminate the appointment of _____ as the Company's independent auditors without the approval of the shareholders of the Company whenever the Board of Directors deems such termination necessary or appropriate. A representative of _______is expected to attend the Annual Meeting and will have the opportunity to make a statement, if such representative desires to do so, and will be available to respond to appropriate questions. SHAREHOLDER PROPOSALS AND DIRECTOR NOMINATIONS Shareholders may propose matters to be presented at shareholders' meetings and may also nominate persons to be directors. Formal procedures have been established for those proposals and nominations. PROPOSALS FOR 2000 ANNUAL MEETING Pursuant to various rules promulgated by the SEC, any proposals of holders of Common Stock intended to be presented to the annual meeting of shareholders of the Company to be held in 2000 (the "2000 Annual meeting") must be received by the Company, addressed to Robert K. Reeves, Corporate Secretary, 1001 Fannin, Suite 1600, Houston, Texas 77002, no later than December 31, 1999, to be included in the Company proxy statement and form of proxy relating to that meeting. With respect to business to be brought before the 2000 Annual Meeting, the Company has not received any notices from its shareholders. In addition to the SEC rules described in the preceding paragraph, the Company's bylaws provide that for business to be properly brought before the Company's annual meetings of shareholders, it must be either (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (b) otherwise brought before the meeting by or at the direction of the Board of Directors or (c) otherwise properly brought before the meeting by a shareholder of the Company who is a shareholder of record at the time of giving of notice hereinafter provided for, who shall be entitled to vote at such meeting and who complies with the following notice procedures. In addition to any other applicable requirements, for business to be brought before an annual meeting by a shareholder of the Company, the shareholder must have given timely notice in writing of the business to be brought before an annual meeting of shareholders of the Company to the Secretary of the Company. To be timely, a shareholder's notice must be delivered to or mailed and received at the Company's principal executive offices, 1001 Fannin, Suite 1600, Houston, Texas 77002, on or before February 25, 2000. If a shareholder fails to provide timely notice of a proposal to be presented at the 2000 Annual Meeting, the proxies designated by the Board of Directors of the Company will have discretionary authority to vote on any such proposal which may come before the meeting. A shareholder's notice to the Secretary shall set forth as to each matter the shareholder proposes to bring before the annual meeting (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, 30 32 (ii) the name and address, as they appear on the Company's books, of the shareholder proposing such business, (iii) the acquisition date, the class and the number of shares of Common Stock which are owned beneficially by the shareholder, (iv) any material interest of the shareholder in such business and (v) a representation that the shareholder intends to appear in person or by proxy at the meeting to bring the proposed business before the meeting. Notwithstanding the foregoing bylaw provisions, a shareholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in the foregoing bylaw provisions. Notwithstanding anything in the Company's bylaws to the contrary, no business shall be conducted at the annual meeting except in accordance with the procedures outlined above. NOMINATIONS FOR 2000 ANNUAL MEETING AND FOR ANY SPECIAL MEETINGS Only persons who are nominated in accordance with the following procedures will be eligible for election as directors. Nominations of persons for election to the Company's Board of Directors may be made at a meeting of shareholders (a) by or at the direction of the Board of Directors or (b) by any shareholder of the Company who is a shareholder of record at the time of giving of notice hereinafter provided for, who shall be entitled to vote for the election of directors at the meeting and who complies with the following notice procedures. Such nominations, other than those made by or at the direction of the Board of Directors, shall be made pursuant to timely notice in writing to the Secretary of the Company. To be timely, a shareholder's notice shall be delivered to or mailed and received at the Company's principal executive offices, 1001 Fannin, Suite 1600, Houston, Texas 77002 (i) with respect to an election to be held at the annual meeting of shareholders of the Company, on or before February 25, 2000 and (ii) with respect to an election to be held at a special meeting of shareholders of the Company for the election of Directors, not later than the close of business on the 10th day following the date on which notice of the date of the meeting was mailed or public disclosure of the date of the meeting was made, whichever first occurs. Such shareholder's notice to the Secretary shall set forth (a) as to each person whom the shareholder proposes to nominate for election or re-election as a director, all information relating to the person that is required to be disclosed in solicitations for proxies for election of directors, or is otherwise required, pursuant to Regulation 14A under the Exchange Act (including the written consent of such person to be named in the proxy statement as a nominee and to serve as a director if elected); and (b) as to the shareholder giving the notice, (i) the name and address, as they appear on the Company's books, of such shareholder, and (ii) the class and number of shares of capital stock of the Company which are beneficially owned by the shareholder. In the event a person is validly designated as a nominee to the Board and shall thereafter become unable or unwilling to stand for election to the Board of Directors, the Board of Directors or the shareholder who proposed such nominee, as the case may be, may designate a substitute nominee. Notwithstanding the foregoing bylaw provisions, a shareholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in the foregoing bylaw provisions. 31 33 OTHER MATTERS The Board of Directors does not know of any other matters that are to be presented for action at the Annual Meeting. However, if any other matters properly come before the Annual Meeting or any adjournment(s) or postponement(s) thereof, it is intended that the enclosed proxy will be voted in accordance with the judgment of the persons named in the proxy. By Order of the Board of Directors, /s/ ROBERT K. REEVES ROBERT K. REEVES Secretary April __, 1999 32 34 ANNEX A OCEAN ENERGY, INC. 1999 LONG-TERM INCENTIVE PLAN SECTION 1. Purpose of the Plan. The Ocean Energy, Inc. 1999 Long-Term Incentive Plan (the "Plan") is intended to promote the interests of Ocean Energy, Inc., a Texas corporation (the "Company"), by encouraging employees of the Company, its subsidiaries and affiliated entities and Directors (as defined below) to acquire or increase their equity interest in the Company and to provide a means whereby employees may develop a sense of proprietorship and personal involvement in the development and financial success of the Company, and to encourage them to remain with and devote their best efforts to the business of the Company thereby advancing the interests of the Company and its shareholders. The Plan is also contemplated to enhance the ability of the Company, its subsidiaries and affiliated entities to attract and retain the services of individuals who are essential for the growth and profitability of the Company. SECTION 2. Definitions. As used in the Plan, the following terms shall have the meanings set forth below: "Affiliate" shall mean (i) any entity that, directly or through one or more intermediaries, is controlled by the Company and (ii) any entity in which the Company has a significant equity interest, as determined by the Committee. "Award" shall mean any Option, Stock Appreciation Right, Restricted Stock, Performance Award, Phantom Shares, Bonus Shares or Cash Award. "Award Agreement" shall mean any written agreement, contract, or other instrument or document evidencing any Award, which may, but need not, be executed or acknowledged by a Participant. "Board" shall mean the Board of Directors of the Company. "Bonus Shares" shall mean an award of Shares granted pursuant to Section 6(e) of the Plan. "Cash Award" shall mean an award payable in cash granted pursuant to Section 6(g) of the Plan. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time, and the rules and regulations thereunder. 33 35 "Committee" shall mean the Compensation Committee of the Board, which shall be comprised solely of two or more Directors who are "outside directors" within the meaning of section 162(m) of the Code and "Non-Employee Directors" within the meaning of Rule 16b-3. "Director" shall mean a member of the Board who is not also an Employee. "Employee" shall mean any employee of the Company or an Affiliate. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. "Fair Market Value" shall mean, with respect to Shares, the closing price of a Share quoted on the New York Stock Exchange Composite Tape, or if the Shares are not listed on the New York Stock Exchange, on the principal United States securities exchange registered under the Exchange Act on which such stock is listed, or if the Shares are not listed on any such stock exchange, the last sale price, or if none is reported, the highest closing bid quotation on the National Association of Securities Dealers, Inc., Automated Quotations System or any successor system then in use on the Date of Grant, or if none are available on such day, on the next preceding day on which the Shares were publicly traded. In the event the Shares are not publicly traded at the time a determination of its fair market value is required to be made hereunder, the determination of fair market value shall be made in good faith by the Committee. "Incentive Stock Option" or "ISO" shall mean an option granted under Section 6(a) of the Plan that is intended to qualify as an "incentive stock option" under Section 422 of the Code or any successor provision thereto. "Non-Qualified Stock Option" or "NQO" shall mean an option granted under Sections 6(a) or 6(h) of the Plan that is not intended to be an Incentive Stock Option. "Option" shall mean an Incentive Stock Option or a Non-Qualified Stock Option. "Participant" shall mean any individual granted an Award under the Plan. "Performance Award" shall mean any right granted under Section 6(d) of the Plan. "Person" shall mean individual, corporation, partnership, association, joint-stock company, trust, unincorporated organization, government or political subdivision thereof or other entity. "Phantom Shares" shall mean an Award of the right to receive Shares issued at the end of a Restricted Period which is granted pursuant to Section 6(f) of the Plan. 34 36 "Restricted Period" shall mean the period established by the Committee with respect to an Award during which the Award either remains subject to forfeiture or is not exercisable by the Participant. "Restricted Stock" shall mean any Share, prior to the lapse of restrictions thereon, granted under Section 6(c) of the Plan. "Rule 16b-3" shall mean Rule 16b-3 promulgated by the SEC under the Exchange Act, or any successor rule or regulation thereto as in effect from time to time. "SEC" shall mean the Securities and Exchange Commission, or any successor thereto. "Shares" or "Common Shares" or "Common Stock" shall mean the common stock of the Company, $0.10 par value, and such other securities or property as may become the subject of Awards of the Plan. "Spread" shall mean, in the case of a Stock Appreciation Right, an amount equal to the excess, if any, of the Fair Market Value of a Share on the date such right is exercised over the exercise price of such Stock Appreciation Right. "Stock Appreciation Right" or "Right" shall mean any right to receive the spread of Shares granted under Section 6(b) of the Plan. "Substitute Award" shall mean Awards granted in assumption of, or in substitution for, outstanding awards previously granted by (i) a company acquired by the Company or one or more of its Affiliates, or (ii) a company with which the Company or one or more of its Affiliates combines. To the extent reasonably practical, as determined by the Committee in its sole discretion, Substitute Awards shall contain the same terms and conditions as the award they replace. SECTION 3. Administration. The Plan shall be administered by the Committee. A majority of the Committee shall constitute a quorum, and the acts of the members of the Committee who are present at any meeting thereof at which a quorum is present, or acts unanimously approved by the members of the Committee in writing, shall be the acts of the Committee. Subject to the terms of the Plan and applicable law, and in addition to other express powers and authorizations conferred on the Committee by the Plan, the Committee shall have full power and authority to: (i) designate Participants; (ii) determine the type or types of Awards to be granted to an eligible Participant; (iii) determine the number of Shares to be covered by, or with respect to which payments, rights, or other matters are to be calculated in connection with, Awards; (iv) determine the terms and conditions of any Award, including such terms and conditions as shall be requisite in the judgment of the Committee to cause designated Options to qualify as Incentive Stock Options; (v) determine whether, to what extent, and under what circumstances Awards may be settled or exercised in cash, Shares, other securities, other 35 37 Awards or other property, or canceled, forfeited, or suspended and the method or methods by which Awards may be settled, exercised canceled, forfeited, or suspended; (vi) determine whether, to what extent, and under what circumstances cash, Shares, other securities, other Awards, other property, and other amounts payable with respect to an Award shall be deferred either automatically or at the election of the holder thereof or of the Committee; (vii) interpret and administer the Plan and any instrument or agreement relating to, or Award made under, the Plan; (viii) establish, amend, suspend, or waive such rules and regulations and appoint such agents as it shall deem appropriate for the proper administration of the Plan; and (ix) make any other determination and take any other action that the Committee deems necessary or desirable for the administration of the Plan. The Committee may correct any defect or supply any omission or reconcile any inconsistency in the Plan or in any Award Agreement in the manner and to the extent it shall deem expedient to carry it into effect. Unless otherwise expressly provided in the Plan, all designations, determinations, interpretations, and other decisions under or with respect to the Plan or any Award shall be within the sole discretion of the Committee, may be made at any time and shall be final, conclusive, and binding upon all Persons, including the Company, any Affiliate, any Participant, any holder or beneficiary of any Award, any shareholder, any Employee and any Director. SECTION 4. Shares Available for Awards. (a) Shares Available. Subject to adjustment as provided in Section 4(c) and below, the number of Shares with respect to which Awards may be granted under the Plan shall be 3,000,000. If any Shares covered by an Award granted under the Plan, or to which such an Award relates, are forfeited, or if an Award otherwise terminates or is canceled without the delivery of Shares or of other consideration, then the Shares covered by such Award, or to which such Award relates, or the number of Shares otherwise counted against the aggregate number of Shares with respect to which Awards may be granted, to the extent of any such forfeiture, termination or cancellation, shall again be, or shall become, Shares with respect to which Awards may be granted. (b) Sources of Shares Deliverable Under Awards. Any Shares delivered pursuant to an Award may consist, in whole or in part, of authorized and unissued Shares or of treasury Shares. Any of such Shares which remain unissued and which are not subject to outstanding Awards at the termination of the Plan shall cease to be subject to the Plan but, until termination of the Plan, the Company shall at all times make available a sufficient number of shares to meet the requirements of the Plan. (c) Adjustments. In the event that the Committee determines that any dividend or other distribution (whether in the form of cash, Shares, other securities, or other property), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase, or exchange of Shares or other securities of the Company, issuance of warrants or other rights to purchase Shares or other securities of the Company, or other similar corporate transaction or event affects the Shares such that an adjustment is determined by the Committee in its discretion to be appropriate in order to 36 38 prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan, then the Committee shall, in such manner as it may deem equitable, adjust any or all of (i) the number and type of Shares (or other securities or property) with respect to which Awards may be granted, (ii) the number and type of Shares (or other securities or property) subject to outstanding Awards, and (iii) the grant or exercise price with respect to any Award or, if deemed appropriate, make provision for a cash payment to the holder of an outstanding Award; provided, in each case, that with respect to Awards of Incentive Stock Options and Awards intended to qualify as performance based compensation under Section 162(m)(4)(C) of the Code, no such adjustment shall be authorized to the extent that such authority would cause the Plan to violate Section 422(b)(1) of the Code or would cause such Award to fail to so qualify under Section 162(m) of the Code, as the case may be, or any successor provisions thereto; and provided, further, that the number of Shares subject to any Award denominated in Shares shall always be a whole number. SECTION 5. Eligibility and Award Limits. Other than Awards granted to Directors pursuant to Section 6(h) of the Plan, any Employee shall be eligible to be designated a Participant. However, no Employee may receive Share-denominated Awards during the term of the Plan that, in the aggregate, are with respect to more than 33-1/3% of all Shares that may be made subject to Awards under the Plan. The maximum amount of compensation (including the Fair Market Value of any Shares) that may be paid to any Participant with respect to any single Performance Award or Cash Award in any calendar year shall be $1.5 million. With respect to any Restricted Stock Award, Phantom Stock Award, or Cash Award granted in tandem with, and expressed as a percentage of, a Share-denominated Award which is intended to qualify as "performance-based compensation," the maximum payment to any Participant with respect to such Award in any calendar year shall be an amount (in cash and/or in Shares) equal to the Fair Market Value of the number of Shares subject to such Award. The limitations set forth in the preceding sentences shall be applied in a manner which will permit compensation generated under the Plan to constitute "performance-based" compensation for purposes of section 162(m) of the Code, including, without limitation, counting against such maximum number of Shares, to the extent required under Section 162(m) of the Code and applicable interpretive authority thereunder, any Shares subject to Options that are canceled or repriced. Further, Restricted Stock, Performance Awards, Phantom Shares and Bonus Shares paid in Shares may not, in the aggregate, exceed 20% of all Shares that may be the subject of Awards under the Plan. SECTION 6. Awards. (a) Options. Subject to the provisions of the Plan, the Committee shall have the authority to determine the Employees to whom Options shall be granted, the number of Shares to be covered by each Option, the purchase price therefor and the conditions and limitations applicable to the exercise of the Option, including the following terms and conditions and such additional terms and conditions, as the Committee shall determine, that are not inconsistent with the provisions of the Plan. 37 39 (i) Exercise Price. The purchase price per Share purchasable under an Option shall be determined by the Committee at the time each Option is granted, but shall not be less than the Fair Market Value of a Share on such date, unless such Option is a Substitute Award. (ii) Time and Method of Exercise. The Committee shall determine the time or times at which an Option may be exercised in whole or in part, and the method or methods by which, and the form or forms (which may include, without limitation, cash, already-owned Shares, outstanding Awards, Shares that would otherwise be acquired upon exercise of the Option, a "cashless-broker" exercise (through procedures approved by the Company), other securities or other property, or any combination thereof, having a Fair Market Value on the exercise date equal to the relevant exercise price) in which payment of the exercise price with respect thereto may be made or deemed to have been made. (iii) Special Limitations on Incentive Stock Options. Incentive Stock Options may be granted only to employees of the Company and its subsidiaries, within the meaning of Section 424(f) of the Code. To the extent that the aggregate Fair Market Value (determined at the time the respective Incentive Stock Option is granted) of Shares with respect to which Incentive Stock Options granted after 1986 are exercisable for the first time by an individual during any calendar year under all incentive stock option plans of the Company and its parent and subsidiary corporations exceeds $100,000, such Incentive Stock Options shall be treated as Options which do not constitute Incentive Stock Options. The Committee shall determine, in accordance with applicable provisions of the Code, Treasury regulations and other administrative pronouncements, which of a Participant's Incentive Stock Options will not constitute Incentive Stock Options because of such limitation and shall notify the Participant of such determination as soon as practicable after such determination. No Incentive Stock Option shall be granted to an individual if, at the time the Option is granted, such individual owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or of its parent or subsidiary corporation, within the meaning of Section 422(b)(6) of the Code, unless (1) at the time such Option is granted the option price is at least 110% of the Fair Market Value of the Shares subject to the Option and (2) such Option by its terms is not exercisable after the expiration of five years from the date of grant. (iv) Expiration. Except as provided in Section 6(a)(iii), each Option shall expire ten (10) years from the date of grant thereof, and, unless provided otherwise in the Award Agreement, shall be subject to earlier termination as follows: Options, to the extent exercisable as of the date a Participant ceases to be an Employee, must be exercised within three (3) months of such date unless such event results from death, disability or retirement, in which case all outstanding Options held by such Participant may be exercised in full by the optionee, the optionee's legal representative, heir or devisee, as the case may be, within two (2) years from the date of the Participant's death, disability or retirement; provided, however, that no such event shall extend the 38 40 expiration date of an Option beyond the 10th anniversary of its date of grant. Options that are not exercisable on termination of employment shall be automatically canceled on termination of employment. For purposes hereof, (x) "disability" means the Participant is receiving benefits under a long-term disability plan of the Company or, if the Company does not maintain such a plan, a determination by the Committee, upon the basis of medical evidence satisfactory to it, that the Participant is totally disabled, whether due to a physical or mental condition, such that he is expected to be unable to continue his employment for a continuous period of 12 or more months, and (y) "retirement" means a termination of employment on or after the Participant has reached age 65 or, with the consent of the Committee, on or after reaching age 55. (b) Stock Appreciation Rights. Subject to the provisions of the Plan, the Committee shall have the authority to determine the Employees to whom Stock Appreciation Rights shall be granted, the number of Shares to be covered by each Stock Appreciation Right Award, the grant price thereof and the conditions and limitations applicable to the exercise thereof. A Stock Appreciation Right may be granted in tandem with another Award, in addition to another Award, or freestanding and unrelated to another Award. A Stock Appreciation Right granted in tandem with or in addition to another Award may be granted either at the same time as such other Award or at a later time. (i) Grant Price. The grant price of a Stock Appreciation Right shall be determined by the Committee on the date of grant, but shall not be less than the Fair Market Value of a Share on such date (or such greater exercise price as may be required if such Stock Appreciation Right is granted in connection with an Incentive Stock Option that must have an exercise price equal to 110% of the Fair Market Value of a Share on the date of grant pursuant to Section 6(a)(iii)), unless such Stock Appreciation Right is a Substitute Award. (ii) Other Terms and Conditions. Subject to the terms of the Plan and any applicable Award Agreement, the Committee shall determine, at or after the grant of a Stock Appreciation Right, the term, methods of exercise, methods of settlement, and any other terms and conditions of any Stock Appreciation Right. Any such determination by the Committee may be changed by the Committee from time to time and may govern the exercise of Stock Appreciation Rights granted or exercised prior to such determination as well as Stock Appreciation Rights granted or exercised thereafter. The Committee may impose such conditions or restrictions on the exercise of any Stock Appreciation Right as it shall deem appropriate. (iii) Expiration. Each Stock Appreciation Right shall expire ten (10) years from the date of grant thereof, or, if granted in tandem with another Award, upon the expiration of such tandem Award, if earlier, and, unless provided otherwise in the Award Agreement, shall be subject to earlier termination as follows: Stock Appreciation Rights, to the extent exercisable as of the date a Participant ceases to be an Employee, must be exercised within three (3) months of such date unless such event results from death, disability or retirement, in which case all outstanding Stock Appreciation 39 41 Rights held by such Participant may be exercised in full by the Participant, the Participant's legal representative, heir or devisee, as the case may be, within two (2) years from the date of the Participant's death, disability or retirement; provided, however, that no such event shall extend the expiration date of a Stock Appreciation Right beyond the 10th anniversary of its date of grant. Stock Appreciation Rights that are not exercisable on termination of employment shall be automatically canceled on termination of employment. For purposes hereof, "disability" and "retirement" shall have their respective meanings as set forth in Section 6(a)(iv). (c) Restricted Stock. Subject to the provisions of the Plan, the Committee shall have the authority to determine the Employees to whom Restricted Stock shall be granted, the number of Shares of Restricted Stock to be granted to each such Participant, the duration of the Restricted Period during which, and the conditions, including performance goals, if any, under which, the Restricted Stock may be forfeited to the Company, and the other terms and conditions of such Awards. (i) Dividends. Dividends paid on Restricted Stock may be paid directly to the Participant, may be subject to risk of forfeiture and/or transfer restrictions during any period established by the Committee or sequestered and held in a bookkeeping cash account (with or without interest) or reinvested on an immediate or deferred basis in additional shares of Common Stock, which credit or shares may be subject to the same restrictions as the underlying Award or such other restrictions, all as determined by the Committee in its discretion. (ii) Registration. Any Restricted Stock may be evidenced in such manner as the Committee shall deem appropriate, including, without limitation, book-entry registration or issuance of a stock certificate or certificates. In the event any stock certificate is issued in respect of Restricted Stock granted under the Plan, such certificate shall be registered in the name of the Participant and shall bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such Restricted Stock. (iii) Forfeiture and Restrictions Lapse. Except as otherwise determined by the Committee or the terms of the Award that granted the Restricted Stock, upon termination of a Participant's employment (as determined under criteria established by the Committee) for any reason during the applicable Restricted Period, all Restricted Stock shall be forfeited by the Participant and re-acquired by the Company. The Committee may, when it finds that a waiver would be in the best interests of the Company and not cause such Award, if it is intended to qualify as performance-based compensation under Section 162(m) of the Code, to fail to so qualify under Section 162(m) of the Code, waive in whole or in part any or all remaining restrictions with respect to such Participant's Restricted Stock. Unrestricted Shares, evidenced in such manner as the Committee shall deem appropriate, shall be issued to the holder of Restricted Stock promptly after the applicable restrictions have lapsed or otherwise been satisfied. 40 42 (iv) Transfer Restrictions. During the Restricted Period, Restricted Stock will be subject to the limitations on transfer as provided in Section 6(i)(iii). (d) Performance Awards. The Committee shall have the authority to determine the Employees who shall receive a Performance Award, which shall be denominated as a cash amount at the time of grant and confer on the Participant the right to receive payment of such Award, in whole or in part, upon the achievement of such performance goals during such performance periods as the Committee shall establish with respect to the Award. (i) Terms and Conditions. Subject to the terms of the Plan and any applicable Award Agreement, the Committee shall determine the performance goals to be achieved during any performance period, the length of any performance period, the amount of any Performance Award and the amount of any payment or transfer to be made pursuant to any Performance Award. (ii) Payment of Performance Awards. Performance Awards may be paid (in cash and/or in Shares, in the sole discretion of the Committee) in a lump sum or in installments following the close of the performance period, in accordance with procedures established by the Committee with respect to such Award. (e) Bonus Shares. The Committee shall have the authority, in its discretion, to grant Bonus Shares to eligible Employees. Each Bonus Share shall constitute a transfer of an unrestricted Share to the Participant, without other payment therefor, as additional compensation for the Participant's services to the Company. (f) Phantom Shares. The Committee shall have the authority to grant Awards of Phantom Shares to eligible Employees upon such terms and conditions as the Committee may determine. (i) Terms and Conditions. Each Phantom Share Award shall constitute an agreement by the Company to issue or transfer a specified number of Shares or pay an amount of cash equal to the Fair Market Value of a specified number of Shares, or a combination thereof to the Participant in the future, subject to the fulfillment during the Restricted Period of such conditions, including performance goals, if any, as the Committee may specify at the date of grant. During the Restricted Period, the Participant shall not have any right to transfer any rights under the subject Award, shall not have any rights of ownership in the Phantom Shares and shall not have any right to vote such shares. (ii) Dividends. Any Phantom Share award may provide that any or all dividends or other distributions paid on Shares during the Restricted Period be credited in a cash bookkeeping account (without interest) or that equivalent additional Phantom Shares be awarded, which account or shares may be subject to the same restrictions as the underlying Award or such other restrictions as the Committee may determine. 41 43 (g) Cash Awards. The Committee shall have the authority to determine the Employees to whom Cash Awards shall be granted, the amount, and the terms or conditions, if any, as additional compensation for the Employee's services to the Company or its Affiliates. A Cash Award may be granted (simultaneously or subsequently) separately or in tandem with another Award and may entitle a Participant to receive a specified amount of cash from the Company upon such other Award becoming taxable to the Participant, which cash amount may be based on a formula relating to the anticipated taxable income associated with such other Award and the payment of the Cash Award. (h) Granting of Options to Directors. Each individual who serves as a Director on the date the Plan is approved by the shareholders of the Company (the "Approval Date") or who is elected or appointed as a Director for the first time after such date shall receive, as of the Approval Date of the Plan or the date of his election or appointment, whichever is applicable, and without the exercise of the discretion of any person or persons, a Non-Qualified Stock Option (an "Initial Grant") exercisable for 10,000 Shares (subject to adjustment in the same manner as provided in Section 7 hereof with respect to Shares subject to Options then outstanding). As of the date of the annual meeting of the shareholders of the Company ("Annual Meeting") in each year after 1999 that the Plan is in effect, each Director who is in office immediately after such meeting and who is not then entitled to receive an Initial Grant pursuant to the preceding provisions of this Section 6(h) shall receive, without the exercise of the discretion of any person or persons, a Non-Qualified Stock Option exercisable for 6,000 Shares (an "Annual Grant") (subject to adjustment in the same manner as provided in Section 7 hereof with respect to shares of Stock subject to Options then outstanding). (i) Other Terms and Conditions. The following provisions are applicable to Options granted pursuant to this Section 6(h): A. Subject to the following provisions, (1) an Initial Grant shall become exercisable for 50% of the Shares covered thereby on the date of grant, and for the remaining 50% thereof on the first Annual Meeting following its date of grant and (2) an Annual Grant shall become exercisable for [33_%] of the Shares covered thereby on the first Annual Meeting following the date of grant, and thereafter, for an additional [33_%] of the Shares covered thereby on each of the second and third Annual Meetings following the date of grant. B. The purchase price of a Share covered under an Option granted under this Section 6(h) shall be the Fair Market Value of a Share on the date of grant. C. To the extent that the right to exercise an Option has accrued and is in effect, the Option may be exercised in full at one time or in part from time to time by giving written notice, signed by the optionee exercising the Option, to the Company, stating the number of Shares with respect to which the Option is being exercised, accompanied by payment in full for such Shares, which payment may be in cash, 42 44 already-owned Shares, a "cashless-broker" exercise (through procedures approved by the Company), or any combination thereof, having a Fair Market Value on the exercise date equal to the relevant exercise price in which payment of the exercise price with respect thereto may be made or deemed to have been made; provided however, that (i) no Option shall be exercisable after ten (10) years from the date on which it was granted, and (ii) there shall be no such exercise at any one time for fewer than one hundred (100) Shares or for all of the remaining Shares then purchasable by the optionee exercising the Option, if fewer than one hundred (100) Shares. D. Each Option shall expire ten (10) years from the date of grant thereof, subject to earlier termination as follows: Options, to the extent exercisable as of the date a Director optionee ceases to serve as a director of the Company, must be exercised within three (3) months of such date unless such event results from death, disability or retirement, as determined by the Committee, in which case all outstanding Options held by such Director may be exercised in full by the optionee, the optionee's legal representative, heir or devisee, as the case may be, within two (2) years from the date of death, disability or retirement; provided, however, that no such event shall extend the normal expiration date of such Options. Options not exercisable on termination as provided above shall be automatically canceled on termination. E. Upon exercise of the Option, delivery of a certificate for fully paid and nonassessable Shares shall be made at the corporate office of the Company to the optionee exercising the Option either at such time during ordinary business hours after fifteen (15) days but not more than thirty (30) days from the date of receipt of the notice by the Company as shall be designated in such notice, or at such time, place and manner as may be agreed upon by the Company and the optionee exercising the Option. (ii) Number of Available Shares. In the event that the number of Shares available for grants under the Plan is insufficient to make all grants provided for in this Section 6(h) hereby made on the applicable date, then all Directors who are entitled to a grant on such date shall share ratably in the number of Shares then available for grant under the Plan, and shall have no right to receive a grant with respect to the deficiencies in the number of available Shares and the grants under this Section 6(h) shall terminate. (i) General. (i) Awards May Be Granted Separately or Together. Awards to Employees may, in the discretion of the Committee, be granted either alone or in addition to, in tandem with, or in substitution for any other Award granted under the Plan or any award granted under any other plan of the Company or any Affiliate. Awards granted in addition to or in tandem with other Awards or awards granted under any other plan of the Company or any Affiliate may be granted either at the same time as or at a different time from the grant of such other Awards or awards. 43 45 (ii) Forms of Payment by Company Under Awards. Subject to the terms of the Plan and of any applicable Award Agreement, payments or transfers to be made by the Company or an Affiliate upon the grant, exercise or payment of an Award may be made in such form or forms as the Committee shall determine, including, without limitation, cash, Shares, other securities, other Awards or other property, or any combination thereof, and may be made in a single payment or transfer, in installments, or on a deferred basis, in each case in accordance with rules and procedures established by the Committee. Such rules and procedures may include, without limitation, provisions for the payment or crediting of reasonable interest on installment or deferred payments. (iii) Limits on Transfer of Awards. (A) Except as provided in (C) below, each Award, and each right under any Award, shall be exercisable only by the Participant during the Participant's lifetime, or, if permissible under applicable law, by the Participant's guardian or legal representative or by a transferee receiving such Award pursuant to a qualified domestic relations order (a "QDRO") as determined by the Committee. (B) Except as provided in (C) below, no Award and no right under any such Award may be assigned, alienated, pledged, attached, sold or otherwise transferred or encumbered by a Participant otherwise than by will or by the laws of descent and distribution (or, in the case of Restricted Stock, to the Company) or, if permissible under applicable law, pursuant to a QDRO and any such purported assignment, alienation, pledge, attachment, sale, transfer or encumbrance shall be void and unenforceable against the Company or any Affiliate. (C) Notwithstanding anything in the Plan to the contrary, except to the extent specifically provided otherwise by the Committee in an Award Agreement, Non-Qualified Stock Options may be transferred by the optionee to one or more permitted transferees; provided that (i) there may be no consideration given for such transfer, (ii) the optionee (or such optionee's estate or representative) shall remain obligated to satisfy all employment tax and other withholding tax obligations associated with the exercise of the transferred Options, (iii) the optionee shall notify the Company in writing that such transfer has occurred, the identity and address of the permitted transferee and the relationship of the permitted transferee to the optionee, and (iv) such transfer shall be effected pursuant to transfer documents approved from time to time by the Company. Any permitted transferee may not further assign or transfer the transferred Option otherwise than by will or the laws of descent and distribution. Following any permitted transfer, any such Options shall continue to be subject to the same terms and conditions as were applicable to the Option immediately prior to the transfer, provided that the term "optionee" as used in the Plan shall be deemed to refer also to each permitted transferee where required by the context. A transferred Option may only be exercised by a transferee to the same 44 46 extent such Option could, at such time, be exercised by the optionee "but for" such transfer. The term "permitted transferees" shall mean one or more of the following: (i) any member of the optionee's immediately family; (ii) a trust established for the exclusive benefit of one or more members of such immediately family; (iii) a partnership in which such immediately family members are the only partners; or (iv) any other person approved from time to time by the Committee. The term "immediate family" is defined for such purpose as spouses, children, stepchildren and grandchildren, including relationships arising from adoption. (iv) Term of Awards. The term of each Award (other than pursuant to Section 6(h)) shall be for such period as may be determined by the Committee; provided, that in no event shall the term of any Award exceed a period of ten (10) years from the date of its grant. (v) Share Certificates. All certificates for Shares or other securities of the Company or any Affiliate delivered under the Plan pursuant to any Award or the exercise thereof shall be subject to such stop transfer orders and other restrictions as the Committee may deem advisable under the Plan or the rules, regulations, and other requirements of the SEC, any stock exchange upon which such Shares or other securities are then listed, and any applicable Federal or state laws, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. (vi) Consideration for Grants. Awards may be granted for no cash consideration or for such consideration as the Committee determines including, without limitation, such minimal cash consideration as may be required by applicable law. (vii) Delivery of Shares or other Securities and Payment by Participant of Consideration. No Shares or other securities shall be delivered pursuant to any Award until payment in full of any amount required to be paid pursuant to the Plan or the applicable Award Agreement is received by the Company, including without limitation, all applicable withholding taxes. Such payment may be made by such method or methods and in such form or forms as the Committee shall determine, including, without limitation, cash, Shares, other securities, other Awards or other property, withholding of Shares, cashless exercise with simultaneous sale, or any combination thereof; provided that the combined value, as determined by the Committee, of all cash and cash equivalents and the Fair Market Value of any such Shares or other property so tendered to the Company, as of the date of such tender, is at least equal to the full amount required to be paid pursuant to the Plan or the applicable Award Agreement to the Company. (viii) Performance Goals. Where necessary, the Committee shall establish performance goals applicable to those Awards the payment of which is intended by the Committee to qualify as "performance-based compensation" as described in Section 162(m)(4)(C) of the Code. Until changed by the Committee, the performance 45 47 goals shall be based upon the attainment of such target levels of Share price, net income, cash flows, reserve additions or revisions, acquisitions, total capitalization, total or comparative shareholder return, assets, exploration successes, production volumes, findings and development costs, costs reductions and savings, reportable incidents in safety or environmental matters, return on equity, profit margin or sales, and/or earnings per share as may be specified by the Committee. The performance goals may be made subject to adjustment for specified unusual and nonrecurring events and may be absolute, relative to one or more other companies, or relative to one or more indices. Which factor or factors to be used with respect to any grant, and the weight to be accorded thereto if more than one factor is used, shall be determined by the Committee at the time of grant. SECTION 7. Amendment and Termination. Except to the extent prohibited by applicable law and unless otherwise expressly provided in an Award Agreement or in the Plan: (a) Amendments to the Plan. The Board may amend, alter, suspend, discontinue, or terminate the Plan without the consent of any shareholder, Participant, other holder or beneficiary of an Award, or other Person; provided, however, notwithstanding any other provision of the Plan or any Award Agreement, without the approval of the shareholders of the Company no such amendment, alteration, suspension, discontinuation, or termination shall be made that would (i) increase the total number of Shares available for Awards under the Plan, except as provided in Section 4(c) of the Plan; (ii) increase the class of eligible Participants; or (iii) amend the eligibility requirements for Awards under the Plan. (b) Amendments to Awards. The Committee may waive any conditions or rights under, amend any terms of, or alter any Award theretofore granted (other than Initial Grants or Annual Grants under Section 6(h)), provided no change, other than pursuant to Section 7(c), in any Award shall reduce the benefit to Participant without the consent of such Participant. Notwithstanding the foregoing, with respect to any Award intended to qualify as performance-based compensation under Section 162(m) of the Code, no adjustment shall be authorized to the extent such adjustment would cause the Award to fail to so qualify. (c) Adjustment of Awards Upon the Occurrence of Certain Unusual or Nonrecurring Events. The Committee is hereby authorized to make adjustments in the terms and conditions of, and the criteria included in, Awards in recognition of unusual or nonrecurring events (including, without limitation, the events described in Section 4(c) of the Plan) affecting the Company, any Affiliate, or the financial statements of the Company or any Affiliate, or of changes in applicable laws, regulations, or accounting principles, whenever the Committee determines that such adjustments are appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan. Notwithstanding 46 48 the foregoing, with respect to any Award intended to qualify as performance-based compensation under Section 162(m) of the Code, no adjustment shall be authorized to the extent such adjustment would cause the Award to fail to so qualify. SECTION 8. Change in Control. Notwithstanding any other provision of this Plan to the contrary, in the event of a Change in Control of the Company, all outstanding Awards granted prior to the date of the Change in Control automatically shall become fully vested on such Change in Control, all restrictions, if any, with respect to such Awards shall lapse, and all performance goals, if any, with respect to such Awards shall be deemed to have been met in full (at the maximum performance level). For purposes of this Plan, a "Change in Control" shall be deemed to occur: (i) if any person (as such term is used in sections 13(d) and 14(d)(2) of the Exchange Act), other than the Company, any parent corporation or subsidiary corporation of the Company or any employee benefit plan of the Company or any such entity, is or becomes the "beneficial owner" (as defined in Rule 13d-3 of the Exchange Act), directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the Company's then outstanding securities, (ii) upon the first purchase of the Company's common stock pursuant to a tender or exchange offer (other than a tender or exchange offer made by the Company), (iii) on the date of consummation of a merger, consolidation, recapitalization, reorganization, sale or disposition of all or a substantial portion of the Company's assets, or the issuance of shares of stock of the Company in connection with the acquisition of the stock or assets of another entity, provided, however, that a Change in Control shall not occur under this clause (iii) if consummation of the transaction would result in at least [66_%] of the total voting power represented by the voting securities of the Company (or, if not the Company, the entity that succeeds to all or substantially all of the Company's business) outstanding immediately after such transaction being beneficially owned (within the meaning of Rule 13d-3 promulgated pursuant to the Exchange Act) by at least [66_%] of the holders of outstanding voting securities of the Company immediately prior to the transaction, with the voting power of each such continuing holder relative to other such continuing holders not substantially altered in the transaction, or (iv) if, during any period of two consecutive years, individuals who at the beginning of such period constitute the Board cease for any reason to constitute at least a majority thereof, unless the election or nomination for the election by the Company's shareholders of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period. 48 49 SECTION 9. Parachute Tax Gross-Up. To the extent that the grant, payment, or acceleration of vesting or payment, whether in cash or stock, of any Award made to a Participant under the Plan is subject to an excise tax under Section 4999(a) of the Code, or any similar or successor provision (a "Parachute Tax"), the Company shall pay such Participant an additional amount of cash (the "Gross-up Amount") such that the "net" after-tax benefit received by the Participant, after paying all applicable Parachute Taxes with respect to such Awards (including those on the Gross-up Amount) and any federal or state taxes on the Gross-up Amount, shall be equal to the net after-tax benefit that such Participant would have received if such Parachute Tax had not been applicable. SECTION 10. General Provisions. (a) No Rights to Awards. No Employee, Participant or other Person shall have any claim to be granted any Award, and there is no obligation for uniformity of treatment of Employees, Participants, or holders or beneficiaries of Awards. The terms and conditions of Awards need not be the same with respect to each recipient. (b) Withholding. The Company or any Affiliate is authorized to withhold from any Award, from any payment due or transfer made under any Award or under the Plan or from any compensation or other amount owing to a Participant the amount (in cash, Shares, other securities, Shares that would otherwise be issued pursuant to such Award, other Awards or other property) of any applicable taxes payable in respect of an Award, its exercise, the lapse of restrictions thereon, or any payment or transfer under an Award or under the Plan and to take such other action as may be necessary in the opinion of the Company to satisfy all obligations for the payment of such taxes. Any Participant who is subject to Rule 16b-3 may direct the Company to withhold Shares or may tender Shares to the Company to satisfy his tax withholding obligations. (c) No Right to Employment. The grant of an Award shall not be construed as giving a Participant the right to be retained in the employ of the Company or any Affiliate. Further, the Company or an Affiliate may at any time dismiss a Participant from employment, free from any liability or any claim under the Plan, unless otherwise expressly provided in the Plan or in any Award Agreement. Nothing contained in the Plan shall confer on any Director any right with respect to continuation of membership on the Board. (d) Governing Law. The validity, construction, and effect of the Plan and any rules and regulations relating to the Plan shall be determined in accordance with the laws of the State of Texas and applicable Federal law. (e) Severability. If any provision of the Plan or any Award is or becomes or is deemed to be invalid, illegal, or unenforceable in any jurisdiction or as to any Person or Award, or would disqualify the Plan or any Award under any law deemed applicable by the Committee, such provision shall be construed or deemed amended to conform to the applicable laws, or if 48 50 it cannot be construed or deemed amended without , in the determination of the Committee, materially altering the intent of the Plan or the Award, such provision shall be stricken as to such jurisdiction, Person or Award and the remainder of the Plan and any such Award shall remain in full force and effect. (f) Other Laws. The Committee may refuse to issue or transfer any Shares or other consideration under an Award if, acting in its sole discretion, it determines that the issuance of transfer or such Shares or such other consideration might violate any applicable law or regulation or entitle the Company to recover the same under Section 16(b) of the Exchange Act, and any payment tendered to the Company by a Participant, other holder or beneficiary in connection with the exercise of such Award shall be promptly refunded to the relevant Participant, holder or beneficiary. (g) No Trust or Fund Created. Neither the Plan nor the Award shall create or be construed to create a trust or separate fund of any kind or a fiduciary relationship between the Company or any Affiliate and a Participant or any other Person. To the extent that any Person acquires a right to receive payments from the Company or any Affiliate pursuant to an Award, such right shall be no greater than the right of any general unsecured creditor of the Company or any Affiliate. (h) No Fractional Shares. No fractional Shares shall be issued or delivered pursuant to the Plan or any Award, and the Committee shall determine whether cash, other securities, or other property shall be paid or transferred in lieu of any fractional Shares or whether such fractional Shares or any rights thereto shall be canceled, terminated, or otherwise eliminated. (i) Headings. Headings are given to the Sections and subsections of the Plan solely as a convenience to facilitate reference. Such headings shall not be deemed in any way material or relevant to the construction or interpretation of the Plan or any provision thereof. (j) No Restriction on Corporate Action. Nothing contained in the Plan shall be construed to prevent the Company or any Affiliate from taking any action that is deemed by the Company or such Affiliate to be appropriate or in its best interest, whether or not such action would have an adverse effect on the Plan or any Award made under the Plan. No Employee, Participant, or other Person shall have any claim against the Company or any Affiliate as a result of any such action. (k) Facsimile Signature. Any Award Agreement or related document may be executed by facsimile signature. If any officer who shall have signed or whose facsimile signature shall have been placed upon any such Award Agreement or related document shall have ceased to be such officer before the related Award is granted by the Company, such Award may 49 51 nevertheless be issued by the Company with the same effect as if such person were such officer at the date of grant. SECTION 11. Effective Date of the Plan. The Plan shall be effective as of the date of its approval by the Board, provided the Plan is subsequently approved by the shareholders of the Company within 12 months thereafter. Notwithstanding any provision in the Plan or in any Award Agreement, no Option or Stock Appreciation Right shall be exercisable and no Award shall vest or become satisfiable prior to such shareholder approval. SECTION 12. Term of the Plan. No Award shall be granted under the Plan after the tenth anniversary of the date the Plan was adopted by the Board or approved by the shareholders, whichever is earlier. However, unless otherwise expressly provided in the Plan or in an applicable Award Agreement, any Award theretofore granted may, and the authority of the Board or the Committee to amend, alter, adjust, suspend, discontinue, or terminate any such Award or to waive any conditions or rights under any such Award shall, extend beyond such date. 50 52 - ------------------------------------------------------------------------------ PROXY OCEAN ENERGY, INC. ANNUAL MEETING OF SHAREHOLDERS -- MAY 25, 1999 PROXY SOLICITED ON BEHALF OF BOARD OF DIRECTORS The undersigned hereby appoints James T. Hackett and Robert K. Reeves as Proxies, each with the power to appoint his substitute, and hereby authorizes each of them to represent and to vote as designated below, all the shares of Common Stock or Series C Convertible Preferred Stock of Ocean Energy, Inc. (the "Company"), held of record by the undersigned at the close of business on April 26, 1999, at the Annual Meeting of Shareholders to be held May 25, 1999, or any adjournment(s) or postponement(s) thereof. The undersigned hereby revokes any proxy to vote shares held by the undersigned heretofore given. THE UNDERSIGNED ACKNOWLEDGES THAT THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED SHAREHOLDER AND THAT IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR ALL NOMINEES LISTED IN PROPOSAL 1 AND IN FAVOR OF PROPOSALS 2, 3 AND 4. Please sign exactly as name appears hereon. When shares are held by joint tenants, both should sign. When signing as attorney, 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. I plan to attend the meeting (Please check if yes) [ ] This proxy may be revoked at any time prior to the voting of the proxy by the execution and submission of a revised proxy, by written notice to the Secretary of the Company or by voting in person at the meeting. (Continued and to be signed on the reverse side) SEE REVERSE SIDE - ------------------------------------------------------------------------------ 53 - ------------------------------------------------------------------------------ 1. Election of five directors to serve in Class I until the 2002 Annual Meeting of Shareholders. Class I Nominees: Milton Carroll, Thomas D. Clark, Jr., Peter J. Fluor, Robert L. Howard, Charles F. Mitchell, M.D. [ ] For [ ] Withhold Authority [ ] _____________________ For all nominees except as noted above 2. Proposal to amend the Company's Articles of Incorporation to reduce the authorized number of shares of Common Stock to 230,000,000 and to reduce the authorized number of shares of Convertible Preferred Stock to 10,000,000. [ ] For [ ] Against [ ] Abstain 3. Proposal to approve the Ocean Energy, Inc. 1999 Long-Term Incentive Plan. [ ] For [ ] Against [ ] Abstain 4. Proposal to ratify the appointment by the Board of Directors of the firm of _________________ as independent auditors of the Company for the fiscal year ending December 31, 1999. [ ] For [ ] Against [ ] Abstain 5. In their discretion, the proxies are authorized to vote upon such other business as may properly come before the meeting, or any adjournment(s) or postponement(s) thereof. [ ] Mark here for address change and note below If you receive more than one proxy card, please sign and return all cards in the accompanying envelope. Signature: --------------------------------------- Date: ------------------------------ Signature: --------------------------------------- Date: ------------------------------ (If held jointly) - ------------------------------------------------------------------------------ 52 -----END PRIVACY-ENHANCED MESSAGE-----