SCHEDULE 14A INFORMATION Proxy Statement Pursuant to Section 14(a) of the Securities and Exchange Act of 1934 Filed by the Registrant [X] Filed by a Party other than the Registrant [ ] Check the appropriate box: [ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) [X] Definitive Proxy Statement [ ] Definitive Additional Materials [ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12 ST. MARY LAND & EXPLORATION COMPANY ----------------------------------------------------------------- (Name of Registrant as Specified In Its Charter) ----------------------------------------------------------------------- (Name of Person(s) Filing Proxy Statement if other than the Registrant) Payment of Filing Fee (check the appropriate box): [X] No fee required. [ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11. 1) Title of each class of securities to which transaction applies: ------------------------------------------------------- 2) Aggregate number of securities to which transaction applies: ------------------------------------------------------- 3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is calculated and state how it was determined): ------------------------------------------------------- 4) Proposed maximum aggregate value of transaction: ------------------------------------------------------- 5) Total fee paid: ------------------------------------------------------- [ ] Fee paid previously with preliminary materials. [ ] Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. 1) Amount Previously Paid: ------------------------------------------------------- 2) Form, Schedule or Registration Statement Number: ------------------------------------------------------- 3) Filing party: ------------------------------------------------------- 4) Date filed: ------------------------------------------------------- April 15, 1999 Dear Shareholder: You are cordially invited to attend the Annual Meeting of Stockholders which will be held at the Brown Palace Hotel, 321 Seventeenth Street, 2nd Floor, Denver, Colorado on Wednesday, May 19, 1999 at 3:00 p.m. Mountain Daylight Time. The matters to be acted upon at the meeting will include the election of nine Directors and the approval of an amendment to the Stock Option Plans. In addition, reports of the Company's operations and other matters of interest will be made at the meeting.Shareholders will have an opportunity to ask questions of general interest. Please complete and sign the enclosed proxy card and return it promptly in the accompanying envelope. This will ensure that your shares are represented at the meeting even if you cannot attend. Returning your proxy card to us will not prevent you from voting in person at the meeting if you are present and wish to do so. Thank you for your cooperation in returning your proxy card as promptly as possible. We hope to see many of you at our meeting in Denver. Very truly yours, /s/ THOMAS E. CONGDON --------------------- Thomas E. Congdon Chairman ST. MARY LAND & EXPLORATION COMPANY 1776 Lincoln Street, Suite 1100 Denver, Colorado 80203 ----------------------------------------------------------------- NOTICE OF ANNUAL MEETING OF STOCKHOLDERS ----------------------------------------------------------------- May 19, 1999 TO ALL SHAREHOLDERS: NOTICE IS HEREBY GIVEN that the Annual Meeting of the Stockholders of St. Mary Land & Exploration Company will be held at the Brown Palace Hotel, 321 Seventeenth Street, 2nd Floor, Denver, Colorado on Wednesday, May 19, 1999 at 3:00 p.m. Mountain Daylight Time. The meeting shall have the following purposes: 1. To elect nine Directors to serve during the ensuing year and until their successors are elected and qualified; 2. To approve an amendment to the Stock Option Plans increasing the number of shares authorized to be issued under the plans by 950,000 to an aggregate total of 1,650,000; 3. To transact any other business which may properly come before the meeting at the time and place scheduled or, should the meeting be adjourned, at such time and place as it may be resumed. Only Stockholders of record at the close of business on April 6, 1999 will be entitled to vote at this meeting. Please execute and return the accompanying proxy in the enclosed envelope as soon as possible. Any Stockholder who signs and returns the accompanying proxy shall have the power to revoke it at any time before it is exercised. By Order of the Board of Directors /s/ RICHARD C. NORRIS --------------------- RICHARD C. NORRIS Secretary Denver, Colorado April 15, 1999 ST. MARY LAND & EXPLORATION COMPANY 1776 Lincoln Street, Suite 1100, Denver, Colorado 80203 (303) 861-8140 PROXY STATEMENT ------------------------ ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON MAY 19, 1999 ------------------------ The accompanying proxy is solicited by the Board of Directors of St. Mary Land & Exploration Company (the "Company") for use at the annual meeting of stockholders (the "Annual Meeting") to be held at the Brown Palace Hotel, 321 Seventeenth Street, 2nd Floor, Denver, Colorado on Wednesday, May 19, 1999 at 3:00 p.m. local time, and at any and all adjournments thereof, for the purposes set forth in the Notice of Annual Meeting of Stockholders. The Company anticipates that this Proxy Statement and the accompanying form of proxy will be first sent or given to stockholders on or about April 15, 1999. Any stockholder giving such a proxy has the right, at any time before it is voted, to revoke the proxy by giving written notice to the Secretary of the Company, by executing a new proxy bearing a later date, or by voting in person at the Annual Meeting. A proxy, when executed and not revoked, will be voted in accordance therewith. If no instructions are given, proxies will be voted FOR management's slate of directors and FOR approval of the amendment to the Stock Option Plans to increase the aggregate number of shares available for issuance under those Plans by 950,000. All expenses in connection with the solicitation of proxies will be borne by the Company. The solicitation will be made by mail. The Company will also supply brokers or persons holding stock in the names of brokers or their nominees with such number of proxies, proxy material and annual reports as they may require for mailing to beneficial owners and will reimburse them for their reasonable expenses incurred in connection therewith. Certain directors, officers and employees of the Company not specifically employed for that purpose may, without additional compensation, solicit proxies by mail, telephone, facsimile transmission, telegraph or personal interview. UPON WRITTEN REQUEST, THE COMPANY WILL PROVIDE, WITHOUT CHARGE, A COPY OF ITS ANNUAL REPORT ON FORM 10-K, INCLUDING FINANCIAL STATEMENTS AND SCHEDULES THERETO, FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 TO EACH RECORD OR BENEFICIAL OWNER OF ITS COMMON STOCK ON THE RECORD DATE. THERE WILL BE A REASONABLE CHARGE FOR COPIES OF THE EXHIBITS TO THE REPORT, LIMITED TO THE COMPANY'S REASONABLE EXPENSES IN FURNISHING THE EXHIBITS. SUCH REQUESTS SHOULD BE DIRECTED TO THE COMPANY AT 1776 LINCOLN STREET, SUITE 1100, DENVER, COLORADO 80203, ATTENTION: ADELE LINNEMAN. VOTING SECURITIES The Board of Directors of the Company has fixed the close of business on Friday, April 6, 1999 as the record date for the determination of stockholders entitled to notice of and to vote at the Annual Meeting. On that date, the Company had outstanding 10,827,067 shares of Common Stock, all of which are entitled to vote on the matters to come before the Annual Meeting. Each outstanding share of common stock entitles the holder to one vote. The presence in person or by proxy of one-third of the outstanding shares of common stock is necessary to constitute a quorum at the meeting, but if a quorum should not be present, the meeting may be adjourned from time to time until a quorum is obtained. If a quorum is present, the affirmative vote of a majority of shares represented in person or by proxy will be required to approve the matters upon which the stockholders are to vote. Accordingly, any shares present but not voted shall have the same effect as shares voted against approval. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table shows beneficial ownership of shares of the Company's outstanding common stock as of the record date (i) by all persons, insofar as is known to the Company, owning more than 5% of such stock and (ii) by each director, each of the executive officers, and all directors and executive officers as a group.
Name and Address Amount and Nature of Percent of Beneficial Owner Beneficial Ownership Owned ------------------- -------------------- ----- Stockholders Owning More Than 5% Greenhouse Associates (1) 644,731 6.0 444 Madison Avenue, 34th Floor New York, New York 10022 Prudential Investment Corporation 633,000 5.8 Two Gateway Center, Fourth Floor Newark, NJ 07102-5096 Wellington Management Company 631,700 5.8 75 State Street, 19th Floor Boston, MA 02109 Oppenheimer Capital 560,195 5.2 200 Liberty Street, 37th Floor New York, New York 10281 Name and Position of Beneficial Owner ------------------- Directors and Executive Officers Larry W. Bickle 10,800 (*) Director David C. Dudley (2)(3) 88,985 .8 Director Richard C. Kraus 4,706 (*) Director R. James Nicholson (3)(4) 20,483 .2 Director Arend J. Sandbulte (3)(5) 13,290 .1 Director John M. Seidl (6) 6,606 (*) Director Thomas E. Congdon (7)(8) 122,767 1.1 Chairman and Director Mark A. Hellerstein (9) 18,669 .2 President, Chief Executive Officer and Director Ronald D. Boone (10) 50,215 .5 Executive Vice President, Chief Operating Officer and Director All Executive Officers and Directors as a Group (9 persons) (11) 336,521 2.9
- ------------- (*) Ownership is less than 0.1 percent. (1) Greenhouse Associates is a Dudley family general partnership, the partners of which include David C. Dudley. (2) Includes 64,473 shares which represents 10% of the total number of shares of Common Stock owned by Greenhouse Associates, in which Mr. Dudley is a 10% general partner. (3) Includes 4,507 shares underlying stock options presently exercisable or exercisable within 60 days. (4) Held by the defined benefit plan of a corporate affiliate as to which Mr. Nicholson has voting and investment power. (5) Includes 400 shares held of record by the spouse of Arend J. Sandbulte as to which he may be deemed to be the beneficial owner. (6) Includes 1,106 shares underlying stock options presently exercisable or exercisable within 60 days. (7) Includes 12,205 shares held of record by the spouse of Thomas E. Congdon as to which he may be deemed to be the beneficial owner. Thomas E. Congdon and members of his extended family own approximately 30 percent of the outstanding common stock of the Company. While no formal arrangements exist, these extended family members may be inclined to act in concert with Mr. Congdon on matters related to control of the Company. (8) Includes 36,451 shares underlying stock options presently exercisable or exercisable within 60 days. (9) Includes 14,689 shares underlying stock options presently exercisable or exercisable within 60 days. (10) Includes 41,824 shares underlying stock options presently exercisable or exercisable within 60 days. (11) Includes 83,382 shares underlying presently exercisable stock options. 2 BOARD OF DIRECTORS AND COMMITTEES All directors of the Company are elected annually. At this meeting, nine directors are to be elected to serve for one year or until their successors are elected and qualified. The Company's nominees for these directorships are identified below, all of whom are currently serving in that capacity. The proxies will be voted for such persons as the Company shall determine unless a contrary specification is made in the proxy. All nominees have indicated their willingness to serve as directors of the Company. However, if any nominee is unable or should decline to serve as a director, it is the intention of the persons named in the proxy to vote for such other person as they in their discretion shall determine. The Board of Directors, acting as a Nominating Committee of the Whole, selects director nominees and will consider suggestions by stockholders for names of possible future nominees delivered in writing to the Secretary of the Company on or before November 1 in any year for election at the next Annual Meeting. The Board performed its Nominating Committee functions during the course of regular meetings of the full Board of Directors in early 1999. The Board has a Compensation Committee whose primary function is to oversee the administration of the Company's employee benefit plans and to establish the Company's compensation policies. The Compensation Committee recommends to the Board the compensation arrangements for senior management and directors, adoption of compensation plans in which officers and directors are eligible to participate, and the granting of stock options or other benefits under compensation plans. See "Report of Compensation Committee" contained herein. This committee, comprised of Richard C. Kraus, Chairman, R. James Nicholson and Arend J. Sandbulte, met twice during 1998. All members of the committee attended the meeting. The Board also has an Audit Committee to assist the Board in fulfilling its responsibilities for financial reporting by the Company. The Audit Committee recommends the engagement and discharge of independent auditors, directs and supervises special investigations when necessary, reviews with independent auditors the audit plan and the results of the audit, reviews the independence of the independent auditors, considers the range of audit fees, and reviews the scope and results of the Company's procedures for internal auditing and the adequacy of its system of internal accounting controls. Members of the audit committee are John M. Seidl, Chairman, Larry W. Bickle and Richard C. Kraus. The audit committee met twice during 1998 to review the audit plan and the results of the audit and to plan and recommend auditors for the next audit. All members of the audit committee attended each meeting. During 1998, the full Board of Directors met six times. No director attended less than 75% of the Board and committee meetings held during the Director's tenure on the Board and its committees. 3 Nominees - -------- The following information regarding the nominees is provided in conjunction with their nomination for re-election.
Age at April 15, Director Directors/Occupation and Background 1999 Since ----------------------------------- --------- -------- Thomas E. Congdon. Mr. Congdon has served the Company as 72 1966 an officer and director since 1966, including service as its President and Chief Executive Officer for more than 25 years. Mr. Congdon is also a director, officer or general partner of a number of family corporations and partnerships which produce scientific and statistical software, iron ore and agricultural products, manage marketable securities and own and operate developed real estate. Mark A. Hellerstein. Mr. Hellerstein joined the Company 46 1992 in September 1991 and served as Executive Vice President and Chief Financial Officer until May 1992, at which time he was elected President and a director of the Company. Mr. Hellerstein was elected Chief Executive Officer of the Company in May 1995. He also has served as Chairman of the Board of Summo Minerals from 1995 to 1998. Ronald D. Boone. Mr. Boone has served the Company as 51 1996 Executive Vice President since 1990, as Chief Operating Officer since 1992 and as a director of the Company since 1996. Larry W. Bickle. Mr. Bickle has served as a director of 53 1995 the Company since 1995. He is currently Managing Director of Haddington Ventures, L.L.C., a private company that invests in midstream energy companies and assets. He is also a Director of Unisource, Inc., the holding company for Tucson Electric. He formerly founded and was Chairman and Chief Executive Officer of TPC Corporation, a public gas storage and transportation company. David C. Dudley. Mr. Dudley has served as a director of 48 1986 the Company since 1986. Since 1983, he has served as Operating Manager of Dudley & Associates, LLC, Denver, Colorado, a closely-held oil and gas exploration and production firm. Since 1985, he has served as a member of the New York investment advisory firm Dudley & Company LLC. In addition, since 1980 Mr. Dudley has served as a general partner of Greenhouse Associates, a closely-held investment partnership. Richard C. Kraus. Mr. Kraus has served as a director of 52 1994 the Company since 1994. Mr. Kraus is currently President and Chief Executive Officer of Carmeuse North America. From 1981 to 1997 he was employed by Echo Bay Mines Ltd., a public company engaged primarily in mining operations, most recently as a Director and its President and Chief Executive Officer. 4 R. James Nicholson. Mr. Nicholson has served as a 61 1987 director of the Company since 1987. Since 1978, he has served as President of Nicholson Enterprises, Inc., a land development company. Mr. Nicholson has also served as President of Renaissance Homes, a residential home building company, since 1988. He was elected Chairman of the Republican National Committee in January 1997. Arend J. Sandbulte. Mr. Sandbulte has served as a 65 1989 director of the Company since 1989. From 1964 to 1996, he was employed by Minnesota Power & Light Company, a publicly-held, diversified energy utility, most recently as its Chairman of the Board, President and Chief Executive Officer, and continues as a director of this utility, a position to which he was first elected in 1983. John M. Seidl. Mr. Seidl has served as a director of the 60 1994 Company since 1994. He currently serves as Chairman, President, Chief Executive Officer and director of CellNet Data Systems. From 1989 to 1993, he served as an officer and director of MAXXAM Inc., a public company, and of Kaiser Aluminum Corporation and The Pacific Lumber Company, subsidiaries of MAXXAM Inc.
There are no family relationships among the directors. There are no arrangements or understandings between any director and any other person pursuant to which that director was or is to be elected. Director Compensation - --------------------- Each non-employee director receives 600 shares of the Company's stock per year for serving as a director and is paid $750 for each meeting attended. Non-employee directors named to the various committees are paid $600 for each committee meeting attended and $300 for telephonic meetings. Directors are reimbursed for expenses incurred in attending Board and committee meetings. Members of the Board of Directors also participate in the Company's Stock Option Plan as described below under Executive Compensation. EXECUTIVE OFFICERS OF THE COMPANY The following background information is provided on the Company's executive officers.
Age at Officer Name/Position and Background April 15, 1999 Since ---------------------------- -------------- ------- Thomas E. Congdon. Chairman. See "Board 72 1966 of Directors and Committees." Mark A. Hellerstein. President and Chief 46 1991 Executive Officer. See "Board of Directors and Committees." Ronald D. Boone. Executive Vice President 51 1990 and Chief Operating Officer. See "Board of Directors and Committees."
5 The executive officers of the Company serve at the pleasure of the Board of Directors and do not have fixed terms. Executive officers generally are elected at the regular meeting of the Board immediately following the annual stockholder meeting. Any officer or agent elected or appointed by the Board of Directors may be removed by the Board whenever in its judgment the best interests of the Company will be served thereby without prejudice, however, to contractual rights, if any, of the person so removed. There are no family relationships among the executive officers. There are no arrangements or understandings between any officer and any other person pursuant to which that officer was elected. EXECUTIVE COMPENSATION In addition to salaries, the Company has granted stock options to executive management and selected other personnel. These individuals also participate with other members of management in a net profits interest bonus plan and with selected other employees in the prior stock appreciation rights ("SARs") plan. All employees are eligible to participate in the Company's cash bonus plan. These plans are described on pages 8-11 of this proxy statement. The following table sets forth the annual and long term compensation received during each of the Company's last three years by the Chief Executive Officer of the Company and by the four other highest compensated executive officers of the Company during 1998.
SUMMARY COMPENSATION TABLE -------------------------- Long Term Compensation ------------------------ Awards ------------------------ Annual Compensation Restricted All Other Name and ----------------------------- Stock Options/ Compensation Principal Position Year Salary($) Bonus Awards($) SARs (#) ($) (1) - ------------------ ---- --------- ----- --------- -------- ------- Mark A. Hellerstein 1998 $253,333 $216,172 (2) - 14,976 $ 10,000 President and Chief 1997 235,000 410,167 (2) - 9,241 9,500 Executive Officer 1996 219,167 63,563 - 56,239 (3) 9,500 Ronald D. Boone 1998 202,667 193,074 (2) - 11,980 10,000 Executive Vice President 1997 186,667 389,735 (2) - 7,372 9,500 and Chief Operating Officer 1996 173,333 54,279 - 48,622 (3) 9,500 Ralph H. Smith (4) 1998 180,000 50,000 - - 10,000 Senior Vice President - 1997 176,000 51,150 - 6,767 9,500 Mid-Continent 1996 169,333 8,350 - 15,425 (3) 1,740 David L. Henry (5) 1998 135,867 55,650 - 8,064 8,152 Chief Financial Officer 1997 129,933 38,850 - 5,014 5,236 1996 85,295 350 - 14,573 (3) - Thomas E. Congdon 1998 81,067 109,919 (2) - 4,792 4,864 Chairman of the Board 1997 80,000 424,123 (2) - 3,036 4,800 1996 80,000 8,350 - 47,547 (3) 4,800
- ----------- (1) Amounts consist of the Company's contribution to the 401(k) Savings Plan. (2) Includes cash bonuses and payments pursuant to the Company's SAR Plan and Net Profits Interest Bonus Plan. (3) Includes SARs granted January 1, 1996, options granted effective Nov- ember 21,1996 pursuant to the Stock Option Plan to cap appreciation for all SARs at $20.50 per SAR, and options granted on December 31, 1996 pursuant to the Company's Stock Option Plan. (4) Ralph H. Smith resigned effective February 25, 1999. (5) David L. Henry became an executive officer April 29, 1996, compensated at an annual salary of $125,000. Mr. Henry resigned effective February 28, 1999. 6 Stock options granted to the Company's five highest compensated executive officers during 1998 are set forth in the following two tables.
OPTION GRANTS IN LAST FISCAL YEAR --------------------------------- Individual Grants - --------------------------------------------------------------------------------------- Potential Realizable Value Percentage of at Assumed Annual Rates of Total Stock Price Appreciation Options Granted for Option Term Number of to Employees Exercise Expiration -------------------------- NAME Options Granted in 1998 Per Share Date 5% 10% - ---- --------------- ------- --------- ---- -- --- Mark A. Hellerstein 14,976 (1) 6.3% $18.50 12/31/08 $174,239 $441,556 Ronald D. Boone 11,980 (1) 5.0% $18.50 12/31/08 139,382 353,221 Ralph H. Smith - - - - - - David L. Henry 8,064 (1) 3.4% $18.50 12/31/08 93,821 237,761 Thomas E. Congdon 4,792 (1) 2.0% $18.50 12/31/08 55,753 141,288
- ------------ (1) Stock options granted effective December 31, 1998 pursuant to the Company's Stock Option Plan as described on page 8 of this proxy statement. AGGREGATED OPTION/SAR EXERCISES IN 1998 AND DECEMBER 31, 1998 OPTION/SAR VALUE
Number of Value of Unexercised Unexercised Options/SARs In-the-Money Held at Options/SARs at Shares December 31, 1998 December 31, 1998 (1) Acquired Value ------------------------------------------------------------ Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable ---- ----------- -------- ----------- ------------- ----------- ------------- Mark A. Hellerstein - - 6,087 52,618 $ - $108,354 Ronald D. Boone (2) - - 39,942 41,961 304,000 89,233 Ralph H. Smith - - - 14,877 - - David L. Henry - - - 14,610 - - Thomas E. Congdon - - 32,150 20,368 - 54,270
- -------------- (1) On December 31, 1998, the last reported sales price of the Common Stock as quoted on the Nasdaq National Market System was $18.50. (2) On November 1,1990, the Company granted Mr. Boone an option to purchase 27,307 shares of the Company's Common Stock at an exercise price of $3.30 per share.The option expires ten years from the date of grant. In 1997, 7,307 shares were exercised, leaving 20,000 shares remaining under this option as of December 31, 1998. Mr. Boone exercised an addi- tional 5,000 shares in February 1999. 7 Incentive Compensation Plans - ---------------------------- Effective January 1992, the Company adopted the Cash Bonus Plan, the Net Profits Interest Bonus Plan, and the Stock Appreciation Rights Plan ("SAR Plan"). On November 21, 1996 the Company adopted the Stock Option Plan and on March 27, 1997 the Company adopted the Incentive Stock Option Plan. Effective January 1, 1998, the Company adopted the Employee Stock Purchase Plan. Cash Bonus Plan. In March of each year the Board of Directors of the Company determines whether the Company's performance during the prior year warrants payment of a cash bonus to employees. If so, the Board designates key employees to participate in the Cash Bonus Plan and the aggregate amount of bonuses to be paid to those designated persons, which amount is to be not less than five nor more than fifty percent of their aggregate base salaries. The Cash Bonus Plan participants share in such aggregate amount pro rata to the performance adjusted base salary of each participant. The performance adjusted base salary is between zero and one hundred percent of the employee's base salary for the prior calendar year as determined by his or her supervisor. The Board of Directors determines the performance adjusted base salary of the Chief Executive Officer of the Company. No participant may receive a pro rata portion of the aggregate bonus amount in excess of fifty percent of his or her salary for the prior year and a participant must be employed by St. Mary at the time the cash bonuses are awarded. The Board of Directors has the unilateral right to terminate or modify the Cash Bonus Plan. Net Profits Interest Bonus Plan. Each year the Board of Directors of the Company designates key employees to participate in the Net Profits Interest Bonus Plan for the following calendar year. Participation is contingent upon the participant continuing to be an employee of the Company throughout the entire calendar year. The participants receive a bonus based on the aggregate net profits earned by the Company's interests in oil and gas wells completed or acquired during the following year. The total amount of the bonus pool to be distributed to all participants for such year is ten percent of net profits after the Company has recovered one hundred percent of all costs incurred by it with respect to those wells. The bonus pool increases to twenty percent of aggregate net profits after the Company has recovered two hundred percent of costs. Participants in the Net Profits Interest Bonus Plan for a year share in the net profits bonus pool for the year in proportion to their relative weighted base salaries during that year. For this purpose, the salaries of the President and the Executive Vice President of the Company are weighted at one hundred percent of their base salaries and the salaries of all other participants are weighted at two-thirds thereof or less. The Company has the right at any time to acquire the rights of all participants in any Plan Year if the participants holding no less than two-thirds of the Plan Year's interests have agreed in writing to the terms and conditions of a buyout of that Plan Year. The Board of Directors has the right at any time to terminate or modify prospectively the Net Profits Interest Bonus Plan. Stock Appreciation Rights Plan. Effective January 1, 1992 the Company adopted a SAR Plan. Participation in the plan was limited to the directors and the most senior employees of the Company. The SAR Plan was designed to provide a participant with the opportunity five years after he was allocated a stock appreciation right to receive with respect to such right a cash amount equal to 100% of his base salary for the year of grant if the per share value of the Common Stock during such five-year period increased at an average rate of 25% per annum. This plan was replaced by a Stock Option Plan on November 21, 1996, subject to all SARs then granted. As part of this new option plan, substantially all of the SARs previously granted were capped at $20.50, the market price of the Common Stock on that date, and an equal number of stock options were granted to replace them with an exercise price of $20.50 which allows the holders to realize the same appreciation as would otherwise have been realized under the SAR Plan. Stock Option Plan. Effective November 21, 1996 the Company adopted a Stock Option Plan. Directors and selected employees of the Company are granted options under the Stock Option Plan at the discretion of the Board of Directors. Options are exercisable five years after grant and expire unless exercised within ten years of grant. 8 The Board of Directors of the Company each year determines the participants in the Stock Option Plan. The right of a participant to an allocated stock option vests 25% immediately and the balance ratably over a three-year period following the award of the option so that if such participant terminates his employment prior to three years after an award, the award will be proportionately reduced. However, by Board resolution, the options of a participant employed by the Company for no less than 12 years who retires after reaching age 60 and who does not subsequently become a full-time employee of a competitor prior to reaching age 65 shall not be subject to any reduction. Non-employee directors currently receive an aggregate number of non-tax qualified options each year equal to the average number of options granted to the two most senior employees of the Company proportionately divided among the directors and vest over a three-year period in the same manner as for employee participants, except that the options of a director who retires after five years of service shall become fully vested upon retirement. The Board of Directors retains the right to terminate or modify prospectively the Stock Option Plan at any time. In addition, the Board of Directors adopted on March 27, 1997 an Incentive Stock Option Plan ("ISO Plan") which is intended to be a companion option plan with the Stock Option Plan. The ISO Plan is an alternative to the above-described Stock Option Plan for those employees designated by the Board of Directors to be granted stock options, with such employees electing at the time of grant whether the options to be granted shall be non-tax qualified options granted under the above-described Stock Option Plan or incentive stock options granted under the ISO Plan. Employee Stock Purchase Plan. Effective January 1, 1998, the Company adopted the Employee Stock Purchase Plan. All employees of the Company who have completed one year of continuous employment are eligible to participate in subsequent Semi-Annual Programs. Employees who elect to participate in a Semi-Annual Program do so by means of after-tax payroll deductions equal to not less than 1 percent and not more than 15 percent of their base salary. Employees may discontinue their participation in a Semi-Annual Program at any time and may withdraw all amounts withheld pursuant to a Semi-Annual Program or may elect to decrease their participation on one occasion during the term of a Semi-Annual Program. Employees may not purchase more than $25,000 in fair market value of the Company's Common Stock in any calendar year through the Employee Stock Purchase Plan. The price of shares of Common Stock purchased on behalf of employees with payroll deductions at the termination of a Semi-Annual Program is equal to the lower of 85 percent of the closing price of the Common Stock of the Company on the Nasdaq National Market System on the commencement date of a Semi-Annual Program or 85 percent of the closing price of the Common Stock of the Company on the Nasdaq National Market System on the termination date of a Semi-Annual Program. The total number of shares of Common Stock of the Company that may be issued under the Employee Stock Purchase Plan is 500,000. The Employee Stock Purchase Plan provides for semi-annual offerings of the Common Stock of the Company to employees commencing on January 1 and July 1 and terminating on June 30 and December 31 of each year through 2017 (the "Semi-Annual Programs"). 9 REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION The Compensation Committee of the Board of Directors (the "Committee") administers the Company's executive compensation programs. After consideration of the Committee's recommendations, the full Board of Directors reviews and approves the salaries of all elected officers, including those of the executive officers named in the Summary Compensation Table on page 6. The Committee is responsible for all other elements of executive compensation, including cash bonuses, stock options, and the Net Profits Interest Bonus. The Committee is also responsible for approving the salaries of all officers, reviewing salary policies for all employees and approving the amount and distribution of payments made under the Cash Bonus Plan. In addition, the Committee reviews the performance of the Company's pension and 401(k) plans with the trustees of the plans. The goals of the Company's integrated executive compensation programs include the following: 1. Attract and retain talented management personnel. 2. Encourage management to obtain superior returns for the Company's stockholders. 3. Promote preservation of the Company's capital base. Salaries - -------- In order to emphasize performance-based incentive compensation, base salaries are targeted to be slightly below the median salary for the industry. The Committee, with the assistance of management, determines the salary ranges for various positions based on survey data from the Company's industry peer group. The Committee then reviews management's recommendations for executive salaries and the performance summaries on which they are based. Final salary recommendations are made by the Committee to the full Board based on experience, sustained performance, and comparison to peers inside and outside the Company. Incentive Compensation - ---------------------- The Company also has established three compensation plans, which have the potential to increase annual compensation if the economic performance of the Company and its employees so warrants. These plans, which are described in detail in the "Incentive Compensation Plans" section of the Proxy Statement, have certain specific objectives. 1. The Net Profits Interest Bonus Plan is designed to reward the personal contributions made by various management personnel to the Company's financial success. Plan participants share in the net profits in proportion to their relative weighted salaries during the year. Recognizing that the primary incentive for profitable acquisitions and operations needs to be provided to the most senior of the executive officers, the salaries of the president and the executive vice president are weighted at 100% and the salaries of all other participants are weighted at two-thirds of actual base salary or less. 2. The Stock Option Plan is intended to reward executive management of the Company for long-term increases in the value of the Company's stock. The Stock Option Plan focuses on appreciation of the market price of the Company's stock over a five-year period. As presently implemented by the Board, generally if the average stock appreciation during this period is 15% per year, then the persons granted stock options at the beginning of the period will, at the end of five years, have the opportunity to receive an amount equal to 100% of their base salary at the time the stock option was granted. The options may be exercised at any time during a five-year period beginning five years after the grant. This Stock Option Plan is designed to encourage management's concern for long-term appreciation of the stockholders' interest. In addition, the Board of Directors approved on March 27, 1997 an Incentive Stock Option Plan ("ISO Plan") which is intended to be a companion option plan with the Stock Option Plan. The ISO Plan is an alternative to the above-described Stock Option Plan for those employees designated by the Board of Directors to be granted stock options, with such employees electing at the time of grant whether the options to be granted shall be non-tax qualified options granted under the above-described Stock Option Plan or incentive stock options granted under the ISO Plan. 10 3. The Company also has established a Cash Bonus Plan. Each year the Board of Directors evaluates the overall performance of the Company for the year and with the assistance of management determines the total cash bonus available to be allocated to employees. The proportional participation of each designee is a function of his or her performance during the year. As the minimum cash bonus distribution would equal five percent of the salaries of designated participants, employees are motivated to achieve individual excellence even if the business climate affecting the oil and gas industry is poor. Compensation of the Chief Executive Officer - ------------------------------------------- The compensation of Mark A. Hellerstein, President and Chief Executive Officer, consisted of the same components and criteria as other executive officers including base salary, cash bonus, net profits interest bonus and stock options. His base salary is reviewed annually by the Committee and is targeted to be slightly below the median salary for the industry with a greater emphasis on incentive compensation tied to Company performance. Mr. Hellersteins' base salary in 1998 increased $10,000 or 4% over 1997. His cash bonus declined by approximately $194,000 in 1998 compared to 1997 primarily as a result of the SAR payments. The 1991 grant paid in 1997 was issued at $4.26 per share while the 1992 grant paid in 1998 was issued at $11.50 per share. Both grants were capped at $20.50 per share pursuant to the Stock Option Plan. Mr. Hellerstein was granted stock options in 1998 using the same formula as that used for all other employees. Conclusion - ---------- The Company's executive compensation is linked to individual and corporate performance and stock price appreciation. Base salaries are set below the median for the industry so that incentivized compensation can have its intended effect. The Compensation Committee plans both to continue the policy of linking executive compensation to individual and corporate performance and returns to stockholders and to provide a cash bonus incentive to key employees which will provide performance motivation independent of the ups and downs of the oil and gas industry's business cycle. Richard C. Kraus, Chairman R. James Nicholson April 6, 1999 Arend J. Sandbulte 11 RETIREMENT PLANS Pension Plan - ------------ The Company's Pension Plan is a qualified, non-contributory defined benefit plan, which is available to substantially all employees. This Plan was amended in 1994 to conform with the changes required by the Tax Reform Act of 1986 and to reduce the plan formula. The Company also has a supplemental pension plan for certain executive officers to provide for benefits in excess of Internal Revenue Code limits. The following table shows the estimated maximum annual benefits payable upon retirement at age 65 as a straight life annuity to participants in the Pension Plans for the indicated levels of average annual compensation and years of service.
Estimated Annual Pension Estimated Annual Pension Benefits for Executives Benefits for Executives Hired before 1995 with > Hired after 1995 with > Remuneration 15 years of service 25 years of service ------------ ------------------------ ------------------------- $100,000 $ 65,234 $ 35,000 150,000 103,734 52,500 200,000 142,234 70,000 250,000 180,734 87,500 300,000 219,234 105,000 350,000 257,734 122,500
The qualified plan provides a benefit after 25 years of service equal to 35% of final average compensation, subject to Internal Revenue Code limits. Final average compensation is the average of the highest 3 consecutive years of the 10 years preceding termination of employment. For each named executive officer, the level of compensation used to determine benefits payable under the qualified pension plan is such officer's average of the base salaries (excluding bonus) shown in the Summary Compensation Table. The supplemental plan provides executives hired prior to 1995, after completing 15 years of service and reaching age 65, a benefit equal to 40% of final average compensation plus 37% of final average compensation integrated with the social security wage base without regard to compensation limitations provided under the qualified plan less the benefit provided by the qualified plan. For executives hired after 1994, the supplemental benefit is calculated using the formula for the qualified plan without the limitation imposed by Section 415 of the Internal Revenue Code, less the benefit provided by the qualified plan. As of December 31, 1998, the named executive officers have the following years of credited service: Mark A. Hellerstein 7 Ronald D. Boone 8 Ralph H. Smith 3 David L. Henry 3 Thomas E. Congdon 33 401(k) Plan - ----------- The Company's 401(k) Profit Sharing Plan is a defined contribution pension plan qualified under the Employee Retirement Income Security Act of 1974. The 401(k) Plan allows eligible employees to contribute up to nine percent of their income on a pre-tax and/or after tax basis through contributions to the 401(k) Plan. The Company matches each employee's contributions up to six percent of the employee's pre-tax income. The Company also may contribute additional funds to the 401(k) Plan each year in its discretion. Company contributions vest over an employee's first five years of employment. 12 PERFORMANCE GRAPH The following Performance Graph compares the Company's cumulative total stockholder return on its Common Stock for the period December 31, 1993 to December 31, 1998 with the cumulative total return of the Standard Industrial Classification Code ("SIC Code") for Crude Petroleum and Natural Gas and the S&P 500 Index. The SIC Code for Crude Petroleum and Natural Gas is 1311. The identities of the companies included in the index will be provided upon request. [GRAPH APPEARS HERE]
COMPARISON OF CUMULATIVE TOTAL RETURN* AMONG ST. MARY LAND & EXPLORATION COMPANY, THE S&P 500 INDEX, AND THE SIC CODE INDEX 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97 12/31/98 -------- -------- -------- -------- -------- -------- ST. MARY LAND & EXPLORATION COMPANY 100.00 109.47 117.08 210.06 297.50 158.57 SIC CODE INDEX 100.00 104.80 115.26 153.26 155.34 124.43 S&P 500 INDEX 100.00 101.32 139.40 171.41 228.59 293.92
Assumes $100 invested on December 31, 1993 in St. Mary Land & Exploration Company, S&P 500 Index and SIC Code Index for Crude Petroleum and Natural Gas. *Total return assumes reinvestment of dividends. 13 EMPLOYMENT AGREEMENT On September 1, 1991, the Company entered into an employment agreement with Mr. Hellerstein. His current salary is $260,000 per year. Compensation is reviewed annually. Mr. Hellerstein participates in the Company's benefit plans and is entitled to bonuses and incentive compensation as determined by the Board of Directors and the Chairman of the Company. The agreement is terminable at any time upon 30 days' notice by either party. Upon termination of the agreement by the Company for any reason whatsoever (other than death, disability or misconduct by Mr. Hellerstein), the Company is obligated to continue to pay his compensation, including insurance benefits, for a period of one year. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Set forth below is a description of transactions entered into between the Company and certain of its officers and directors during the last three years. Certain of these transactions will continue in effect and may result in conflicts of interest between the Company and such individuals. Although these persons may owe fiduciary duties to the Company and its stockholders, there can be no assurance that conflicts of interest will always be resolved in favor of the Company. R. James Nicholson has served as a director of the Company since 1987. He is also active in the real estate business. See "Nominees". Mr. Nicholson owns a 17% interest in a 40-acre parcel subject to a preferential distribution right in favor of Parish Corporation (a wholly-owned subsidiary of the Company) in the amount of $1,265,000. Ralph H. Smith was hired as Senior Vice President - Mid-Continent on October 1, 1995. During the previous 14 years he was a shareholder of St. Mary Operating Company, formerly Anderman/Smith Operating Company ("Anderman/Smith") and the principal manager of its activities in the Anadarko Basin. Along with the Company, he acquired a working interest in all of the oil and gas rights acquired through Anderman/Smith. The Board of Directors approved the cost-bearing working interest participation by Mr. Smith, at his annual election as to participation and amount, of up to 10% of all working interests acquired by the Company each year which are managed from the Mid-Continent (Tulsa) office. Mr. Smith elected to participate at 7.5% for 1997 and 0% for 1998. Mr. Smith resigned February 25, 1999. As a result of their prior employment by Anderman/Smith, Ronald D. Boone and two other Vice Presidents own working interests and royalty interests in many of the Company's properties, earned as part of two Anderman/Smith employee benefit programs and from other Anderman/Smith entities in which they participated. They have no royalty participation in any new Company properties. Mr. Boone also owns 50% of Princeton Resources Ltd. and has a 33% interest in Baron Oil Corporation, entities which manage oil and gas working and royalty interests which he acquired as a result of his Anderman/Smith employment. While another former Anderman/Smith employee manages these corporations, Mr. Boone participates in their investment decisions. The Board of Directors has approved Mr. Boone's involvement in Princeton Resources and Baron Oil. From time to time, David C. Dudley, a director of the Company, offers the Company the right to participate in lease acquisition, exploration and development prospects in which Mr. Dudley's firm has an interest. The Company currently is not participating in any such prospect. During 1993 and 1994 the Company and others, having reserved to themselves the maximum working interest desired by each of them, sought to obtain the participation of outside parties in the drilling of an exploratory well on the Patterson Prospect in Louisiana. During 1994, in an effort to obtain the required amount of outside participation, the Board of Directors approved participation by any officer, employee or director who wished to acquire a portion of the available working interest on a promoted basis. Thomas E. Congdon, Dudley & Associates, LLC and Ronald D. Boone (through Princeton Resources Ltd.) all participated. A dry well was drilled in early 1995. The Company and its partners believe that the area remains prospective and plan to test a new prospect during 1999. 14 The Company's By-Laws provide that no director may pursue a business or investment opportunity for himself if he has obtained knowledge of such opportunity through his affiliation with the Company, provided that the Company is interested in pursuing such opportunity and is financially or otherwise able to pursue the opportunity. Moreover, no officer or employee of the Company may pursue for his own account an oil and gas opportunity unless (a) with respect to an officer of the Company, the interest has been approved by the Board of Directors and (b) with respect to a non-officer of the Company, such interest of the employee has been approved by a senior officer of the Company with full knowledge of such opportunity. These restrictions do not apply to the acquisition of less than one percent of the publicly traded stock of another company as long as the Company is not at such time engaged in any present or pending transaction with the other company. OTHER MATTERS TO BE VOTED UPON Amendment to the Stock Option Plans The Company's stockholders are being asked to approve an amendment to the Company's Stock Option Plans which will increase the total number of shares of Common Stock that may be issued under the Stock Option Plans by 950,000 to 1,650,000. All 700,000 shares of Common Stock presently covered by the unamended Stock Option Plans have been allocated to outstanding options and accordingly the Company is presently not able to grant additional options under the unamended Stock Option Plans. On March 25, 1999, the Board of Directors approved an amendment to the Stock Option Plans increasing the number of shares authorized to be issued under the Stock Option Plans to 1,650,000. The primary purpose of the amendment is to ensure that the Company will have a sufficient reserve of Common Stock available for the Stock Option Plans. The Board of Directors believes that the availability of stock options is important to the Company and enhances stockholder value by increasing the Company's ability to attract, retain and motivate key employees of the Company through providing them with the means of acquiring an interest in the Company. The Company intends to issue additional options under the amended Stock Option Plans over an extended uncertain period of time and it is anticipated that the additional stock options will be issued both to present and to future key employees of the Company. The following is a summary of the principal features of the Stock Option Plans, as amended. Copies of the Stock Option Plans will be furnished by the Company to any stockholder upon written request to the Corporate Secretary. The Stock Option Plans consist of two separate but companion option plans: 1. The Stock Option Plan adopted by the Board of Directors effective November 21, 1996 to replace the 1992 SAR Plan, and 2. The ISO Plan adopted by the Board of Directors effective March 27, 1997. The Stock Option Plan All current and former employees, consultants and members of the Board of Directors of the Company or of any subsidiary of the Company are eligible to participate in the Stock Option Plan. As of December 31, 1998, 55 persons had been designated by the Board of Directors to participate in the Stock Option Plan. 15 The total number of shares of Common Stock which may be issued under the Stock Option Plan is 1,650,000. However, to the extent that options are issued under the ISO Plan, the shares of Common Stock that may be issued under the Stock Option Plan are reduced. At the discretion of the Board of Directors the Stock Option Plan may be administered by a Committee of two or more non-employee Directors appointed by the Board. Optionees under the Stock Option Plan shall be selected at the discretion of the Board or such Committee from among those eligible participants who, in the opinion of the Board or such Committee, are or were in a position to contribute materially to the Company's continued growth and development and to its long-term success. Subject to the provisions of the Stock Option Plan, the Board or such Committee shall have complete discretion in determining the terms and conditions and number of Options granted under the Stock Option Plan. Options granted under the Stock Option Plan are to be exercisable at the market price of the Company's Common Stock on the date of grant, are to have a term not to exceed ten years and may not be exercised prior to five years following the date of grant. Options under the Plan will fully vest (i) just prior to the completion of an acquisition of the Company or (ii) upon termination of the optionee's employment with the Company due to death, disability or normal retirement. Unexercised options will terminate (i) upon completion of an acquisition of the Company or (ii) upon termination of the optionee's employment with the Company for cause. Nothing contained in the Stock Option Plan shall be construed to give any employee or consultant any right to continued employment or association with the Company. Each option under the Stock Option Plan must be evidenced by a written option agreement that specifies the exercise price, the duration of the option, the number of shares of stock to which the option applies, and such vesting or exercisability restrictions and other terms and conditions which the Board or Committee may impose. The principal federal income tax consequences of the issuance and exercise of options under the Stock Option Plan are, in general, as follows: 1. Options issued under the Stock Option Plan are not intended to qualify as "incentive stock options" under the Internal Revenue Code. 2. Upon the issuance of an option under the Stock Option Plan, the optionee will have no taxable income and the Company will have no tax deduction. 3. Upon exercise of an option under the Stock Option Plan, the optionee will realize ordinary taxable income in an amount equal to the excess of the fair market value of the underlying shares of Common Stock at the time the option is exercised over the exercise price of the option for such shares. 4. The amount of income recognized by the optionee will be deductible by the Company as compensation in the year in which ordinary income is recognized by the optionee by reason of exercise of options under the Stock Option Plan. 5. An optionee's basis for the shares of Common Stock acquired pursuant to the exercise of options under the Stock Option Plan will be the option exercise price plus any amount recognized as ordinary income by reason of the exercise of the options. 6. Upon the sale of the Common Stock acquired pursuant to the exercise of options under the Stock Option Plan, capital gain or loss will be realized by the optionee in the amount by which the sales price is greater or less than the basis of such stock. Such gain or loss will be long-term or short-term depending on whether the shares were held for more than one year after the option was exercised. The ISO Plan The ISO Plan is a companion option plan with the Stock Option Plan. It is intended that the ISO Plan will be an alternative to the Stock Option Plan for those employees designated by the Board of Directors to be granted stock options, with such employees electing at the time of grant whether the options to be granted shall be options granted under the Stock Option Plan or incentive stock options granted under the ISO Plan. All employees of the Company or any subsidiary of the Company are eligible to participate in the ISO Plan. As of December 31, 1998, 24 persons had been designated by the Board of Directors to participate in the ISO Plan. 16 The total number of shares of Common Stock which may be issued under the ISO Plan is 1,650,000. However, to the extent that options are issued under the Stock Option Plan, the shares of Common Stock that may be issued under the ISO Plan are reduced. At the discretion of the Board of Directors the ISO Plan may be administered by a Committee of two or more non-employee Directors appointed by the Board. Optionees under the ISO Plan shall be selected at the discretion of the Board or such Committee from among those eligible participants who, in the opinion of the Board or such Committee, are in a position to contribute materially to the Company's continued growth and development and to its long-term success. Subject to the provisions of the ISO Plan, the Board or such Committee shall have complete discretion in determining the terms and conditions and number of options granted under the ISO Plan. It is intended that options granted under the ISO Plan will constitute "incentive stock options" under the Internal Revenue Code and thus the ISO Plan provides that options granted thereunder are to be (i) exercisable at the market price of the Company's Common Stock on the date the options are granted, (ii) nontransferable by the optionee, and (iii) terminated if not exercised within 3 months of an optionee's termination of employment with the Company. Further, options granted under the ISO Plan will have a term of no more that ten years (five years in the case of ten percent or more shareholders). Options under the ISO Plan will fully vest (i) just prior to the completion of an acquisition of the Company or (ii) upon termination of the optionee's employment with the Company due to death, disability or normal retirement. Unexercised options will terminate (i) upon completion of an acquisition of the Company or (ii) upon termination of the optionee's employment with the Company for cause. Nothing contained in the ISO Plan shall be construed to give any employee any right to continued employment with the Company. Unless earlier terminated by the Board of Directors, the ISO Plan shall terminate on the date ten years subsequent to the date of the adoption of the ISO Plan by the Board, after which date no options may be granted under the ISO Plan. The Board of Directors may at any time terminate the ISO Plan and from time to time may amend or modify the ISO Plan, provided, however that no such action of the Board, without approval of the shareholders, may: (i) increase the total amount of Common Stock which may be purchased through options granted under the ISO Plan; or (ii) change the class of employees eligible to receive options under the ISO Plan. Each option under the ISO Plan must be evidenced by a written option agreement that specifies the exercise price, the duration of the option, the number of shares of stock to which the option applies, and such vesting or exercisability restrictions and other terms and conditions which the Board or Committee may impose. The principal federal income tax consequences of the issuance and exercise of options under the ISO Plan are, in general, as follows: 1. Options issued under the ISO Plan are intended to qualify as "incentive stock options" under the Internal Revenue Code. 2. Upon the issuance of an option under the ISO Plan, the optionee will have no taxable income and the Company will have no tax deduction. 3. The tax consequences upon exercise of the option and later disposition of the shares of Common Stock acquired thereby depend upon whether the optionee satisfies the holding period rule whereby the optionee must hold the shares for more than one year after exercise and two years after the date of issuance of the option. 17 4. If the optionee satisfies the holding period rule, the optionee will not realize income upon exercise of the option (although the excess of the fair market value of the shares on the date of exercise over the option price must be included as an adjustment in computing alternative minimum taxable income) and the Company will not be allowed an income tax deduction at any time. The difference between the option price and the amount realized upon disposition of the shares by the optionee will constitute a long-term capital gain or loss, as the case may be. 5. If the optionee fails to observe the holding period rule, the portion of any gain realized upon such disqualifying disposition of the shares which does not exceed the excess of the fair market value at the date of exercise over the option price will be treated as ordinary income to the optionee, the balance of any gain or any loss will be treated as capital gain or loss (long-term or short-term depending on whether the shares were held for more than one year after the option was exercised) and the Company will be entitled to a deduction equal to the amount of ordinary income upon which the optionee is taxed. Two option grants have been made by the Company covering 4,268 shares on the basis of the amendment to the Stock Option Plans to increase the number of authorized shares, subject to stockholder approval. Such options were granted to non-executive officer employees as a result of the Company allowing non-supervisory technical employees to participate in the plan and have an exercise price of $18.50 per share, which was the fair market value of the Common Stock on the date of grant, and expire December 31, 2008. The actual value that a particular optionee may realize will depend on the excess of the Common Stock price over the exercise price on the date vested options are exercised. Since the Board of Directors believes that the proposed increase in the number of shares authorized for issuance under the Stock Option Plans will attract, retain and motivate key employees and enhance stockholder value, the Board of Directors recommends that stockholders vote FOR approval of the increase in number of authorized shares available for issuance under the Stock Option Plans. Other than the election of Directors and the approval of the amendment to the Stock Option Plans, the Company is aware of no matters to be submitted to a vote of the stockholders at the Annual Meeting. COMPLIANCE WITH SECTION 16(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934 Based solely on a review of reports filed with the Company, all directors and executive officers timely filed all reports regarding transactions in the Company's securities required to be filed during 1998 by Section 16(a) under the Securities Exchange Act of 1934. INDEPENDENT ACCOUNTANTS The Board of Directors has selected Arthur Andersen LLP as the independent public accountants to audit the books, records and accounts of the Company for its 1999 fiscal year. Arthur Andersen LLP has served as the Company's independent accountants since 1997 and is familiar with the business and financial procedures of the Company. To the knowledge of management, neither this firm nor any of its members has any direct or material indirect financial interest in the Company nor any connection with the Company in any capacity other than as independent public accountants. A representative of Arthur Andersen LLP is expected to attend the meeting. STOCKHOLDER PROPOSALS Proposals of stockholders intended to be presented at the 2000 Annual Meeting of Stockholders must be received by the Company on or before November 1, 1999 in order to be eligible for inclusion in the Company's proxy statement and form of proxy. To be so included, a proposal must also comply with all applicable provisions of Rule 14a-8 under the Securities Exchange Act of 1934. 18 OTHER MATTERS Management does not know of any other matters to be brought before the Annual Meeting of Stockholders. If any other matters not mentioned in this proxy statement are properly brought before the meeting, the individuals named in the enclosed proxy intend to vote such proxy in accordance with their best judgment on such matters. By Order of the Board of Directors Richard C. Norris Secretary April 15, 1999 19 Appendix A ST. MARY LAND & EXPLORATION COMPANY AS AMENDED MARCH 25, 1999 STOCK OPTION PLAN ARTICLE I ESTABLISHMENT AND PURPOSE 1.1 Establishment. St. Mary Land & Exploration Company, a Delaware corporation (the "Company"), hereby establishes a stock option plan for key employees, consultants and members of the Board of Directors of the Company or of a subsidiary of the Company, providing material services to the Company, which shall be known as the ST. MARY LAND & EXPLORATION COMPANY STOCK OPTION PLAN (the "Plan"). The Company shall enter into Option agreements with Optionees pursuant to the Plan. 1.2 Purpose. The purpose of the Plan is to enhance shareholder value by attracting, retaining and motivating key employees, consultants and members of the Board of Directors of the Company and of a subsidiary of the Company by providing them with a means to acquire a proprietary interest in the Company's success. ARTICLE II ELIGIBILITY AND PARTICIPATION All current and former employees, consultants and members of the Board of Directors of the Company (the "Board"), and of any subsidiary of the Company, are eligible to participate in the Plan and receive Options under the Plan. Optionees under the Plan shall be selected by the Board, in its sole discretion, from among those current and former employees, consultants and members of the Board of the Company, and of any subsidiary of the Company, who, in the opinion of the Board, are or were in a position to contribute materially to the Company's continued growth and development and to its long-term success. ARTICLE III ADMINISTRATION Administration. The Board shall be responsible for administering the Plan. (a) The Board is authorized to interpret the Plan; to prescribe, amend, and rescind rules and regulations relating to the Plan; to provide for conditions and assurances deemed necessary or advisable to protect the interests of the Company with respect to the Plan; and to make all other determinations necessary or advisable for the administration of the Plan. Determinations, interpretations, or other actions made or taken by the Board with respect to the Plan and Options granted under the Plan shall be final and binding and conclusive for all purposes and upon all persons. -1A- (b) At the discretion of the Board the Plan may be administered by a Committee of two or more non-employee Directors appointed by the Board (the "Committee"). The members of the Committee may be Directors who are eligible to receive Options under the Plan, but Options may be granted to such persons only by action of the full Board and not by action of the Committee. The Committee shall have full power and authority, subject to the limitations of the Plan and any limitations imposed by the Board, to construe, interpret and administer the Plan and to make determinations which shall be final, conclusive and binding upon all persons, including any persons having any interests in any Options which may be granted under the Plan, and, by resolution or resolutions to provide for the creation and issuance of any Option, to fix the terms upon which and the time or times at or within which, and the price or prices at which any shares may be purchased from the Company upon the exercise of an Option. Such terms, time or times and price or prices shall, in every case, be set forth or incorporated by reference in the instrument or instruments evidencing an Option, and shall be consistent with the provisions of the Plan. (c) Where a Committee has been created by the Board pursuant to this Article III, references in the Plan to actions to be taken by the Board shall be deemed to refer to the Committee as well, except where limited by the Plan or by the Board. (d) No member of the Board or the Committee shall be liable for any action or determination made in good faith with respect to the Plan or any Option granted under it. ARTICLE IV STOCK SUBJECT TO THE PLAN 4.1 Number. The total number of shares of common stock of the Company (the "Stock") hereby made available and reserved for issuance under the Plan upon exercise of Options shall be 1,650,000 shares. Notwithstanding anything to the contrary contained in the foregoing, to the extent that options are issued under any Incentive Stock Option Plan adopted by the Company, the shares of common stock reserved for issuance pursuant to Options granted under this Plan shall be reduced. The aggregate number of shares of Stock available under the Plan shall be subject to adjustment as provided in Section 4.3. 4.2 Unused Stock. If an Option shall expire or terminate for any reason without having been exercised in full, or if an "immaculate cashless exercise" (as described in Section 5.4) results in the issuance of a reduced number of shares in satisfaction of an option grant, the unpurchased shares of Stock subject thereto shall (unless the Plan shall have terminated) become available for other Options under the Plan. -2A- 4.3 Adjustment in Capitalization. In the event of any change in the outstanding shares of Stock of the Company by reason of a stock dividend or split, recapitalization, reclassification, or other similar capital change, the aggregate number of shares of Stock set forth in Section 4.1 shall be appropriately adjusted by the Board, whose determination shall be conclusive. In any such case, the number and kind of shares of Stock that are subject to any Option and the Option price per share shall be proportionately and appropriately adjusted without any change in the aggregate Option price to be paid therefor upon exercise of the Option. ARTICLE V TERMS OF STOCK OPTIONS 5.1 Grant of Options. Subject to Section 4.1, Options may be granted to current and former employees, consultants and members of the Board of the Company and of any subsidiary of the Company at any time and from time to time as determined by the Board. The Board shall have complete discretion in determining the terms and conditions and number of Options granted to each Optionee. In making such determinations, the Board may take into account the nature of services rendered by such current and former employees, consultants and members of the Board, their present and potential contributions to the Company and such other factors as the Board in its discretion shall deem relevant. 5.2 Option Agreement; Terms and Conditions to Apply Unless Otherwise Specified. As determined by the Board on the date of grant, each Option shall be evidenced by an option agreement (the "Option Agreement") that specifies: the Option price; the duration of the Option; the number of shares of Stock to which the Option applies; such vesting or exercisability restrictions which the Board may impose; and any other terms or conditions which the Board may impose. All such terms and conditions shall be determined by the Board at the time of grant of the Option. (a) If not otherwise specified by the Board, the following terms and conditions shall apply to Options granted under the Plan: (i) Term. The duration of the Option shall be for ten years from the date of grant. (ii) Exercise of Option. Unless an Option is terminated as provided hereunder, an Optionee may exercise an Option pursuant to a vesting schedule as determined by the Board. The Option may however not be exercised prior to five years following the date of its grant. (iii) Termination. Each Option granted pursuant to the Plan shall expire upon the earliest to occur of: -3A- (A) The date set forth in such Option, not to exceed ten years from the date of grant; (B) The completion of the merger or sale of substantially all of the Stock or assets of the Company with or to another company in a transaction in which the Company is not the survivor, except for the merger of the Company into a wholly-owned subsidiary (and the Company shall not be considered the surviving corporation for purposes hereof if the Company is the survivor of a reverse triangular merger), provided that the Company shall have given the Optionee at least thirty days' prior written notice of its intent to enter into such merger or sale; or (C) The termination of the employment of an Optionee for cause by the Company. (iv) Acceleration. The Option shall become fully exercisable irrespective of its other provisions (i) immediately prior to the completion of the merger or sale of substantially all of the stock or assets of the Company in a transaction in which the Company is not the survivor, except for the merger of the Company into a wholly-owned subsidiary (and the Company shall not be considered the surviving corporation for purposes hereof if the Company is the survivor of a reverse triangular merger); or (ii) upon termination of the Optionee's employment with the Company or a subsidiary thereof because of death, disability or normal retirement. (v) Transferability. In addition to the Optionee, the Option may be exercised, to the extent exercisable by the Optionee, by the person or persons to whom the Optionee's rights under the Option pass by will or the laws of descent and distribution, by the spouse or the descendants of the Optionee or by trusts for such persons, to whom or which the Optionee may have transferred the Option, or by legal representative of any of the foregoing. Any such transfer shall be made only in compliance with the Securities Act of 1933, as amended, and the requirements therefor as set forth by the Company. (b) The Board shall be free to specify terms and conditions other than and in addition to those set forth above, in its discretion. (c) All Option Agreements shall incorporate the provisions of the Plan by reference. -4A- 5.3 Option Price. No Option granted pursuant to the Plan shall have an Option price that is less than the fair market value of Stock on the date the Option is granted, as determined by the Board. The Option exercise price shall be subject to adjustment as provided in Section 4.3 above. 5.4 Payment. Payment for all shares of Stock shall be made at the time that an Option, or any part thereof, is exercised, and no shares shall be issued until full payment therefor has been made. Payment shall be made (i) in cash, or (ii) if acceptable to the Board, in Stock, by the surrender of Option rights hereunder valued at the difference between the Option exercise price plus income taxes to be withheld, if any, and the fair market value of the common stock (referred to as "immaculate cashless exercise"), or in some other form. ARTICLE VI WRITTEN NOTICE, ISSUANCE OF STOCK CERTIFICATES, SHAREHOLDER PRIVILEGES 6.1 Written Notice. An Optionee wishing to exercise an Option shall give written notice to the Company, in the form and manner prescribed by the Board. Full payment for the shares of Stock acquired pursuant to the Option must accompany the written notice. 6.2 Issuance of Stock Certificates. As soon as practicable after the receipt of written notice and payment, the Company shall deliver to the Optionee a certificate or certificates for the requisite number of shares of Stock. 6.3 Privileges of a Shareholder. An Optionee or any other person entitled to exercise an Option under the Option Agreement shall not have shareholder privileges with respect to any Stock covered by the Option until the date of issuance of a stock certificate for such Stock. ARTICLE VII RIGHTS OF OPTIONEES Nothing in the Plan shall interfere with or limit in any way the right of the Company or a subsidiary corporation to terminate any employee's or consultant's employment at any time, nor confer upon any employee or consultant any right to continue in the employ of the Company or a subsidiary corporation. ARTICLE VIII AMENDMENT, MODIFICATION, AND TERMINATION OF THE PLAN The Board may at any time terminate and from time to time may amend or modify the Plan. -5A- No amendment, modification, or termination of the Plan shall in any manner adversely affect any outstanding Option under the Plan without the consent of the Optionee holding the Option. ARTICLE IX ACQUISITION, MERGER OR LIQUIDATION 9.1 Acquisition. (a) In the event that an acquisition occurs with respect to the Company, the Company shall have the option, but not the obligation, to cancel Options outstanding as of the effective date of such acquisition, whether or not such Options are then exercisable, in return for payment to the Optionees of an amount equal to a reasonable estimate of an amount (hereinafter the "Spread"), determined by the Board, equal to the difference between the net amount per share payable in the acquisition or as a result of the acquisition, less the exercise price of the Option. In estimating the Spread, appropriate adjustments to give effect to the existence of the Options shall be made, such as deeming the Options to have been exercised, with the Company receiving the exercise price payable thereunder, and treating the Stock receivable upon exercise of the Options as being outstanding in determining the net amount per share. (b) For purposes of this section, an "acquisition" shall mean any transaction in which substantially all of the Company's assets are acquired or in which a controlling amount of the Company's outstanding shares are acquired, in each case by a single person or entity or an affiliated group of persons and entities. For purposes of this section, a controlling amount shall mean more than fifty percent of the issued and outstanding shares of Stock of the Company. The Company shall have the above option to cancel Options regardless of how the acquisition is effectuated, whether by direct purchase, through a merger or similar corporate transaction, or otherwise. In cases where the acquisition consists of the acquisition of assets of the Company, the net amount per share shall be calculated on the basis of the net amount receivable with respect to shares upon a distribution and liquidation by the Company after giving effect to expenses and charges, including but not limited to taxes, payable by the Company before the liquidation can be completed. (c) Where the Company does not exercise its option under this Section 9.1 the remaining provisions of this Article IX shall apply, to the extent applicable. 9.2 Merger or Consolidation. If the Company shall be the surviving corporation in any merger or consolidation, any Option granted hereunder shall pertain to and apply to the securities to which a holder of the number of shares of Stock subject to the Option would have been entitled in such merger or consolidation, provided that the Company shall not be considered the surviving corporation for purposes hereof if the Company is the survivor of a reverse triangular merger. -6A- 9.3 Other Transactions. A dissolution or a liquidation of the Company or a merger and consolidation in which the Company is not the surviving corporation (the Company shall not be considered the surviving corporation for purposes hereof if the Company is the survivor of a reverse triangular merger) shall cause every Option outstanding hereunder to terminate as of the effective date of such dissolution, liquidation, merger or consolidation. However, the Optionee either (i) shall be offered a firm commitment whereby the resulting or surviving corporation in a merger or consolidation will tender to the Optionee an option (the "Substitute Option") to purchase its shares on terms and conditions both as to number of shares and otherwise, which will substantially preserve to the Optionee the rights and benefits of the Option outstanding hereunder granted by the Company, or (ii) shall have the right immediately prior to such dissolution, liquidation, merger, or consolidation to exercise any unexercised Options whether or not then vested, subject to the other provisions of the Plan. The Board shall have absolute and uncontrolled discretion to determine whether the Optionee has been offered a firm commitment and whether the tendered Substitute Option will substantially preserve to the Optionee the rights and benefits of the Option outstanding hereunder. ARTICLE X SECURITIES REGISTRATION 10.1 Securities Registration. In the event that the Company shall deem it necessary or desirable to register under the Securities Act of 1933, as amended, or any other applicable statute, any Options or any Stock with respect to which an Option may be or shall have been granted or exercised, or to qualify any such Options or Stock under the Securities Act of 1933, as amended, or any other statute, then the Optionee shall cooperate with the Company and take such action as is necessary to permit registration or qualification of such Options or Stock. 10.2 Representations. Unless the Company has determined that the following representation is unnecessary, each person exercising an Option under the Plan may be required by the Company, as a condition to the issuance of the shares of Stock pursuant to exercise of the Option, to make a representation in writing (i) that he is acquiring such shares for his own account for investment and not with a view to, or for sale in connection with, the distribution of any part thereof within the meaning of the Securities Act of 1933, and (ii) that before any transfer in connection with the resale of such shares, he will obtain the written opinion of counsel for the Company, or other counsel acceptable to the Company, that such shares may be transferred without registration thereof. The Company may also require that the certificates representing such shares contain legends reflecting the foregoing. To the extent permitted by law, including the Securities Act of 1933, nothing herein shall restrict the right of a person exercising an Option to sell the shares received in an open market transaction. -7A- ARTICLE XI TAX WITHHOLDING Whenever shares of Stock are to be issued in satisfaction of Options exercised under the Plan, the Company shall have the power to require the recipient of the Stock to remit to the Company an amount sufficient to satisfy federal, state, and local withholding tax requirements, if any. ARTICLE XII INDEMNIFICATION To the extent permitted by law, each person who is or shall have been a member of the Board or the Committee shall be indemnified and held harmless by the Company against and from any loss, cost, liability, or expense that may be imposed upon or reasonably incurred by him in connection with or resulting from any claim, action, suit, or proceeding to which he may be a party or in which he may be involved by reason of any action taken or failure to act under the Plan and against and from any and all amounts paid by him in settlement thereof, with the Company's approval, or paid by him in satisfaction of judgment in any such action, suit, or proceeding against him, provided he shall give the Company an opportunity, at its own expense, to handle and defend the same before he undertakes to handle and defend it on his own behalf. The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such persons may be entitled under the Company's certificate of incorporation or bylaws, as a matter of law, or otherwise, or any power that the Company or a Subsidiary Corporation may have to indemnify them or hold them harmless. ARTICLE XIII REQUIREMENTS OF LAW 13.1 Requirements of Law. The granting of Options and the issuance of shares of Stock upon the exercise of an Option shall be subject to all applicable laws, rules, and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required. 13.2 Governing Law. The Plan, and all agreements hereunder, shall be construed in accordance with and governed by the laws of the State of Colorado. ARTICLE XIV EFFECTIVE DATE OF PLAN The Plan shall be effective on November 21, 1996. -8A- ARTICLE XV NO OBLIGATION TO EXERCISE OPTION The granting of an Option shall impose no obligation upon the holder thereof to exercise such Option. THIS STOCK OPTION PLAN was adopted by the Board of Directors of St. Mary Land & Exploration Company on November 21, 1996, to be effective upon adoption. The Plan was amended on March 25, 1999 to increase the number of shares available for issuance under Article IV to 1,650,000. ST. MARY LAND & EXPLORATION COMPANY By: /s/ RICHARD C. NORRIS ---------------------------------- Title: Vice President-Finance, Secretary and Treasurer -9A- Appendix B ST. MARY LAND & EXPLORATION COMPANY INCENTIVE STOCK OPTION PLAN AS AMENDED MARCH 25, 1999 ARTICLE I ESTABLISHMENT AND PURPOSE 1.1 Establishment. St. Mary Land & Exploration Company, a Delaware corporation (the "Company"), hereby establishes a stock option plan for key employees providing material services to the Company or a subsidiary of the Company as described herein, which shall be known as the "ST. MARY LAND & EXPLORATION COMPANY INCENTIVE STOCK OPTION PLAN" (the "Plan"). It is intended that the options issued to employees pursuant to the Plan constitute incentive stock options within the meaning of Section 422 of the Internal Revenue Code. The Company shall enter into stock option agreements with recipients of options pursuant to the Plan. 1.2 Purpose. The purpose of the Plan is to enhance shareholder value by attracting, retaining and motivating key employees of the Company and of a subsidiary of the Company by providing them with a means to acquire a proprietary interest in the Company's success. ARTICLE II DEFINITIONS 2.1 Definitions. Whenever used herein, the following terms shall have the respective meanings set forth below, unless the context clearly requires otherwise, and when such meaning is intended, the term shall be capitalized. (a) "Board" means the Board of Directors of the Company. (b) "Code" means the Internal Revenue Code of 1986, as amended. (c) "Committee" shall mean the Committee provided for by Article IV hereof, which may be created at the discretion of the Board. (d) "Company" means St. Mary Land & Exploration Company, a Delaware corporation. (e) "Date of Exercise" means the date the Company receives notice, by an Optionee, of the exercise of an Option pursuant to Section 8.1 of the Plan. Such notice shall indicate the number of shares of Stock the Optionee intends to acquire pursuant to exercise of the Option. -1B- (f) "Employee" means any person, including an officer or director of the Company or a Subsidiary Corporation, who is employed by the Company or a Subsidiary Corporation. (g) "Fair Market Value" means the fair market value of Stock upon which an option is granted under the Plan, determined as follows: (i) If the Stock is listed on a national securities exchange or admitted to unlisted trading privileges on such exchange, the Fair Market Value shall be the last reported sale price of the Stock on the composite tape of such exchange on the date of issuance of this option, or if such day is not a normal trading day, the last trading day prior to the date of issuance of this option, and if no such sale is made on such day, the Fair Market Value shall be the average closing bid and asked prices for such day on the composite tape of such exchange; or (ii) If the Stock is not so listed or admitted to unlisted trading privileges, the Fair Market Value shall be the mean of the last reported bid and asked prices reported by the National Association of Securities Dealers Quotation System (or, if not so quoted on NASDAQ, by the National Quotation Bureau, Inc.) on the last trading day prior to the date of issuance of the option. (h) "Incentive Stock Option" means an Option granted under the Plan which is intended to qualify as an "incentive stock option" within the meaning of Section 422 of the Code. (i) "Option" means the right, granted under the Plan, to purchase Stock of the Company at the option price for a specified period of time. (j) "Optionee" means an Employee holding an Option under the Plan. (k) "Parent Corporation" shall have the meaning set forth in Section 424(e) of the Code with the Company being treated as the employer corporation for purposes of this definition. (l) "Subsidiary Corporation" shall have the meaning set forth in Section 424(f) of the Code with the Company being treated as the employer corporation for purposes of this definition. (m) "Significant Shareholder" means an individual who, within the meaning of Section 422(b)(6) of the Code, owns stock possessing more than ten percent of the total combined voting power of all classes of stock of the Company or of any Parent Corporation or Subsidiary Corporation of the Company. In determining whether an individual is a Significant Shareholder, an individual shall be treated as owning stock owned by certain relatives of the individual and certain stock owned by corporations in which the individual is a shareholder, partnerships in which the individual is a partner, and estates or trusts of which the individual is a beneficiary, all as provided in Section 424(d) of the Code. -2B- (n) "Stock" means the $.01 par value common stock of the Company. 2.2 Gender and Number. Except when otherwise indicated by the context, any masculine terminology when used in the Plan also shall include the feminine gender, and the definition of any term herein in the singular also shall include the plural. ARTICLE III ELIGIBILITY AND PARTICIPATION All Employees are eligible to participate in the Plan and receive Incentive Stock Options under the Plan. Optionees in the Plan shall be selected by the Board, in its sole discretion, from among those Employees who, in the opinion of the Board, are in a position to contribute materially to the Company's continued growth and development and to its long-term financial success. ARTICLE IV ADMINISTRATION The Board shall be responsible for administering the Plan. (a) The Board is authorized to interpret the Plan; to prescribe, amend, and rescind rules and regulations relating to the Plan; to provide for conditions and assurances deemed necessary or advisable to protect the interests of the Company; and to make all other determinations necessary or advisable for the administration of the Plan. Determinations, interpretations, or other actions made or taken by the Board with respect to the Plan and Options granted under the Plan shall be final and binding and conclusive for all purposes and upon all persons. (b) At the discretion of the Board the Plan may be administered by a Committee of two or more non-employee Directors appointed by the Board (the "Committee"). The Committee shall have full power and authority, subject to the limitations of the Plan and any limitations imposed by the Board, to construe, interpret and administer the Plan and to make determinations which shall be final, conclusive and binding upon all persons, including any persons having any interests in any Options which may be granted under the Plan, and, by resolution or resolutions to provide for the creation and issuance of any Option, to fix the terms upon which, the time or times at or within which, and the price or prices at which any shares of Stock may be purchased from the Company upon the exercise of an Option. Such terms, time or times and price or prices shall, in every case, be set forth or incorporated by reference in the instrument or instruments evidencing an Option, and shall be consistent with the provisions of the Plan. -3B- (c) Where a Committee has been created by the Board pursuant to this Article IV, references in the Plan to actions to be taken by the Board shall be deemed to refer to the Committee as well, except where limited by the Plan or by the Board. (d) No member of the Board or the Committee shall be liable for any action or determination made in good faith with respect to the Plan or any Option granted under it. ARTICLE V STOCK SUBJECT TO THE PLAN 5.1 Number. The total number of shares of Stock hereby made available and reserved for issuance under the Plan upon exercise of Options shall be 1,650,000 shares. Notwithstanding anything to the contrary contained in the foregoing, to the extent that options are issued under any other current Stock Option Plan adopted by the Company, the shares of Stock reserved for issuance pursuant to Options granted under the Plan shall be reduced. The aggregate number of shares of Stock available under the Plan shall be subject to adjustment as provided in Section 5.3. 5.2 Unused Stock. If an Option shall expire or terminate for any reason without having been exercised in full, the unpurchased shares of Stock subject thereto shall (unless the Plan shall have terminated) become available for other Options under the Plan. 5.3 Adjustment in Capitalization. In the event of any change in the outstanding shares of Stock by reason of a stock dividend or split, recapitalization, reclassification, or other similar capital change, the aggregate number of shares of Stock set forth in Section 5.1 shall be appropriately adjusted by the Board, whose determination shall be conclusive. In any such case, the number and kind of shares of Stock that are subject to any Option and the Option price per share shall be proportionately and appropriately adjusted without any change in the aggregate Option price to be paid therefor upon exercise of the Option. ARTICLE VI DURATION OF THE PLAN Subject to approval of shareholders, the Plan shall be in effect for ten years from the date of its adoption by the Board. Any Options outstanding at the end of such period shall remain in effect in accordance with their terms. The Plan shall terminate before the end of such period if all Stock subject to it has been purchased pursuant to the exercise of Options granted under the Plan. ARTICLE VII TERMS OF STOCK OPTIONS 7.1 Grant of Options. Subject to Section 5.1, Options may be granted to Employees at any time and from time to time as determined by the Board. The Board shall have complete discretion in determining the terms and conditions and number of Options granted to each Optionee. In making such determinations, the Board may take into account the nature of services rendered by such Employees, their present and potential contributions to the Company and its Subsidiary Corporations, and such other factors as the Board in its discretion shall deem relevant. -4B- (a) The total Fair Market Value (determined at the date of grant) of shares of Stock with respect to which incentive stock options granted are exercisable for the first time by the Optionee during any calendar year under all plans of the Company under which incentive stock options may be granted (and all such plans of any Parent Corporations and any Subsidiary Corporations of the Company) shall not exceed $100,000. Hereinafter, this requirement is sometimes referred to as the "$100,000 Limitation". (b) The Board is expressly given the authority to issue amended or replacement Options with respect to shares of Stock subject to an Option previously granted hereunder. An amended Option amends the terms of an Option previously granted and thereby supersedes the previous Option. A replacement Option is similar to a new Option granted hereunder except that it provides that it shall be forfeited to the extent that a previously granted Option is exercised, or except that its issuance is conditioned upon the termination of a previously granted Option. 7.2 No Tandem Options. Where an Option granted under the Plan is intended to be an Incentive Stock Option, the Option shall not contain terms pursuant to which the exercise of the Option would affect the Optionee's right to exercise another Option, or vice versa, such that the Option intended to be an Incentive Stock Option would be deemed a tandem stock option within the meaning of the regulations under Section 422 of the Code. 7.3 Option Agreement; Terms and Conditions to Apply Unless Otherwise Specified. As determined by the Board on the date of grant, each Option shall be evidenced by an Option agreement (the "Option Agreement") that includes the non-transferability provisions required by Section 10.2 hereof and that specifies: the Option price; the duration of the Option; the number of shares of Stock to which the Option applies; such vesting or exercisability restrictions which the Board may impose; a provision implementing the $100,000 Limitation; and any other terms or conditions which the Board may impose. All such terms and conditions shall be determined by the Board at the time of grant of the Option. (a) If not otherwise specified by the Board, the following terms and conditions shall apply to Options granted under the Plan: (i) Term. The duration of the Option shall be for ten years from the date of grant. (ii) Exercise of Option. Unless an Option is terminated as provided hereunder, an Optionee may exercise an Option pursuant to a vesting schedule as determined by the Board. -5B- (iii) Termination. Each Option granted pursuant to the Plan shall expire upon the earliest to occur of: (A) The date set forth in such Option, not to exceed ten years from the date of grant (five years in the case of a Significant Shareholder); (B) The completion of the merger or sale of substantially all of the Stock or assets of the Company with or to another company in a transaction in which the Company is not the survivor, except for the merger of the Company into a wholly-owned subsidiary and, provided that the Company shall have given the Optionee at least thirty days' prior written notice of its intent to enter into such merger or sale (and the Company shall not be considered the surviving corporation for purposes hereof if the Company is the survivor of a reverse triangular merger); (C) Ninety days following the termination of the employment of an Optionee, except for termination for cause by the Company or termination because of the Optionee's death or disability (in which event of termination of employment due to the Optionee's death or disibility, the Option shall expire one year following the termination of employment of an Optionee); or (D) Immediately upon the termination of the employment of an Optionee for cause by the Company. (iv) Nontransferability. All Options granted under the Plan shall be nontransferable by the Optionee, other than by will or the laws of descent and distribution, and shall be exercisable during the Optionee's lifetime only by the Optionee. (b) The Board shall be free to specify terms and conditions other than and in addition to those set forth above, in its discretion. (c) All Option Agreements shall incorporate the provisions of the Plan by reference. 7.4 Option Price. No Option granted pursuant to the Plan shall have an Option price that is less than the Fair Market Value of Stock on the date the Option is granted. Incentive Stock Options granted to Significant Shareholders shall have an Option price of not less than 110% of the Fair Market Value of Stock on the date of grant. The Option exercise price shall be subject to adjustment as provided in Section 5.3 above. 7.5 Payment. Payment for all shares of Stock shall be made at the time that an Option, or any part thereof, is exercised, and no shares shall be issued until full payment therefor has been made. Payment shall be made (i) in cash, or (ii) if acceptable to the Board, in Stock or in some other form; provided, however, in the case of an Incentive Stock Option, that such other form of payment does not prevent the Option from qualifying for treatment as an "incentive stock option" within the meaning of the Code. -6B- ARTICLE VIII WRITTEN NOTICE, ISSUANCE OF STOCK CERTIFICATES, SHAREHOLDER PRIVILEGES 8.1 Written Notice. An Optionee wishing to exercise an Option shall give written notice to the Company, in the form and manner prescribed by the Board. Full payment for the shares of Stock to be acquired pursuant to the exercise of the Option must accompany the written notice. 8.2 Issuance of Stock Certificates. As soon as practicable after the receipt of written notice and payment, the Company shall deliver to the Optionee a certificate or certificates for the requisite number of shares of Stock. 8.3 Privileges of a Shareholder. An Optionee or any other person entitled to exercise an Option under the Option Agreement shall not have shareholder privileges with respect to any Stock covered by the Option until the date of issuance of a stock certificate for such Stock. ARTICLE IX TERMINATION OF EMPLOYMENT OR SERVICES 9.1 Death or Disability. Subject to any prior partial exercise of the Option, if an Optionee's employment terminates by reason of Optionee's death or permanent and total disability, the Option may be exercised up to one hundred percent of the shares originally subject to the Option at any time prior to the expiration date of the Option or within 12 months after the date of such death or disability, whichever period is the shorter, by the person or persons entitled to do so under the Optionee's will or, if the Optionee shall fail to make a testamentary disposition of an Option or shall die intestate, the Optionee's legal representative or representatives. 9.2 Termination other than for Cause or Due to Death. In the event of an Optionee's termination of employment other than by reason of death or permanent and total disability, the Optionee may exercise such portion of his Option as was vested and exercisable by him at the date of such termination (the "Termination Date") at any time within ninety days of the Termination Date. In any event, the Option cannot be exercised after the expiration of the term of the Option. Options not exercised within the applicable period specified above shall terminate. (a) In the case of an Employee, a change of duties or position within the Company or an assignment of employment in a Subsidiary Corporation or Parent Corporation of the Company, if any, or from such a Corporation to the Company, shall not be considered a termination of employment for purposes of the Plan. -7B- (b) The Option Agreements may contain such provisions as the Board shall approve with reference to the effect of approved leaves of absence upon termination of employment. 9.3 Termination for Cause. In the event of an Optionee's termination of employment, which termination is by the Company or a Subsidiary Corporation for cause, any Option or Options held by him under the Plan, to the extent not exercised before such termination, shall terminate upon notice of termination for cause. ARTICLE X RIGHTS OF OPTIONEES 10.1 Service. Nothing in the Plan shall interfere with or limit in any way the right of the Company or a Subsidiary Corporation to terminate any Employee's employment at any time, nor confer upon any Employee any right to continue in the employ of the Company or a Subsidiary Corporation. 10.2 Non-transferability. All Options granted under the Plan shall be nontransferable by the Optionee, other than by will or the laws of descent and distribution, and shall be exercisable during the Optionee's lifetime only by the Optionee. ARTICLE XI OPTIONEE-EMPLOYEE'S TRANSFER OR LEAVE OF ABSENCE For purposes of the Plan: (a) A transfer of an Optionee who is an Employee from the Company to a Subsidiary Corporation or Parent Corporation, or from one such Corporation to another, or (b) A leave of absence for such an Optionee (i) which is duly authorized in writing by the Company or a Subsidiary Corporation, and (ii) if the Optionee holds an Incentive Stock Option, which qualifies under the applicable regulations under the Code which apply in the case of incentive stock options, shall not be deemed a termination of employment. However, under no circumstances may an Optionee exercise an Option during any leave of absence, unless authorized by the Board. ARTICLE XII AMENDMENT, MODIFICATION, AND TERMINATION OF THE PLAN (a) The Board may at any time terminate and from time to time may amend or modify the Plan, provided, however, that no such action of the Board, without approval of the shareholders, may: (i) increase the total amount of Stock which may be purchased through Options granted under the Plan, except as provided in Article V; (ii) change the class of Employees eligible to receive Options; (b) No amendment, modification, or termination of the Plan shall in any manner adversely affect any outstanding Option under the Plan without the consent of the Optionee holding the Option. -8B- ARTICLE XIII ACQUISITION, MERGER OR LIQUIDATION 13.1 Acquisition. (a) In the event that an acquisition occurs with respect to the Company, the Company shall have the option, but not the obligation, to cancel Options outstanding as of the effective date of such acquisition, whether or not such Options are then exercisable, in return for payment to the Optionees of an amount equal to a reasonable estimate of an amount (hereinafter the "Spread"), determined by the Board, equal to the difference between the net amount per share payable in the acquisition or as a result of the acquisition, less the exercise price of the Option. In estimating the Spread, appropriate adjustments to give effect to the existence of the Options shall be made, such as deeming the Options to have been exercised, with the Company receiving the exercise price payable thereunder, and treating the shares receivable upon exercise of the Options as being outstanding in determining the net amount per share. (b) For purposes of this section, an "acquisition" shall mean any transaction in which substantially all of the Company's assets are acquired or in which a controlling amount of the Company's outstanding shares are acquired, in each case by a single person or entity or an affiliated group of persons and entities. For purposes of this section, a controlling amount shall mean more than 50% of the issued and outstanding shares of Stock of the Company. The Company shall have the above option to cancel Options regardless of how the acquisition is effectuated, whether by direct purchase, through a merger or similar corporate transaction, or otherwise. In cases where the acquisition consists of the acquisition of assets of the Company, the net amount per share shall be calculated on the basis of the net amount receivable with respect to shares upon a distribution and liquidation by the Company after giving effect to expenses and charges, including but not limited to taxes, payable by the Company before the liquidation can be completed. (c) Where the Company does not exercise its option under this Section 13.1 the remaining provisions of this Article XIII shall apply, to the extent applicable. -9B- 13.2 Merger or Consolidation. If the Company shall be the surviving corporation in any merger or consolidation, any Option granted hereunder shall pertain to and apply to the securities to which a holder of the number of shares of Stock subject to the Option would have been entitled in such merger or consolidation, provided that the Company shall not be considered the surviving corporation for purposes hereof if the Company is the survivor of a reverse triangular merger. 13.3 Other Transactions. A dissolution or a liquidation of the Company or a merger and consolidation in which the Company is not the surviving corporation (the Company shall not be considered the surviving corporation for purposes hereof if the Company is the survivor of a reverse triangular merger) shall cause every Option outstanding hereunder to terminate as of the effective date of such dissolution, liquidation, merger or consolidation. However, the Optionee either (i) shall be offered a firm commitment whereby the resulting or surviving corporation in a merger or consolidation will tender to the Optionee an option (the "Substitute Option") to purchase its shares on terms and conditions both as to number of shares and otherwise, which will substantially preserve to the Optionee the rights and benefits of the Option outstanding hereunder granted by the Company, or (ii) shall have the right immediately prior to such dissolution, liquidation, merger, or consolidation to exercise any unexercised Options whether or not then vested, subject to the provisions of the Plan. The Board shall have absolute and uncontrolled discretion to determine whether the Optionee has been offered a firm commitment and whether the tendered Substitute Option will substantially preserve to the Optionee the rights and benefits of the Option outstanding hereunder. In any event, any Substitute Option for an Incentive Stock Option shall comply with the requirements of Code Section 424(a). ARTICLE XIV SECURITIES REGISTRATION 14.1 Securities Registration. In the event that the Company shall deem it necessary or desirable to register under the Securities Act of 1933, as amended, or any other applicable statute, any Options or any Stock with respect to which an Option may be or shall have been granted or exercised, or to qualify any such Options or Stock under the Securities Act of 1933, as amended, or any other statute, then the Optionee shall cooperate with the Company and take such action as is necessary to permit registration or qualification of such Options or Stock. 14.2 Representations. Unless the Company has determined that the following representation is unnecessary, each person exercising an Option under the Plan may be required by the Company, as a condition to the issuance of the shares pursuant to exercise of the Option, to make a representation in writing (i) that he is acquiring such shares for his own account for investment and not with a view to, or for sale in connection with, the distribution of any part thereof within the meaning of the Securities Act of 1933, (ii) that before any transfer in connection with the resale of such shares, he will obtain the written opinion of counsel for the Company, or other counsel acceptable to the Company, that such shares may be transferred without registration thereof. The Company may also require that the certificates representing such shares contain legends reflecting the foregoing. To the extent permitted by law, including the Securities Act of 1933, nothing herein shall restrict the right of a person exercising an Option to sell the shares received in an open market transaction. -10B- ARTICLE XV TAX WITHHOLDING Whenever shares of Stock are to be issued in satisfaction of Options exercised under the Plan, the Company shall have the power to require the recipient of the Stock to remit to the Company an amount sufficient to satisfy federal, state, and local withholding tax requirements, if any. ARTICLE XVI INDEMNIFICATION To the extent permitted by law, each person who is or shall have been a member of the Board or the Committee shall be indemnified and held harmless by the Company against and from any loss, cost, liability, or expense that may be imposed upon or reasonably incurred by him in connection with or resulting from any claim, action, suit, or proceeding to which he may be a party or in which he may be involved by reason of any action taken or failure to act under the Plan and against and from any and all amounts paid by him in settlement thereof, with the Company's approval, or paid by him in satisfaction of judgment in any such action, suit, or proceeding against him, provided he shall give the Company an opportunity, at its own expense, to handle and defend the same before he undertakes to handle and defend it on his own behalf. The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such persons may be entitled under the Company's certificate of incorporation or bylaws, as a matter of law, or otherwise, or any power that the Company or any Subsidiary Corporation may have to indemnify them or hold them harmless. ARTICLE XVII REQUIREMENTS OF LAW 17.1 Requirements of Law. The granting of Options and the issuance of shares of Stock upon the exercise of an Option shall be subject to all applicable laws, rules, and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required. 17.2 Governing Law. The Plan, and all agreements hereunder, shall be construed in accordance with and governed by the laws of the State of Colorado. ARTICLE XVIII EFFECTIVE DATE OF PLAN The Plan shall be effective on March 27, 1997. ARTICLE XIX COMPLIANCE WITH CODE Incentive Stock Options granted hereunder are intended to qualify as "incentive stock options" under Code Section 422. If any provision of the Plan is susceptible to more than one interpretation, such interpretation shall be given thereto as is consistent with Incentive Stock Options granted under the Plan being treated as incentive stock options under the Code. -11B- ARTICLE XX NO OBLIGATION TO EXERCISE OPTION The granting of an Option shall impose no obligation upon the holder thereof to exercise such Option. ARTICLE XXI SHAREHOLDER APPROVAL The Plan was approved by a vote of a majority of the shares of common stock of the Company on May 21, 1997. THIS INCENTIVE STOCK OPTION PLAN was adopted by the Board of Directors of St. Mary Land & Exploration Company on March 27, 1997, to be effective upon adoption. The Plan was amended on March 25, 1999 to increase the number of shares available for issuance under Article V to 1,650,000. ST. MARY LAND & EXPLORATION COMPANY By: /s/ RICHARD C. NORRIS ---------------------------------- Title: Vice President-Finance, Secretary and Treasurer -12B-