Exhibit 10.5
THE HOUSTON EXPLORATION COMPANY
POST-2004, AJCA COMPLIANT
DEFERRED COMPENSATION PLAN
FOR
NON-EMPLOYEE DIRECTORS

 

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THE HOUSTON EXPLORATION COMPANY
POST-2004, AJCA COMPLIANT
DEFERRED COMPENSATION PLAN
FOR
NON-EMPLOYEE DIRECTORS
Table of Contents

                  Page
Section 1
  Definitions   1
 
       
Section 2
  Administration   4
 
       
Section 3
  Participants   4
 
       
Section 4
  Benefits   5
 
       
Section 5
  General Provisions   11

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THE HOUSTON EXPLORATION COMPANY
POST-2004, AJCA COMPLIANT
DEFERRED COMPENSATION PLAN
FOR
NON-EMPLOYEE DIRECTORS
PREAMBLE
     WHEREAS, The Houston Exploration Company (the “Company”) desires to
establish The Houston Exploration Company, Post-2004, AJCA Compliant Deferred
Compensation Plan For Non-Employee Directors (the “Plan”) to assist the Company
in attracting and retaining highly qualified individuals to serve as members of
the Company’s Board of Directors by permitting them to defer all or part of
their annual retainer and meeting fees; and
     WHEREAS, the Plan is intended to provide deferred compensation benefits
taxable pursuant to section 451 of the Internal Revenue Code of 1986, as amended
(the “Code”), and to comply with the requirements of section 409A of the Code,
as added by the American Jobs Creation Act of 2004, and the Treasury regulations
or any other authoritative guidance issued thereunder (“Section 409A”).
     NOW, THEREFORE, the Company does hereby adopt the Plan as set forth herein,
effective as of January 1, 2005.
SECTION 1
DEFINITIONS
        For purposes of the Plan, the following terms shall have the meanings
indicated:

1.1   Account means a ledger Account as provided in Section 4.2.   1.2  
Beneficiary means the person(s) designated by a Participant, on an Election Form
provided by the Company and filed with the Company’s Human Resources Department,
to receive benefits from the Plan in the event of the Participant’s death. A
Participant may change his or her beneficiary designation at any time; provided,
however, no such designation or change

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    in designation shall be effective until received by the Company during the
Participant’s life. If no designated Beneficiary survives the Participant, the
Beneficiary shall be the Participant’s surviving spouse or, if none, his or her
estate.   1.3   Board means the Board of Directors of the Company.   1.4   Code
means the Internal Revenue Code of 1986 and the regulations thereunder, as
amended from time to time.   1.5   Committee means the Compensation Committee of
the Board.   1.6   Common Stock means the common stock, par value $.01 per
share, of the Company.   1.7   Company means The Houston Exploration Company.  
1.8   Compensation means, with respect to a Plan Year, the Participant’s annual
retainer for such Plan Year and any meeting fees for each regular and special
meeting and any committee meeting attended by the Participant during the
applicable Plan Year.   1.9   Effective Date means the effective date of the
Plan, which shall be January 1, 2005.   1.10   Election Form means the form or
forms on which a Participant elects to defer Compensation hereunder, and/or on
which the Participant makes certain other designations required thereon.   1.11
  Exchange Act means the Securities Exchange Act of 1934, as amended.   1.12  
Fair Market Value, means as of any date, (a) the closing sale price of the
Common Stock on that date (or, if there was no sale on such date, the next
preceding date on which there was such a sale) on the principal securities
exchange on which the Common Stock is listed; or (b) if the Common Stock is not
listed on a securities exchange, the closing sale price of the Common Stock on
that date (or, if there was no sale on such date, the next preceding date on
which there was such a sale) as reported on the NYSE; or (c) if the Common Stock
is not

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    listed on the NYSE, the average of the high and low bid quotations for the
Stock on that date as reported by the National Quotation Bureau Incorporated; or
(d) if none of the foregoing is applicable, an amount at the election of the
Committee equal to (x) the average between the closing bid and ask prices per
share of Common Stock on the last preceding date on which those prices were
reported or (y) an amount as determined by the Committee in its sole discretion.

1.13   Non-Employee Director means a member of the Board who is not also an
employee of the Company or a subsidiary thereof.   1.14   Participant means each
Non-Employee Director who elects to participate in the Plan in accordance with
Section 3.   1.15   Payment Date means the date of the Participant’s Termination
or, if elected on an Election Form pursuant to Section 4.5, the date following
such Termination Date on which payment of the Participant’s Account is to be
made or begin.   1.16   Phantom Stock means a phantom share of Common Stock. A
Participant shall not possess any rights of a stockholder of the Company with
respect to a share of Phantom Stock.   1.17   Plan means this, The Houston
Exploration Company, Post-2004, AJCA Compliant Deferred Compensation Plan For
Non-Employee Directors, as it may be amended from time to time.   1.18   Plan
Year means the calendar year.   1.19   Pre-2005 Plan means The Houston
Exploration Company Deferred Compensation Plan for Non-Employee Directors.  
1.20   Section 409A means Code section 409A and the Treasury regulations or
other authoritative guidance issued thereunder.

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1.21   Section 16(b) means Section 16(b) of the Exchange Act, and all rules
promulgated thereunder.   1.22   Specified Employee means, except as may
otherwise be required by Section 409A, a “key employee” as defined in Code
section 416(i) (without regard to paragraph (5) thereof) as an individual who,
at any time during the Plan Year, is (1) an officer of the Company having an
annual compensation greater than one hundred thirty-five thousand dollars
($135,000) for 2005 (indexed for inflation in future years); (ii) a five-percent
(5%) owner of the Company; or (iii) a one-percent (1%) owner of the Company
having an annual compensation from the Company of more than one hundred fifty
thousand dollars ($150,000).   1.23   Termination means a Participant’s ceasing
to be a member of the Board; provided that a Termination shall not include any
event that does not qualify as a “separation from service”, within the meaning
of Section 409A.

SECTION 2
ADMINISTRATION

2.1   Compensation Committee. The Plan shall be administered by the Committee.
The Committee shall have the complete authority and power to interpret the Plan,
prescribe, amend and rescind rules relating to its administration, determine
eligible Participants, determine a Participant’s (or Beneficiary’s) right to a
payment and the amount of such payment, and to take all other actions necessary
or desirable for the administration of the Plan. All actions and decisions of
the Committee shall be final and binding upon all Participants and
Beneficiaries.

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SECTION 3
ELIGIBILITY AND PARTICIPATION

3.1   Participation. Each person who is a Non-Employee Director shall be
eligible to become a Participant.

3.2   Termination of Participation. Notwithstanding anything in the Plan to the
contrary, to the extent permitted under Section 409A, the Company, in its sole
discretion, may (i) permit one or more Participants during the 2005 calendar
year to terminate participation under the Plan and receive payment of the
amounts subject to termination, or (ii) require one or more Participants during
the 2005 calendar year to terminate participation under the Plan and receive
payment of the amounts subject to termination. Notwithstanding anything herein
to the contrary, any amounts subject to such termination shall be paid as a lump
sum as soon as practicable following the date of such termination and shall be
includible in the income of the Participant in the 2005 calendar year.

SECTION 4
BENEFITS

4.1   Voluntary Deferrals. Before the beginning of each Plan Year (or, with
respect to an individual who first becomes a Non-Employee Director during a Plan
Year, within 30 days of the date on which he or she becomes a Non-Employee
Director), each Non-Employee Director may elect on an Election Form to have the
payment of all or a portion of his or her Compensation for that Plan Year (or,
if applicable, the remainder of the Plan Year) deferred until his or her Payment
Date. The election shall be irrevocable and shall be made on an Election Form
prescribed by the Company, which shall govern the amount deferred, and, with
respect to the Participant’s initial Election Form, the timing and form of its
payment pursuant to Section 4.5 following the Participant’s Termination and the
initial investment of the Participant’s Account for such deferred Compensation
pending its payment. A

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    Participant’s deferral election shall apply to Compensation earned during
that specified Plan Year or partial Plan Year, as the case may be, and for all
Compensation earned in subsequent Plan Years, unless the election is changed by
the Participant prior to the beginning of such Plan Year. Notwithstanding the
foregoing, a Participant may change the manner in which the Participant’s
Account is to be paid on Termination pursuant to Section 4.5 by filing a new
Election Form with the Company, provided such new election will not be given
effect unless it meets the requirements set forth in Section 4.5. Once a Plan
Year commences, a Participant may not change or revoke the Participant’s
deferral election for that Plan Year, except as may be expressly permitted under
Section 409A and by the Company (for example, for 2005 only, a Participant may
terminate participation in the Plan or cancel his or her deferral election under
the Plan at any time during the 2005 calendar year). If a Non-Employee Director
has not made a deferral election with respect to a Plan Year, the Compensation
payable to him or her for that Plan Year shall be paid in accordance with the
Company’s normal practices.

4.2   Accounts. The Company shall establish a ledger or notional account (the
“Account”) for each Non-Employee Director who has elected to defer payment of
all or part of his or her Compensation for the purpose of reflecting the
Company’s obligation to pay to the Participant (or the Participant’s
Beneficiary) the amount credited to such Account as specified pursuant to
Section 4.5.   4.3   Investment of Accounts. Unless, and to the extent, a
Participant elects to invest all or a specified portion of his or her Account in
shares of Phantom Stock as provided below, each Account shall automatically
accrue interest on the amount credited to such Account from the date such amount
is credited to the Account through the date of its distribution. Such

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    interest shall be credited to the Account at the end of each calendar
quarter or at such other times as may be determined by the Committee. The
Committee shall determine, in its sole discretion, the rate of interest to be
credited periodically to the Accounts, which may not be less than the prime rate
of interest from time to time as reported in The Wall Street Journal; provided
that any change in such rate may only be given effect prospectively.

     In lieu of having his or her Account credited with interest, a Participant
may direct that all or a specified percentage of his or her deferred
Compensation be invested in shares of Phantom Stock. In such event, the
Participant’s Account shall be credited with whole and fractional shares of
Phantom Stock periodically as of the dates of the deferrals, and with phantom
dividends with respect to the Phantom Stock, which shall be credited as being
reinvested in additional shares of Phantom Stock. All credits and debits of the
Phantom Stock to an Account shall be made based on the Fair Market Value per
share of the Common Stock on the applicable date. Notwithstanding the foregoing,
however, if the Company’s Common Stock ceases to be readily tradeable on a
national securities market, effective therewith all then elections under the
Plan to invest in shares of Phantom Stock, including elections with respect to
existing Account balances, shall be automatically canceled and all deferrals and
Account balances after such date shall be credited with interest as provided
above.

4.4   Change in Investment Elections. Each Participant may elect at any time or
times, in a manner provided by the Company, to change the investment of his or
her future deferrals and/or the current investment of his or her Account between
shares of Phantom Stock and deferred cash credited with interest. Such election
change shall be given effect when received by the Company provided such
transaction will be an exempt “discretionary transaction” for purposes of
Rule 16b-3.

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4.5   Payment of Accounts. In connection with a Participant’s commencement of
participation in the Plan, a Participant may separately elect on an Election
Form the timing and manner in which payment (or commencement of payment) of his
or her Account will be made.

     (i) Timing of Payment. Subject to Section 409A, a Participant may elect on
his or her initial Election Form to receive (or commence to receive) his or her
Account upon the later of the Participant’s Termination or a January 1 specified
following such Termination, but not later than the fifth (5th) January 1
subsequent to such Termination (the “Payment Date”); provided, however, that if
any authoritative guidance is issued by the Internal Revenue Service which would
render this Section (in particular, its post-Termination payment commencement
feature) impermissible under Section 409A, this Section shall become inoperative
and distributions to Participants hereunder shall automatically be made (or
commence) on the Participant’s Termination.
     Notwithstanding the foregoing, any Participant who is a Specified Employee
shall not be entitled to receive payment (or commencement of payment) of his or
her Account under this Section prior to the date which is six (6) months after
the date or his or her Termination (or, if earlier, his or her death).
     If a Participant fails to designate properly the timing of payment of his
or her Account under the Plan, such payment will be made on the Participant’s
Termination (or, with respect to a Specified Employee, six (6) months after his
or her Termination (or, if earlier, his or her death)).

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     Subject to Section 4.6, a Participant shall be permitted to change his or
her above-described election regarding his or her Payment Date by submitting a
new Election Form to the Company, provided that any such Election Form (a) is
submitted at least twelve (12) months prior to the Participant’s Payment Date,
and (b) as required by Section 409A, provides for a new Payment Date which is at
least five (5) full calendar years from the Participant’s previously scheduled
Payment Date.
     (ii) Manner of Payment. On his or her initial Election Form, a Participant
may elect to have an amount in cash equal to the balance then credited to his or
her Account paid (or commence to be paid) upon his or her Payment Date as
follows:
     (a) in a lump sum payment; or
     (b) in substantially equal annual installments over a period selected by
the Participant, not to exceed 10.
     To the extent shares of Phantom Stock are credited to the Account,
“substantially equal” shall be determined by reference to the number of such
shares, not their value. If a Participant fails to designate properly the form
of payment of his or her Account, such Account will be paid in a lump sum.
     Subject to Section 4.6, a Participant shall be permitted to change his or
her above-described election regarding the form of payment of his or her Account
by submitting a new Election Form to the Company, provided that any such
Election Form (A) is submitted at least twelve (12) months prior to the
Participant’s Payment Date, and (B) as required by Section 409A, provides for a
new Payment Date which is at least five (5) full calendar years from the
Participant’s previously scheduled Payment Date.

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     As permitted by Section 409A, payment of Accounts shall commence or be made
on or as soon as reasonably practical following the Participant’s Payment Date.
     (iii) Payment Upon Death. Notwithstanding the foregoing, upon a
Participant’s death, the balance then credited to the Participant’s Account
shall be paid in a lump sum to the Participant’s Beneficiary upon (or, as
permitted by Section 409A, as soon as reasonably practical following) the
Participant’s death.

4.6   2005 Transition/Permitted Accelerations/Prohibited
Acceleration/Distribution Timing. Notwithstanding the preceding, as permitted
under the transition rules of Internal Revenue Service Notice 2005-1, the
Company may permit Participants during the 2005 calendar year to make new
distribution elections to comply with Section 409A with respect to any amounts
credited hereunder prior to such new elections (e.g., to elect by no later than
December 31, 2005 the timing and form of payments of their Accounts,
notwithstanding that such election will not have been at the time the
Participant commenced participation in the Plan). Further, the Company, in its
discretion, may accelerate payments under the Plan to the extent permitted in
Q&A 15 of Internal Revenue Service Notice 2005-1. However, notwithstanding
anything in the Plan to the contrary, no provision of the Plan shall be followed
if following the provision would result in the acceleration of the time or
schedule of any payment from the Plan as would require immediate income tax to
Participants based on the law in effect at the time the distribution is to be
made, including Section 409A. In addition, if the timing of any distribution
election would result in any tax or other penalty (other than ordinarily payable
Federal, state or local income or payroll taxes), which tax or penalty can be
avoided by payment of the distribution at a later time, then the distribution

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    shall be made (or commence, as the case may be) on (or as soon as
practicable after) the first date on which such distributions can be made (or
commence) without such tax or penalty.

SECTION 5
GENERAL PROVISIONS

5.1   Unfunded Obligation. The amounts to be paid to Participants pursuant to
this Plan are unfunded obligations of the Company. The Company is not required
to segregate any monies from its general funds, to create any trusts, or to make
any special deposits with respect to this obligation. Title to and beneficial
ownership of any investments, including trust investments, which the Company may
make to fulfill this obligation shall at all times remain in the Company. Any
investments and the creation or maintenance of any trust or notional accounts
shall not create or constitute a trust or a fiduciary relationship between the
Committee or the Company and a Participant, or otherwise create any vested or
beneficial interest in any Participant or his or her Beneficiary or his or her
creditors in any assets of the Company whatsoever. The Participants (and
Beneficiaries) shall have no claim against the Company for any changes in the
value of any Accounts and shall be general unsecured creditors of the Company
with respect to any payment due under this Plan.

5.2   Incapacity of Participant or Beneficiary. If the Committee finds that any
Participant or Beneficiary to whom a payment is payable under the Plan is under
a legal disability, any payment due (unless a prior claim therefore shall have
been made by a duly appointed legal representative) at the discretion of the
Committee, may be paid to the spouse, child, parent or brother or sister of such
Participant or Beneficiary. Any such payment shall be a complete discharge of
the obligations of the Company under the provisions of the Plan.

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5.3   Nonassignment. The right of a Participant or Beneficiary to the payment of
any amounts under the Plan may not be assigned, transferred, pledged or
encumbered in any manner nor shall such right or other interests be subject to
attachment, garnishment, execution or other legal process.

5.4   Termination and Amendment. Subject to Section 409A, the Board may from
time to time amend or terminate the Plan, in whole or in part, and if the Plan
is suspended or terminated, the Board may reinstate any or all of its
provisions. The Committee may also amend the Plan; provided, however, it may not
terminate the Plan or substantially increase the obligations of the Company
under the Plan (provided, however, that the addition of new phantom investments
with respect to the Accounts shall not be deemed an increase in the obligations
of the Company under the Plan). No amendment or termination of the Plan may
impair the right of a Participant or his or her Beneficiary to receive the
benefit accrued hereunder prior to the effective date of such amendment,
suspension or termination. Following termination, the full amount of each
Participant’s Account shall become distributable to him or her only when Plan
benefits otherwise become due hereunder

5.5   Changes in Law Affecting Taxability. This Section shall become operative
upon the enactment of any change in applicable statutory law or the promulgation
by the Internal Revenue Service of a final regulation or other pronouncement
having the force of law, which statutory law, as changed, or final regulation or
pronouncement, as promulgated, would cause any Participant to include in his or
her federal gross income amounts accrued by the Participant under the Plan on a
date (an “Early Taxation Event”) prior to the date on which such amounts are
made available to him or her hereunder; provided, however, that no portion of
this Section shall become operative to the extent that portion would result in a
violation of

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    Section 409A (e.g., by causing an impermissible distribution under
Section 409A, or would result in pre-2005 deferrals made under the Pre-2005 Plan
becoming subject to Section 409A).

     (i) Affected Right or Feature Nullified. Notwithstanding any other Section
of this Plan to the contrary (but subject to subsection (ii), below), as of an
Early Taxation Event, the feature or features of this Plan that would cause the
Early Taxation Event shall be null and void, to the extent, and only to the
extent, required to prevent the Participant from being required to include in
his or her federal gross income amounts accrued by the Participant under the
Plan prior to the date on which such amounts are made available to him or her
hereunder. If only a portion of a Participant’s Account is impacted by the
change in the law, then only such portion shall be subject to this Section, with
the remainder of the Account not so affected being subject to such rights and
features as if the law were not changed. If the law only impacts Participants
who have a certain status with respect to the Company, then only such
Participants shall be subject to this Section.
     (ii) Tax Distribution. If an Early Taxation Event is earlier than the date
on which the statute, regulation or pronouncement giving rise to the Early
Taxation Event is enacted or promulgated, as applicable (i.e., if the change in
the law is retroactive), there shall be distributed to each Participant, as soon
as practicable following such date of enactment or promulgation, the amounts
that became taxable on the Early Taxation Event.

5.6   Compliance with Securities Laws. It is the intention of the Company that,
so long as any of the Company’s equity securities are registered pursuant to
Section 12(b) or 12(g) of the Exchange Act, this Plan shall be operated in
compliance with Section 16(b).

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5.7   Applicable Law. Except to the extent preempted by applicable federal law,
the Plan shall be construed and governed in accordance with the laws of the
State of Texas.

5.8   Aggregation of Employers. To the extent required under Section 409A, if
the Company is a member of a controlled group of corporations or a group of
trades or business under common control (as described in Code sections 414(b) or
(c)), all members of the group shall be treated as a single employer for
purposes of whether there has occurred a Termination hereunder and for any other
purposes under the Plan as Section 409A shall require.

5.9   Section 409A Compliance. Notwithstanding anything in the Plan to the
contrary, (i) this Plan may be amended in accordance with Section 5.4 at any
time, retroactively if required, to the extent required to conform the Plan to
Section 409A, (ii) no provision of the Plan shall be followed to the extent that
following such provision would result in a violation of Section 409A, and
(iii) no election made by a Participant hereunder, and no change to a previous
election, shall be followed to the extent that following such election or change
could violate any of the requirements of Section 409A, resulting in early
taxation and penalties.

     IN WITNESS WHEREOF, the Company has caused this Plan to be executed
effective as of January 1, 2005.

                         
 
                        ATTEST/WITNESS:       THE HOUSTON EXPLORATION COMPANY
 
                        By:   /s/ Liz Melton       By:  /s/ Roger B. Rice      
        Print Name:  Liz Melton       Print Name:  Roger B. Rice                
Title:     Vice President                 Date:     4/26/05

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