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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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COMMISSION FILE NUMBER 0-3880
TOM BROWN, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-1949781
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
P. O. BOX 2608
500 EMPIRE PLAZA BLDG.
MIDLAND, TEXAS 79701
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
915-682-9715
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(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.10 PAR VALUE
PREFERRED SHARE PURCHASE RIGHTS
--------------------------------
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
The aggregate market value of the Registrant's Common Stock held by
non-affiliates (based upon the last sale price of $18.00 per share as quoted on
the NASDAQ National Market System) on March 24, 1997 was approximately
$430,993,000.
As of March 24, 1997, there were 23,944,044 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive proxy statement for the 1997 Annual
Meeting of Stockholders to be held on May 21, 1997 are incorporated by
reference into Part III.
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TOM BROWN, INC.
FORM 10-K
CONTENTS
PART I PAGE
Item 1. Business.............................................. 3
Item 2. Properties............................................ 13
Item 3. Legal Proceedings..................................... 16
Item 4. Submission of Matters to a Vote of
Security Holders............................... 16
PART II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters................ 17
Item 6. Selected Financial Data............................... 19
Item 7. Management's Discussion and Analysis of
Financial Condition and Results
of Operations.................................. 20
Item 8. Financial Statements and Supplementary Data........... 24
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure......... 55
PART III
Item 10. Directors and Executive Officers of the
Registrant..................................... 55
Item 11. Executive Compensation................................ 55
Item 12. Security Ownership of Certain Beneficial
Owners and Management.......................... 55
Item 13. Certain Relationships and Related Transactions........ 55
PART IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K........................ 56
Signatures.............................................................. 61
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PART I
ITEM 1. BUSINESS
GENERAL
Tom Brown, Inc. (the "Company") was organized as a Nevada corporation in
1931 under the name Gold Metals Consolidated Mining Company. The name of the
Company was changed to Tom Brown Drilling Company, Inc. in 1968 and to Tom
Brown, Inc. in 1971. In April 1987, the Company changed its state of
incorporation from Nevada to Delaware. The executive offices of the Company are
located at 500 Empire Plaza, Midland, Texas 79701 and its telephone number at
that address is (915) 682-9715. Unless the context otherwise requires, all
references to the "Company" include Tom Brown, Inc. and its subsidiaries.
The Company is engaged primarily in the domestic exploration for, and
the acquisition, development, production, marketing, and sale of, natural gas
and crude oil in the United States. The Company's activities are conducted
principally in the Wind River and Green River Basins of Wyoming, the Piceance
Basin of Colorado, the Val Verde Basin of west Texas and the Permian Basin of
west Texas and southeastern New Mexico. The Company also, to a lesser extent,
conducts exploration and development activities in other areas of the
continental United States.
The Company's industry segments are (i) the exploration for, and the
acquisition, development and production of natural gas and crude oil, and (ii)
the marketing, gathering, processing and sale of natural gas, primarily through
Wildhorse Energy Partners, L. L. C. ("Wildhorse").
Except for its gas and oil leases with domestic governmental entities
and other third parties who enter into gas and oil leases or assignments with
the Company in the regular course of its business, the Company has no material
patents, licenses, franchises or concessions which it considers significant to
its gas and oil operations.
The nature of the Company's business is such that it does not maintain
or require a substantial amount of products, customer orders or inventory.
The Company's gas and oil operations are not subject to renegotiation
of profits or termination of contracts at the election of the federal
government.
The Company has not been a party to any bankruptcy, receivership,
reorganization or similar proceeding, except in connection with the
reorganization of Presidio Oil Company as described in Note 3 to Notes to
Consolidated Financial Statements.
BUSINESS STRATEGY
Since 1985, the Company's principal business strategy has been to
obtain and develop long-lived reserves (having a reserve life in excess of the
industry average which is currently 15 years) in areas where the Company has
knowledge and operations expertise. Accordingly, the Company has primarily
invested in natural gas-prone basins which the Company believes will provide the
opportunity to accumulate significant reserves at attractive prices.
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The principal benefits of the Company's strategy include the ability
to:
* Increase reserves at lower-than-average costs,
* Acquire large tracts of contiguous acreage with high working
interests,
* Develop economies of scale in its operations, and
* Control development and marketing decisions relating to its
properties.
In pursuing its strategic goals, the Company focuses on the following
objectives:
Maintaining a strong balance sheet
The Company emphasizes maintaining a strong balance sheet in order to
enhance its operating and financing flexibility.
Achieving critical mass in core areas
The Company has assembled additional acreage since 1986 in natural
gas-prone basins, primarily in the Wind River, Green River, and Piceance
Basins, where the Company can utilize its geological and technical expertise
and its control of operations for the further development and expansion of
these areas. The Company has leases, or options to lease, approximately
1,754,000 gross (1,059,000 net) developed and undeveloped acres in these areas.
Increasing reserves
The Company replaced its production over 8 times during the period from
January 1, 1994 through December 31, 1996. During this period, the Company's
proved reserves increased by approximately 109% to 433 billion cubic feet
("Bcf") of natural gas equivalents.
Increasing production
The Company increased its net average daily production of natural gas
and oil to 55 million cubic feet ("MMcf") of natural gas equivalents in 1996,
an increase of approximately 129% as compared with its production in 1994. At
the end of 1996, with the acquisition of Presidio, the Company's net average
daily production of gas and oil was approximately 103 MMcfe.
Enhancing gas marketing
Since 1991, the Company has strengthened its ability to control and
market its production by accumulating natural gas gathering assets and
increasing its marketing efforts in its core areas of activity.
Making strategic acquisitions
The Company plans to continue to selectively pursue acquisitions of gas
and oil properties in its core areas of activity and, in connection therewith,
the Company from time to time will be involved in evaluations of, or
discussions with, potential acquisition candidates. The consideration for any
such acquisition might involve the
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payment of cash and/or the issuance of equity or debt securities.
Notwithstanding the Company's historical ability to implement the above
strategy, there can be no assurance that the Company will be able to continue
to successfully implement its strategy in the future.
AREAS OF ACTIVITY
The following discussion focuses on areas the Company considers to be
its core areas of operations and those which offer the Company the greatest
opportunities for further exploration and development activities.
Wind River, Green River, and Piceance Basins
The Wind River and Green River Basins of Wyoming, and Piceance Basin of
Colorado account for a major portion of the Company's current and anticipated
exploration and development activities with approximately 41% of the Company's
proved reserves at December 31, 1996. The Company operates 467 wells out of
a total of 733 producing wells in these basins that averaged net daily
production of 26 million cubic feet of natural gas equivalents ("MMCFE") at
December 31, 1996. The Company has approximately 218,000 gross developed acres
and 1,536,000 gross undeveloped acres in these basins. Additionally, the Company
has options to lease approximately 966,000 gross undeveloped acres in the Wind
River Basin. The Company's interest in the options to lease are subject to the
Company performing certain 3-D seismic operations and drilling certain
exploratory wells.
Although the Wind River Basin has experienced limited natural gas
transportation capacity, market forces are working to correct this capacity
constraint. In January 1996, KN Energy, Inc. announced that it reached an
agreement to acquire an 850-mile oil pipeline owned by Amoco Pipeline Company,
which extends from the Wind River Basin southwest to Kansas City, Missouri with
scheduled interconnects to interstate pipelines owned by Northern Natural Gas
Company, ANR Pipeline Company, Natural Gas Pipeline Company of America, and
Panhandle Eastern Pipe Line Company. When converted to transport natural gas,
the pipeline, known as Pony Express, will have an initial capacity of
approximately 250 MMCF of natural gas per day and with additional compression,
up to 350 MMCF per day. The Company expects Pony Express to generate
significant opportunities for Wildhorse, which has initially contracted for
firm transportation of 30 MMCF of natural gas per day on this line.
Val Verde Basin
The Val Verde Basin accounted for approximately 12% of the Company's
proved reserves at December 31, 1996. The Company holds a 50% working interest
in approximately 51,500 gross acres in this basin. As of December 31, 1996
there were 24 producing wells averaging 22 MMCFE per day of natural gas net
to the Company's interest.
Permian Basin
The Permian Basin contains significant oil reserves for the Company and
accounted for approximately 8% of the Company's proved reserves as of December
31, 1996. The Company's properties in the Permian Basin are located primarily
in the Spraberry Field. The Company operates 110 wells and has approximately
23,700 net developed and undeveloped acres in this basin.
East Texas Basin
In January 1996 the Company began an exploration program in the Cotton
Valley Pinnacle Reef Trend of the East Texas Basin. At year end, it had
accumulated approximately 50,000 gross (24,000 net) acres in three prospect
areas containing over 40 2-D anomalies. At year end, the Company was completing
data acquisition on a 77-square mile 3-D survey in one of the prospect areas.
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SIGNIFICANT DEVELOPMENTS IN 1996
Acquisition of KN Production Company
Pursuant to a letter of intent entered into in December 1995, the
Company and KN Energy, Inc. ("KNE") closed certain transactions on January 31,
1996 which resulted in (i) the Company's acquisition of all of the issued and
outstanding stock of KN Production Company ("KNPC"), a wholly owned subsidiary
of KNE, and (ii) Wildhorse being formed by the Company and KNE for the purpose
of providing gas gathering, processing, marketing, field and storage services,
(collectively the "KNPC Acquisition"). The price paid to KNE in connection with
the KNPC Acquisition was determined to be $36.25 million, of which $25 million
was paid in the form of 1,000,000 shares of the Company's $1.75 Convertible
Preferred Stock, Series A (the "Preferred Stock") and the remaining $11,250,000
was paid in the form of 918,367 shares of the Company's Common Stock, based on a
price per share of $12.25. The KNPC Acquisition has been recorded under the
purchase method of accounting.
As a result of the KNPC Acquisition, the Company acquired interests in
624 gross producing wells in Colorado and Wyoming, of which the Company became
operator of 308. The properties acquired by the Company included approximately
243,000 net undeveloped acres in Colorado, Wyoming, Kansas and Nebraska and
approximately 64,000 net developed acres located in Colorado and Wyoming.
An integral part of the KNPC Acquisition was the formation of
Wildhorse, which is owned fifty-five percent (55%) by KNE and forty-five
percent (45%) by the Company. The business and affairs of Wildhorse are managed
by KNE under the direction of an operating team consisting of two
representatives appointed by the Company and two representatives appointed by
KNE. The Company dedicated a significant amount of its Rocky Mountain gas
reserves to Wildhorse and KNE contributed gas marketing contracts.
The Company also acquired a natural gas storage facility in western
Colorado which was simultaneously contributed to Wildhorse.
The principal purpose of Wildhorse is to provide for the furnishing of
services related to natural gas including gathering, processing and storage
services and marketing services.
Acquisition of Presidio Oil Company
On December 23, 1996, the Company completed the acquisition of Presidio
Oil Company and its subsidiaries (the "Presidio Acquisition"), following the
issuance by the U.S. Bankruptcy Court, District of Delaware, on December 10,
1996, of an Order confirming Presidio Oil Company's reorganization under
Chapter 11 of the U.S. Bankruptcy Code. The purchase price was approximately
$206.6 million consisting of approximately $105 million in cash and 2.71
million shares of the Company's Common Stock valued at $17.125 per share,
including the assumption of certain liabilities. Such amount does not include
2.64 million shares of the Company's Common Stock which were not issued due to
the Company's ownership of $56.15 million principal amount of Presidio Oil
Company's Senior Gas Indexed Notes (the "GINs"). The GINs were purchased in June
1995 for approximately $51 million. The Presidio Acquisition has been accounted
for using the purchase method. The cash portion of the Presidio Acquisition was
funded by borrowings under the Company's loan
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agreement with its bank lender. The assets acquired consist of primarily proved
oil and gas properties and approximately 865,000 gross (403,000 net) developed
and undeveloped acres located primarily in Wyoming, North Dakota, Oklahoma and
Louisiana. The Wyoming properties are concentrated in the Green River and
Powder River Basins.
Joint Ventures
In December 1994 and December 1995, the Company and the Shoshone and
Northern Arapaho Tribes (the "Tribes") finalized the negotiations of six gas
and oil option agreements, which in addition to one option acquired earlier in
1993, encompass approximately 666,000 gross acres (400,000 net acres) in the
Wind River Basin of Fremont County, Wyoming. The agreements, which were
approved by the Bureau of Indian Affairs, grant the Company the right to
explore for and develop gas and oil reserves on the option acreage over a ten
year period of time once the options are exercised.
In June 1996, the Company and the Tribes entered into an Exploration
License Agreement covering in excess of 300,000 gross acres in the Wind River
Basin of Wyoming. The agreement provided the Company the opportunity over the
next twelve months to enter into two Exploration Option Agreements covering a
minimum of 100,000 gross acres and a maximum of 150,000 gross acres each.
The Company has a 50% working interest in this agreement.
On October 28, 1996, the Company and Louisiana Land and Exploration
Company ("LL&E") announced the execution of a letter of intent to form a joint
exploration alliance in connection with the Exploration License Agreement that
the Company entered into with the Tribes. At December 31, 1996, the Company had
leases or options to lease approximately 1,072,000 gross (631,000 net) acres in
the Wind River Basin. Upon execution of a definitive participation agreement and
receipt of tribal and regulatory agency approval, the Company will operate the
jointly held interest and have a fifty percent (50%) working interest. LL&E will
have a forty percent (40%) working interest with the remaining ten percent (10%)
being held by a third party.
On December 5, 1996, the Company and American Exploration Company
("American") announced the execution of a definitive agreement to form an
exploration joint venture that covers approximately 50,000 gross (40,000 net)
acres of the Company's Lost Prairie and Lake Tyler Prospects in Anderson,
Cherokee and Smith Counties of east Texas located in the Cotton Valley Pinnacle
Reef Trend. In exchange for a forty percent (40%) working interest ownership,
American has agreed to invest approximately $7.3 million for the acquisition of
land and a 3-D seismic survey. The Company retained the remaining sixty percent
(60%) working interest and serves as operator of the properties.
Acquisition of Williams Field Services
On November 4, 1996 Wildhorse completed the acquisition of the Williams
Field Services' gathering and processing assets in western Colorado and eastern
Utah. The acquired assets access existing production of the Company and others,
as well as approximately 170,000 gross acres of undeveloped leasehold held by
the Company in the Piceance Basin. Such assets will also provide gathering to
undeveloped third-party acreage throughout
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the Piceance and Vinta Basins. The assets acquired include approximately 955
miles of natural gas gathering lines, two processing plants, a carbon dioxide
treatment plant and a dew point control plant. These facilities process and
treat more than 55 MMCFD of natural gas from more than 700 wells. The
acquisition has provided a significant upstream position in an area of the
Rocky Mountains that has a great potential for developing additional natural
gas reserves and deliverability.
MARKETS
The Company's gas production has historically been sold under
month-to-month contracts with marketing companies. During 1996 and early 1997,
there was a significant amount of volatility in the prices received for natural
gas. Monthly closing gas prices as measured on the New York Mercantile Exchange
("NYMEX") varied from a high of $3.90 per million British thermal unit
("Mmbtu") in December, 1996 to a low of $1.85 per Mmbtu in September, 1996.
Additionally, as of January 1997, the Company produces approximately 60% of its
gas production in the Rocky Mountain area where the price of gas varies as
compared to NYMEX prices (the "Basis Differential"). The Basis Differential for
Rocky Mountain gas varied from $2.19 per Mmbtu below NYMEX prices in January,
1996 to $.19 per Mmbtu above NYMEX prices in January, 1997.
The Company markets most of its oil production with independent
third-party resellers and refiners at market ("posted") prices. These posted
prices generally reflect the prices determined by the trading of West Texas
Intermediate ("WTI") oil futures contracts on the NYMEX, with adjustments due
to Basis Differential and for the quality of oil produced.
NYMEX prices for both gas and oil are influenced by seasonal demand,
levels of storage, production levels and a variety of political and economic
factors over which the Company has no control.
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PRODUCTION VOLUMES, UNIT PRICES AND COSTS
The following table sets forth certain information regarding the
Company's volumes of production sold and average prices received associated
with its production and sales of natural gas and crude oil for each of the
years ended December 31, 1996, 1995 and 1994 as well as pro forma amounts for
the year ended December 31, 1996.
Years ended December 31,
--------------------------------------------------
Pro Forma (1) Historical
------------- ----------------------------
1996 1996 1995 1994
---- ---- ---- ----
Production:
Natural Gas (MMcf) 29,068 16,762 10,585 7,087
Crude Oil (MBbls) 1,292 545 387 276
Net Average Daily
Production Volumes:
Natural Gas (Mcf) 79,421 45,798 29,000 19,416
Crude Oil (Bbls) 3,530 1,489 1,060 756
Average Sales Prices:
Natural Gas (per Mcf) $ 1.83 $ 1.77 $ 1.31 $ 1.62
Crude Oil (per Bbl) $19.89 $20.45 $16.80 $15.73
Average Production
Cost (per Mcfe) (2) $ .58 $ .49 $ .53 $ .69
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(1) The pro forma amounts assume the Presidio Acquisition was completed
January 1, 1996.
(2) Includes production costs and taxes on production. (Mcfe means one
thousand cubic feet of natural gas equivalent, calculated on the basis of six
barrels of oil to one Mcf of gas.)
COMPETITION
The Company encounters strong competition from major oil companies and
independent operators in acquiring properties and leases for the exploration
for, and the development and production of, natural gas and crude oil.
Competition is particularly intense with respect to the acquisition of
desirable undeveloped gas and oil leases. The principal competitive factors in
the acquisition of undeveloped gas and oil leases include the availability and
quality of staff and data necessary to identify, investigate and purchase such
leases, and the financial resources necessary to acquire and develop such
leases. Many of the Company's competitors have financial resources, staffs and
facilities substantially greater than those of the Company. In addition, the
producing, processing and marketing of natural gas and crude oil is affected by
a number of factors which are beyond the control of the Company, the effect of
which cannot be accurately predicted.
The principal raw materials and resources necessary for the exploration
and development of natural gas and crude oil are leasehold prospects under
which gas and oil reserves may be discovered, drilling rigs and related
equipment to drill for and produce such reserves and knowledgeable personnel to
conduct all phases of gas and oil operations. The Company must compete for such
raw materials and resources with
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both major oil companies and independent operators.
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company at March 24, 1997 were as
follows:
Executive Officer
Name Age Position with Company Since
---- --- --------------------- -----
Donald L. Evans 50 Chairman of the Board and
Chief Executive Officer 1976
William R. Granberry 54 President, Chief Operating
Officer and Director 1996
Peter R. Scherer 40 Executive Vice President 1986
Clifford C. Drescher 44 Vice President - Operations 1991
Thomas E. Klauss 53 Vice President - Exploration -
Southern Division 1995
Christopher E. Mullen 36 Vice President - Exploration -
Northern Division 1995
Richard B. Porter 41 Vice President - Land 1995
R. Kim Harris 40 Controller 1986
B. Jack Reed 47 Treasurer 1990
James M. Alsup 60 Secretary 1973
Each executive officer is elected annually by the Company's Board of
Directors to serve at the Board's discretion.
EMPLOYEES
At December 31, 1996, the Company had 129 employees. None of the
Company's employees are represented by labor unions or covered by any
collective bargaining agreement. The Company considers its relations with its
employees to be satisfactory.
REGULATION
Regulation of Gas and Oil Production
Gas and oil operations are subject to various types of regulation by
state and federal agencies. Legislation affecting the gas and oil industry is
under constant review for amendment or expansion. Also, numerous departments
and agencies, both federal and state, are authorized by statute to issue rules
and regulations binding on the gas and oil industry and its individual members,
some of which carry substantial penalties for failure to comply. The regulatory
burden on the gas and
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oil industry increases the Company's cost of doing business and, consequently,
affects its profitability.
Gas Price Controls
Prior to January 1993, certain natural gas sold by the Company was
subject to regulation by the Federal Energy Regulatory Commission ("FERC")
under the Natural Gas Act of 1938 and the Natural Gas Policy Act of 1978
("NGPA"). The NGPA prescribed maximum lawful prices for natural gas sales
effective December 1, 1978. Effective January 1, 1993, natural gas prices were
completely deregulated and sales of the Company's natural gas are now made at
market prices. The majority of the Company's gas sales contracts either contain
decontrolled price provisions or already provide for market prices.
In April 1992, FERC issued Order 636, a rule designed to restructure
the interstate natural gas transportation and marketing system to remove
various barriers and practices that have historically limited non-pipeline gas
sellers, including producers, from effectively competing with pipelines. The
restructuring process was implemented on a pipeline-by-pipeline basis through
negotiations in individual pipeline proceedings. Since the issuance of Order
636, FERC has issued several orders making minor modification to Order 636.
Several parties have already filed for judicial review of the Order. Because
the restructuring requirements that emerge from the lengthy administrative and
judicial review process may be significantly different from those currently in
effect, and because implementation of the restructuring may vary by pipeline,
it is not possible to predict what, if any, effect the restructuring resulting
from Order 636 will have on the Company.
When it issued Order 636, FERC recognized that in an effort to enable
non-pipeline gas sellers to compete more effectively with pipelines, it should
not allow pipelines to be penalized by their existing contracts which require
the pipelines to pay above-market prices for natural gas. FERC recognized that
it did not have authority to nullify these contracts, and instead encouraged
pipelines and producers to negotiate in good faith to terminate or amend these
contracts to conform them with market conditions. Under Order 636, a pipeline
company is permitted to pass through to certain of its customers the costs
incurred by the pipeline in terminating or amending these agreements as
"transition costs". Order 636 allows customers to challenge these costs, in
which case the pipeline will be permitted to pass through costs only to the
extent the pipeline established at a FERC hearing, among other things, that the
contract was prudent at the time it was entered into, that the costs incurred
in the settlement were prudent and that the costs were incurred solely in
response to Order 636.
Oil Price Controls
Sales of crude oil, condensate and gas liquids by the Company are not
regulated and are made at market prices.
State Regulation of Gas and Oil Production
States in which the Company conducts its gas and oil activities
regulate the production and sale of natural gas and crude oil, including
requirements for obtaining drilling permits, the method of developing new
fields, the spacing and operation of
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wells and the prevention of waste of gas and oil resources. In addition, most
states regulate the rate of production and may establish maximum daily
production allowables for wells on a market demand or conservation basis.
Environmental Regulation
The Company's activities are subject to federal and state laws and
regulations governing environmental quality and pollution control. The
existence of such regulations has had no material effect on the Company's
operations and the cost of such compliance has not been material to date.
However, the Company believes that the gas and oil industry may experience
increasing liabilities and risks under the Comprehensive Environmental
Response, Compensation and Liability Act, as well as other federal, state and
local environmental laws, as a result of increased enforcement of environmental
laws by various regulatory agencies. As an "owner" or "operator" of property
where hazardous materials may exist or be present, the Company, like all others
in the petroleum industry, could be liable for fines and/or "clean-up" costs,
regardless of whether the Company was responsible for the release of any
hazardous substances.
Rocno Corporation, a wholly-owned subsidiary of the Company, was named
as a defendant in a Complaint filed by the United States on behalf of the
Environmental Protection Agency ("EPA") and has, along with approximately 117
other defendants, entered into a Consent Decree with the United States,
pursuant to which the defendant companies will carry out a clean-up plan. See
Item 3, Legal Proceedings.
Indian Lands
The Company's Muddy Ridge and Pavillion Fields are located on the Wind
River Indian Reservation. The Shoshone and Northern Arapaho Tribes regulate
certain aspects of the production and sale of natural gas and crude oil,
drilling operations, and the operation of wells and levy taxes on the
production of hydrocarbons. The Bureau of Indian Affairs and the Minerals
Management Service of the United States Department of the Interior perform
certain regulatory functions relating to operation of Indian gas and oil
leases. The Company owns interests in three leases in the Pavillion Field which
were issued pursuant to the provisions of the Act of August 21, 1916, for
initial terms of 20 years each, with a preferential right by the lessee to
renew the leases for subsequent ten-year terms. The leases were renewed for
ten-year terms in 1992, effective as of June 1, 1993.
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ITEM 2. PROPERTIES
GAS AND OIL PROPERTIES
The principal properties of the Company consist of developed and
undeveloped gas and oil leases. Generally, the terms of developed gas and oil
leaseholds are continuing and such leases remain in force by virtue of, and so
long as, production from lands under lease is maintained. Undeveloped gas and
oil leaseholds are generally for a primary term, such as five or ten years,
subject to maintenance with the payment of specified minimum delay rentals or
extension by production.
TITLE TO PROPERTIES
As is customary in the gas and oil industry, the Company makes only a
cursory review of title to undeveloped gas and oil leases at the time they are
acquired by the Company. However, before drilling commences, the Company causes
a thorough title search to be conducted, and any material defects in title are
remedied prior to the time actual drilling of a well on the lease begins. The
Company believes that it has good title to its gas and oil properties, some of
which are subject to immaterial encumbrances, easements and restrictions. The
gas and oil properties owned by the Company are also typically subject to
royalty and other similar non-cost bearing interests customary in the industry.
The Company does not believe that any of these encumbrances or burdens
materially affect the Company's ownership or use of its properties.
ACREAGE
The following table sets forth the gross and net acres of developed and
undeveloped gas and oil leases held by the Company at December 31, 1996.
Excluded from the table are approximately 966,000 gross (580,000 net) acres in
Wyoming under gas and oil option agreements acquired from certain Indian
tribes.
Developed Undeveloped
------------------ -------------------
Gross Net Gross Net
----- --- ----- ---
Colorado 116,458 58,909 293,415 199,626
Louisiana 12,253 3,810 16,389 4,618
Mississippi 576 336 16,449 1,825
Montana 2,028 642 158,307 26,443
Nebraska 640 -- 48,730 44,477
New Mexico 18,411 4,307 2,320 1,206
North Dakota 5,163 4,014 15,046 7,382
Oklahoma 32,633 11,416 5,845 2,598
Texas 90,844 29,609 123,116 46,146
West Virginia 73,671 973 155,835 79,880
Wyoming 150,903 53,912 550,684 386,316
Other 3,241 2,009 11,021 10,281
------- ------- --------- -------
Total 506,821 169,937 1,397,157 810,798
======= ======= ========= =======
"Gross" acres refers to the number of acres in which the Company owns a
working interest. "Net" acres refers to the sum of the fractional working
interests owned by the Company in gross acres.
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GAS AND OIL RESERVES
Estimates of the Company's gas and oil reserves at December 31, 1996,
1995 and 1994 including future net revenues and the present value of future net
cash flows, were made by Williamson Petroleum Consultants, Inc. and by Ryder
Scott at December 31, 1996, (both are independent petroleum consultants), in
accordance with guidelines established by the Securities and Exchange
Commission (the "SEC"). Estimates of gas and oil reserves and their estimated
values require numerous engineering assumptions as to the productive capacity
and production rates of existing geological formations and require the use of
certain SEC guidelines as to assumptions regarding costs to be incurred in
developing and producing reserves and prices to be realized from the sale of
future production. Accordingly, estimates of reserves and their value are
inherently imprecise and are subject to constant revision and change and should
not be construed as representing the actual quantities of future production or
cash flows to be realized from the Company's gas and oil properties or the fair
market value of such properties.
Certain additional unaudited information regarding the Company's
reserves, including the present value of future net cash flows, is set forth in
Note 13 of the notes to consolidated financial statements included herein.
The Company has no gas and oil reserves or production subject to
long-term supply or similar agreements with foreign governments or authorities.
Estimates of the Company's total proved gas and oil reserves have not
been filed with or included in reports to any federal authority or agency other
than the SEC.
PRODUCTIVE WELLS
The following table sets forth the gross and net productive gas and oil
wells in which the Company owned an interest at December 31, 1996.
Productive Wells
---------------------------------
Gross Net
------------ ---------------
Gas Oil Gas Oil
--- --- --- ---
Colorado 427 62 127.32 31.82
Louisiana 49 38 13.19 13.93
New Mexico 35 28 7.32 12.15
North Dakota 6 38 2.13 34.82
Oklahoma 128 35 31.37 10.16
Texas 98 323 39.95 109.12
West Virginia 51 -- 16.74 --
Wyoming 417 144 132.99 39.09
Other 17 15 4.65 1.99
----- ----- ------ ------
1,228 683 375.66 253.08
===== ===== ====== ======
A "gross" well is a well in which the Company owns a working interest.
"Net" wells refer to the sum of the fractional working interests owned by the
Company in gross wells.
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15
GAS AND OIL DRILLING ACTIVITY
The following table sets forth the Company's gross and net interests in
exploratory and development wells drilled during the periods indicated.
Years ended December 31,
--------------------------------------------------------
1996 1995 1994
------------- ------------- -------------
Type of well Gross Net Gross Net Gross Net
------------ ----- --- ----- --- ----- ---
Exploratory
Gas - - - - 1 .3
Oil - - - - - -
Dry 5 2.8 3 1.1 1 .5
-- ---- -- --- -- ---
5 2.8 3 1.1 2 .8
== ==== == === == ===
Development
Gas 14 3.9 34 9.7 19 8.2
Oil - - 3 1.5 2 1.0
Dry 5 1.7 10 3.9 2 1.0
-- ---- -- ---- -- ---
19 5.6 47 15.1 23 10.2
== ==== == ==== == ====
At December 31, 1996, 5 gross (2.6 net) development wells were in
various stages of drilling and completion in Texas and Wyoming.
All of the Company's drilling activities are conducted on a contract
basis with independent drilling contractors. The Company owns no drilling
equipment.
OTHER PROPERTIES
The Company leases its home office facilities in Midland, Texas. The
lease covers approximately 29,000 square feet for a term of five years and
expires December 31, 1997.
The Company owns a 3,200 square foot office building located on a 2.94
acre tract in Midland, Texas. The facility is used primarily for storage of
pipe and oilfield equipment.
The Company also leases two office facilities in Denver, Colorado. At
the Lakewood location, the Company leases approximately 21,000 square feet for a
term of five years which expires on June 30, 1997. In Englewood, the Company
leases approximately 38,000 square feet with a term of five years expiring March
31, 1999; however, as of March 1997, the Company subleased one-half of their
Englewood square footage and has an agreement to sublease the entire square
footage beginning in July. The Company plans to combine personnel from these
locations in downtown Denver in July.
-15-
16
ITEM 3. LEGAL PROCEEDINGS
The Company is a defendant in several routine legal proceedings
incidental to its business which the Company believes will not have a
significant effect on its consolidated financial position or results of
operations.
In addition to routine legal proceedings incidental to the Company's
business, Rocno Corporation ("Rocno"), a wholly-owned subsidiary of the
Company, is a defendant in a Complaint filed by the United States of America
which, among other things, alleges that Rocno arranged for the disposal of
"hazardous materials" (within the meaning of the Comprehensive Environmental
Response, Compensation and Liability Act) in Waller County, Texas (the
"Sheridan Superfund Site"). In addition to Rocno, approximately 117 other
companies were named as defendants in the same matter with similar allegations
by the Government of the release by them of hazardous materials at the Sheridan
Superfund Site. Effective August 31, 1989, Rocno and thirty-six other
defendants executed the Sheridan Site Trust Agreement (the "Trust") for the
purpose of creating a trust to perform agreed upon remedial action at the
Sheridan Superfund Site. In connection with the establishment of the Trust, the
parties to the Trust have agreed to the terms of a Consent Decree entered
December 3, 1991 in the United States District Court, Southern District of
Texas, Houston Division, Civil Action No. H-91-3529, pursuant to which the
defendants joining the Consent Decree will carry out the clean-up plan
prescribed by the Consent Decree. The Consent Decree has not yet been approved
by the court. The estimate of the total clean-up cost is approximately $30
million. Under terms of the Trust, each party is allocated a percentage of
costs necessary to fund the Trust for clean-up costs. Rocno's proportionate
share of the estimated clean-up costs is 0.33% or $99,000, of which $16,000 has
been paid, and the remainder was accrued in the Company's consolidated
financial statements at December 31, 1996. If the clean-up costs exceed the
projected amount, Rocno will be required to pay its pro rata share of the
excess clean-up costs.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders in
the fourth quarter of the year ended December 31, 1996.
-16-
17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded in the over-the-counter market and
appears on the NASDAQ National Market System under the symbol "TMBR". The
following table sets forth the range of high and low closing quotations for
each quarterly period during the past two fiscal years as reported by NASDAQ
National Market System. The quotations are inter-dealer prices without retail
mark-ups, mark-downs or commissions and may not represent actual transactions.
Closing Sale Price
------------------
Quarter Ended High Low
------------- ---- ---
March 31, 1995 15 1/2 10 7/8
June 30, 1995 15 3/4 13 7/8
September 30, 1995 16 5/8 13 1/8
December 31, 1995 15 3/8 11
March 31, 1996 15 3/8 12 1/8
June 30, 1996 17 7/8 12 7/8
September 30, 1996 19 1/4 14 1/4
December 31, 1996 22 3/8 16 7/8
On March 24, 1997 the last sale price of the Company's Common Stock, as
reported by the NASDAQ National Market System, was $18.00 per share.
The transfer agent for the Company's Common Stock is Boston EquiServe,
Canton, Massachusetts.
On December 31, 1996, the outstanding shares of the Company's Common
Stock (23,898,431 shares) were held by approximately 4,300 holders of record.
The Company has never declared or paid any cash dividends to the
holders of Common Stock and has no present intention to pay cash dividends to
the holders of Common Stock in the future. Under the terms of the Company's
Credit Agreement, the Company is prohibited from paying cash dividends to the
holders of Common Stock without the written consent of the bank lenders.
Additionally, the Company's ability to declare and pay dividends on its Common
Stock is further restricted by the rights of the holder of the Series A
Preferred Stock.
On December 23, 1996, the Company completed the acquisition of Presidio
Oil Company and its subsidiaries (collectively, "Presidio"), following the
issuance by the U.S. Bankruptcy Court, District of Delaware, on December 10,
1996, of an order confirming Presidio's reorganization under Chapter 11 of the
U.S. Bankruptcy Code. The Company issued 2,711,137 shares of its Common Stock
to creditors and shareholders of Presidio pursuant to Section 1145 of the
United States Bankruptcy Code.
On March 1, 1991, the Board of Directors adopted a Rights Plan designed
to help assure that all stockholders receive fair and equal treatment in the
event of a
-17-
18
hostile attempt to take over the Company, and to help guard against abusive
takeover tactics. The Board of Directors declared a dividend of one preferred
share purchase right (a "Right") for each outstanding share of Common Stock.
The dividend was distributed on March 15, 1991 to the shareholders of record on
that date. Each Right entitles the registered holder to purchase, for the $20
per share exercise price, shares of Common Stock or other securities of the
Company (or, under certain circumstances, of the acquiring person) worth twice
the per share exercise price of the Right.
The Rights will be exercisable only if a person or group acquires 20%
or more of the Company's Common Stock or announces a tender offer which would
result in ownership by a person or group of 20% or more of the Common Stock.
The date on wich the above occurs is to be known as the ("Distribution Date").
The Rights will expire on March 15, 2001, unless extended or redeemed earlier
by the Company.
At the time the Rights dividend was declared, the Board of Directors
further authorized the issuance of one Right with respect to each share of the
Company's Common Stock that shall become outstanding between March 15, 1991 and
the earlier of the Distribution Date or the expiration or redemption of the
Rights. Until the Distribution Date occurs, the certificates representing
shares of the Company's Common Stock also evidence the Rights. Following the
Distribution Date, the Rights will be evidenced by separate certificates.
The provisions described above may tend to deter any potential
unsolicited tender offers or other efforts to obtain control of the Company
that are not approved by the Board of Directors and thereby deprive the
stockholders of opportunities to sell shares of the Company's Common Stock at
prices higher than the prevailing market price. On the other hand, these
provisions will tend to assure continuity of management and corporate policies
and to induce any person seeking control of the Company or a business
combination with the Company to negotiate on terms acceptable to the then
elected Board of Directors.
-18-
19
ITEM 6. SELECTED FINANCIAL DATA
The following tables set forth selected financial information for the
Company for each of the years shown.
Years ended December 31,
-------------------------------------------------
1996(1) 1995(1) 1994 1993 1992
-------- -------- -------- -------- --------
(in thousands, except per share amounts)
Revenues (2) $ 66,720 $ 41,053 $ 29,071 $ 28,708 $ 18,597
======== ======== ======== ======== ========
Net income (loss) 6,263 5,785 (160) (2,318) (2,987)
======== ======== ======== ======== ========
Weighted average
number of common
shares outstanding 22,223 16,852 15,464 11,898 7,515
======== ======== ======== ======== ========
Net income (loss)
per common share .28 .34 (.01) (.19) (.40)
=== === ==== ==== ====
Total assets 406,374 164,174 115,092 108,084 76,866
======== ======== ======== ======== ========
Long-term debt,
net of current
maturities 119,000 - - - 9,650
======== ======== ======== ======== ========
- -------------------
(1) See Note 3 to the Consolidated Financial Statements for pro forma amounts
assuming the Presidio and KNPC Acquisitions occurred on January 1, 1995.
(2) Certain reclassifications have been made to amounts reported in previous
years to conform to the 1996 presentation.
The following tables set forth selected information for the Company's
gas and oil sales volumes and proved reserves for each of the years shown.
Years ended December 31,
--------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Sales:
Gas (MMcf) 16,762 10,585 7,087 7,041 4,393
Oil (MBbls) 545 387 276 317 377
Proved reserves
at period end:
Gas (MMcf) 359,167 163,303 180,306 130,995 104,955
Oil (MBbls) 12,306 4,068 4,522 3,300 3,803
-19-
20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The Company's historical results of operations have been materially
affected by the substantial increase in the Company's size as a result of the
KNPC Acquisition, making comparisons of individual line items between 1996 and
1995 difficult. In addition, the Presidio Acquisition, which closed on December
23, 1996, will have a significant impact on the Company's future results of
operations.
Revenues
During 1996, revenues from gas and oil production increased 100% to
$40.8 million as compared to $20.4 million in 1995. Such increase in gas and
oil revenues was the result of an increase in (i) average gas prices received
by the Company from $1.31 per Mcf to $1.77 per Mcf which increased revenues by
approximately $4.9 million, (ii) gas sales volumes of 58% which increased
revenues by approximately $10.9 million, (iii) average oil prices received from
$16.80 per barrel to $20.45 per barrel which increased revenues by
approximately $1.4 million and, (iv) oil sales volumes of 41% which increased
revenues by approximately $3.2 million. The increase in gas and oil production
levels was primarily due to the KNPC Acquisition and to a lesser extent,
successful drilling results primarily in the Val Verde Basin of west Texas.
During 1995, revenues from gas and oil production increased by $4.6
million to a total of $20.4 million as compared to $15.8 million in 1994. A
decrease in average gas prices received by the Company from $1.62 per Mcf to
$1.31 per Mcf, decreased revenues by approximately $2.2 million. However; this
was more than offset by an increase in (i) gas sales volumes of 49% which
increased revenues by approximately $4.6 million, (ii) average oil prices from
$15.73 per bbl. to $16.80 per bbl. which increased revenues by approximately
$.3 million and, (iii) oil sales volumes of 40% which increased revenues by
approximately $1.9 million. Natural gas and oil sales volumes increased
dramatically as the Company increased its deliverability through successful
development drilling in 1995.
The following table reflects the Company's revenues, average prices
received for gas and oil, and amount of gas and oil production in each of the
years shown:
Years ended December 31,
-----------------------------
1996 1995 1994
-------- -------- --------
(in thousands)
Revenues:
Natural gas sales ......................... $ 29,639 $ 13,883 $ 11,451
Crude oil sales ........................... 11,150 6,502 4,341
Gain on sales of gas and oil
properties .............................. 267 4,402 13
Marketing, gathering and processing ....... 25,122 15,572 11,876
Interest income and other ................. 542 694 1,390
-------- -------- --------
Total revenues .................... $ 66,720 $ 41,053 $ 29,071
======== ======== ========
Net income (loss) ........................... $ 7,935 $ 5,785 $ (160)
======== ======== ========
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21
Years ended December 31,
----------------------------
1996 1995 1994
---- ---- ----
Natural gas production sold (MMcf) .......... 16,762 10,585 7,087
Crude oil production (MBbls) ................ 545 387 276
Average natural gas sales price ($/Mcf) .... $ 1.77 1.31 1.62
Average crude oil sales price ($/Bbl) ....... $ 20.45 16.80 15.73
The Company had no significant property sales during 1996 and 1994
whereas in 1995 the Company sold all of its properties in Arkansas, resulting
in a gain of $4.1 million.
Marketing, gathering and processing revenues increased 61% in 1996 as
compared to 1995 and 31% in 1995 as compared to 1994. Such increase is due to
higher gas prices and higher volumes of gas marketed due to the Company's
increased production and marketing of additional third party gas.
Costs and Expenses
Expenses related to gas and oil production, production taxes, and
depreciation, depletion and amortization have increased in each of the last two
years due to increased production and revenue levels resulting from successful
drilling operations as well as the KNPC Acquisition in January 1996. On an Mcfe
basis, the Company's costs have continually decreased during the past two years
as a result of operating efficiencies obtained by the Company. Costs of gas and
oil production declined to $.33 per Mcfe in 1996, as compared to $.37 per Mcfe
and $.47 per Mcfe in 1995 and 1994, respectively. Taxes on gas and oil
production, which are generally calculated as a percentage of gas and oil
sales, have also decreased during the last two years. Taxes on gas and oil
production have declined to 8% of gas and oil sales in 1996 as compared to 10%
and 12% of gas and oil sales during 1995 and 1994, respectively. Such decline
is due to the increase of natural gas and oil produced in the Val Verde Basin
where the Company experiences lower production tax rates as compared to its
other areas of operation.
The Company's depletion, depreciation and amortization rate remained
relatively unchanged on an mcfe basis totaling $.76 per mcfe in 1996 and $.77
per Mcfe in 1995. The Company's depletion, depreciation and amortization rate
dropped from $.83 per Mcfe in 1994 to $.77 per Mcfe in 1995 due to the
Company's $8.4 million writedown of gas and oil properties in the first quarter
of 1995.
The cost of gas sold in connection with the Company's marketing,
gathering and processing operations has increased in each of the last two years,
consistent with the increases in the associated revenues. The gross profit
percentage increased slightly to 18% of revenues in 1996 as compared to 16% in
1995 and 1994.
Costs associated with exploration activities and impairments of
leasehold costs remained relatively unchanged in 1996 as compared to 1995.
General and administrative expenses increased in each of the last two
years as a result of the Company's significantly higher level of operations.
The Company
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22
has benefitted from the economies of scale in its growth, resulting in a
decrease in general and administrative expenses on an Mcfe of production basis
to $.29 in 1996 as compared to $.32 and $.41 per Mcfe of production in 1995 and
1994, respectively.
Interest expense increased in 1995 as compared to 1994 as a result of
the debt incurred in connection with the purchase of the Presidio GINs in June
1995. Interest expense then decreased in 1996 as such debt was repaid in
November 1995 with the proceeds from the sale of 4.6 million shares of the
Company's Common Stock.
The Company incurred a current tax liability in the amount of $290,000,
$77,000 and $24,000 in 1996, 1995 and 1994, respectively, as a result of the
application of the alternate minimum tax rules as provided under the Internal
Revenue Code. The Company had not paid, prior to the year ended December 31,
1990, Federal income taxes for the past seven years due to its net operating
loss carryforward. At December 31, 1996, such carryforward for tax purposes was
approximately $53.4 million.
The Company reduced its net deferred tax asset to $2,865,000 in 1996
due primarily to the recording of an additional deferred tax liability in
connection with the KNPC Acquisition. Deferred tax assets (related primarily to
the Company's net operating loss and investment tax credit carryforwards) were
initially recorded in 1993 with the adoption of SFAS No. 109, but these tax
assets had been reserved entirely by a valuation allowance until 1995. Based on
recent additions to the Company's gas and oil reserves and the resulting
increases in anticipated future income, the Company now expects to realize
the future benefit of its net operating loss carryforwards prior to their
expiration. A valuation allowance of approximately $7.6 million has been
retained against the Company's deferred tax assets, primarily because the
Company's investment tax credit carryforwards are still not expected to be
realized in future periods. The deferred tax assets and related valuation
allowance will be adjusted as future events so warrant.
CAPITAL RESOURCES AND LIQUIDITY
Growth and Acquisitions
The Company's total assets have grown from $115 million at December 31,
1994 to $406 million at December 31, 1996. During this period, the Company's
proved gas and oil reserves increased from 207 Bcfe to 433 Bcfe. Most of the
growth of the Company resulted from the KNPC Acquisition and the Presidio
Acquisition; and, to a lesser extent, from the Company's successful
development drilling in recent years.
The Company continues to pursue opportunities which will add value by
increasing its reserve base and presence in significant natural gas areas, and
further developing the Company's ability to control and market the production
of natural gas. As the Company continues to evaluate potential acquisitions and
property development opportunities, it will benefit from its financing
flexibility and the leverage potential of the Company's overall capital
structure.
Wildhorse, which was created to provide gathering, processing,
marketing, storage and field services to Rocky Mountain gas and oil producers
will also pursue the construction or acquisition of gathering, processing and
storage areas of
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23
the Rocky Mountain region. Wildhorse is jointly owned by the Company (45
percent) and KNE (55 percent). Wildhorse is operated by KNE under the direction
of an operating team with equal representation from KNE and the Company.
The Company has dedicated significant amounts of its Rocky Mountain gas
production to Wildhorse for gathering, processing and marketing. KNE
contributed gas marketing contracts and storage assets in western Colorado.
Capital Expenditures
The Company's capital expenditures increased to $281.0 million, ($34.0
million excluding the KNPC and Presidio acquisitions) for the year ended
December 31, 1996 as compared to capital expenditures of $26.0 million and
$23.0 million for the years ended December 31, 1995 and 1994, respectively. The
Company anticipates capital expenditures of approximately $65 million in 1997.
The timing of most of the Company's capital expenditures is discretionary and
there are no material long-term commitments associated with the Company's
capital expenditure plans. Consequently, the Company is able to adjust the
level of its capital expenditures as circumstances warrant. The level of
capital expenditures by the Company will vary in future periods depending on
energy market conditions and other related economic factors.
Historically, the Company has funded capital expenditures and working
capital requirements with both internally generated cash and borrowings. Net
cash flow provided by operating activities increased to $24.9 million for 1996
as compared to $8.8 million and $7.6 million for 1995 and 1994, respectively.
Net cash flow provided by operating activities for 1997 is expected to
increase over 1996 as a result of the Presidio Acquisition.
Markets and Prices
The Company's revenues and associated cash flows are significantly
impacted by changes in gas and oil prices. All of the Company's gas and oil
production is currently market sensitive as no amounts of the Company's future
gas and oil production have been sold at contractually specified prices. During
1996, the average prices received for gas and oil by the Company were $1.77 per
Mcf and $20.45 per barrel, respectively, as compared to $1.31 Mcf and $16.80
per barrel in 1995 and $1.62 per Mcf and $15.73 per barrel in 1994.
Recent Accounting Pronouncements
In October 1996 the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position No. 96-1 ("SOP 96-1") which provides
authoritative guidance intended to improve and narrow the manner in which
existing accounting literature is applied to the recognition, measurement,
display, and disclosure of environmental remediation liabilities arising
pursuant to existing federal, state and local laws and regulations. SOP 96-1
addresses the nature of items that are to be included in the measurement of a
company's liability related to any environmental remediation efforts it is
currently undertaking or required to complete in the future. In this regard,
SOP 96-1 requires that all incremental direct third party costs, as well as any
internal compensation costs (including benefits) for employees expected to
devote a significant amount of time directly to remediation efforts, should be
included in the determination of the estimated liability. The term "remediation
effort" is defined in SOP 96-1 to include such things as remedial risk
assessment, feasibility studies and operations and maintenance associated with
corrective actions. SOP 96-1 must be adopted in the first quarter of 1997. The
adoption of SOP 96-1 is not expected to have a material impact on the Company's
financial position, results of operations or liquidity.
-23-
24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements Page
------------------------------------------ ----
Report of Independent Public Accountants 25
Consolidated Balance Sheets,
December 31, 1996 and 1995 26
Consolidated Statements of Operations,
Years ended December 31, 1996, 1995 and 1994 28
Consolidated Statements of Changes in Stockholders' Equity,
Years ended December 31, 1996, 1995 and 1994 29
Consolidated Statements of Cash Flows,
Years ended December 31, 1996, 1995 and 1994 30
Notes to Consolidated Financial Statements 32
-24-
25
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors
of Tom Brown, Inc.:
We have audited the accompanying consolidated balance sheets of Tom Brown, Inc.
(a Delaware corporation) and subsidiaries as of December 31, 1996 and 1995, and
the related consolidated statements of operations, changes in stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Tom Brown, Inc. and
subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
February 28, 1997
-25-
26
TOM BROWN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31,
-------------------
1996 1995
---- -----
(in thousands)
CURRENT ASSETS:
Cash and cash equivalents $ 20,504 $ 4,982
Accounts receivable 33,080 7,470
Inventories 1,374 246
Other 889 190
-------- --------
Total current assets 55,847 12,888
-------- --------
PROPERTY AND EQUIPMENT, AT COST:
Gas and oil properties, successful
efforts method of accounting 436,879 186,624
Other 35,216 12,056
-------- --------
Total 472,095 198,680
Less: Accumulated depreciation,
depletion and amortization 124,834 112,695
-------- --------
Net property and equipment 347,261 85,985
-------- --------
OTHER ASSETS:
Investment in securities -- 51,093
Deferred income taxes, net 2,865 13,170
Other assets 401 1,038
-------- --------
Total other assets 3,266 65,301
-------- --------
$406,374 $164,174
======== ========
(Continued)
See accompanying notes to consolidated financial statements.
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27
TOM BROWN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31,
----------------------
1996 1995
---- -----
(in thousands)
CURRENT LIABILITIES:
Accounts payable $ 25,033 $ 5,979
Accrued expenses 10,562 1,536
--------- ---------
Total current liabilities 35,595 7,515
--------- ---------
BANK DEBT 119,000 --
--------- ---------
OTHER NON-CURRENT LIABILITIES 5,643 --
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Convertible preferred stock, $.10 par value
Authorized 2,500,000 shares;
Outstanding 1,000,000 shares with a
liquidation preference of $25,000,000 100 --
Common Stock, $.10 par value
Authorized 40,000,000 shares;
Outstanding 23,898,431 shares and
20,180,902 shares, respectively 2,390 2,018
Additional paid-in capital 307,631 224,889
Accumulated deficit (63,985) (70,248)
--------- ---------
Total stockholders' equity 246,136 156,659
--------- ---------
$ 406,374 $ 164,174
========= =========
See accompanying notes to consolidated financial statements.
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28
TOM BROWN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31,
--------------------------------
1996 1995 1994
---- ---- ----
(in thousands, except per share amounts)
REVENUES:
Gas and oil sales $ 40,789 $ 20,385 $ 15,792
Marketing, gathering and
processing 25,122 15,572 11,876
Gain on sales of gas
and oil properties 267 4,402 13
Interest income and other 542 694 1,390
-------- -------- --------
Total revenues 66,720 41,053 29,071
-------- -------- --------
COSTS AND EXPENSES:
Gas and oil production 6,576 4,834 4,130
Taxes on gas and oil production 3,258 2,043 1,869
Cost of gas sold 20,496 13,146 10,022
Exploration costs 3,471 3,644 1,184
Impairments of leasehold costs 331 582 910
General and administrative 5,786 4,184 3,546
Depreciation, depletion and
amortization 15,140 9,994 7,288
Writedown of properties -- 8,368 --
Interest expense 389 1,369 20
-------- -------- --------
Total costs and expenses 55,447 48,164 28,969
-------- -------- --------
Income (loss) before income
taxes 11,273 (7,111) 102
INCOME TAX BENEFIT (PROVISION):
Recognition of deferred tax
asset -- 13,170 --
Income tax expense (3,338) (274) (262)
-------- -------- --------
Net income (loss) 7,935 5,785 (160)
Preferred stock dividends (1,672) -- --
-------- -------- --------
Net income (loss) attributable
to common stock $ 6,263 $ 5,785 $ (160)
======== ======== ========
Weighted average number of common
shares outstanding 22,223 16,852 15,464
======== ======== ========
Net income (loss) per common share $ .28 $ .34 $ (.01)
======== ======== ========
See accompanying notes to consolidated financial statements.
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29
TOM BROWN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Additional Total
Preferred Common Paid-in Accumulated Stockholders'
Stock Stock Capital Deficit Equity
----- ----- ------- ------- ------
(in thousands)
BALANCE AS OF
DECEMBER 31, 1993 $ - $ 1,544 $ 176,705 $ (75,873) $ 102,376
Stock options exercised - 7 304 - 311
Property acquisition - 1 134 - 135
Option plan compensation - - 207 - 207
Net loss - - - (160) (160)
-------- -------- -------- ------- --------
BALANCE AS OF
DECEMBER 31, 1994 - 1,552 177,350 (76,033) 102,869
Stock options exercised - 6 255 - 261
Common stock issuance - 460 47,472 - 47,932
Stock issuance costs - - (285) - (285)
Option plan compensation - - 97 - 97
Net income - - - 5,785 5,785
-------- -------- -------- ------- --------
BALANCE AS OF
DECEMBER 31, 1995 - 2,018 224,889 (70,248) 156,659
Stock issuance for
KNPC Acquisition 100 92 36,058 - 36,250
Stock options exercised - 9 510 - 519
Common stock issuance for
Presidio Acquisition - 271 46,157 - 46,428
Stock issuance costs - - (5) - (5)
Option plan compensation - - 22 - 22
Net income - - - 6,263 6,263
--------- -------- -------- -------- --------
BALANCE AS OF
DECEMBER 31, 1996 $ 100 $ 2,390 $ 307,631 $ (63,985) $ 246,136
========= ========= ========= ========= =========
See accompanying notes to consolidated financial statements.
-29-
30
TOM BROWN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
---------------------------
1996 1995 1994
---- ---- ----
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 6,263 $ 5,785 $ (160)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation, depletion and
amortization 15,140 9,994 7,288
Gain on sales of assets (267) (4,402) (53)
Writedown of properties -- 8,368 --
Use (Recognition) of deferred tax asset 2,701 (13,170) --
Option plan compensation 22 97 207
Exploration costs 3,471 3,644 1,184
Impairments of leasehold costs 331 582 910
Changes in operating assets
and liabilities:
Decrease (increase) in
accounts receivable (15,408) 990 (1,682)
Decrease (increase) in
inventories 75 886 (410)
Decrease (increase) in
other current assets 220 (12) 4
Increase (decrease) in accounts
payable and accrued expenses 9,919 (3,050) 306
Decrease (increase) in other
assets 2,406 (922) 2
-------- -------- -------
Net cash provided by operating
activities $ 24,873 $ 8,790 $ 7,596
-------- -------- -------
(continued)
See accompanying notes to consolidated financial statements.
-30-
31
TOM BROWN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
---------------------------------
1996 1995 1994
----- ---- ----
(in thousands)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of assets $ 593 $ 9,044 $ 295
Investment in securities -- (51,093) --
KNPC and Presidio Acquisitions (95,529) -- --
Capital and exploration expenditures (33,929) (28,814) (17,558)
--------- -------- --------
Net cash used in investing activities (128,865) (70,863) (17,263)
--------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock -- 47,932 --
Borrowings of long-term bank debt 119,000 51,000 --
Repayments of long-term bank debt -- (51,000) --
Proceeds from exercise of stock options 519 261 311
Stock issuance costs (5) (285) --
--------- -------- --------
Net cash provided by financing activities 119,514 47,908 311
--------- -------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 15,522 (14,165) (9,356)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 4,982 19,147 28,503
--------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 20,504 $ 4,982 $ 19,147
========= ======== ========
Cash paid during the year for:
Interest $ 136 $ 1,369 $ 20
Income taxes 190 77 141
See accompanying notes to consolidated financial statements
-31-
32
TOM BROWN, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the years ended December 31, 1996, 1995 and 1994
(1) NATURE OF OPERATIONS
Tom Brown, Inc and its wholly-owned subsidiaries ("the Company") is an
independent energy company engaged in the domestic exploration for, and the
acquisition, development, marketing, production and sale of, natural gas and
crude oil. The Company's industry segments are (i) the exploration for, and the
acquisition, development and production of, natural gas and crude oil, and (ii)
the marketing, gathering and processing of natural gas, primarily through
Wildhorse Energy Partners, L. L. C. ("Wildhorse"). All of the Company's
operations are conducted in the United States. The Company's operations are
presently focused in the Wind River and Green River Basins of Wyoming, the
Piceance Basin of Colorado, the Val Verde Basin of west Texas and the Permian
Basin of west Texas and southeastern New Mexico. The Company also, to a lesser
extent, conducts exploration and development activities in other areas of the
continental United States.
Substantially all of the Company's production is sold under
market-sensitive contracts. The Company's revenue, profitability and future
rate of growth are substantially dependent upon the price of, and demand for,
oil, natural gas and natural gas liquids. Prices for natural gas and oil are
subject to wide fluctuation in response to relatively minor changes in their
supply and demand as well as market uncertainty and a variety of additional
factors that are beyond the control of the Company. These factors include the
level of consumer product demand, weather conditions, domestic and foreign
governmental regulations, the price and availability of alternative fuels,
political conditions in foreign countries, the foreign supply of natural gas
and oil and the price of foreign imports and overall economic conditions. The
Company is affected more by fluctuations in natural gas prices than oil prices
because a majority of its production (84 percent in 1996 on a volumetric
equivalent basis) was natural gas.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation
The accompanying consolidated financial statements include the accounts
of the Company. The Company's proportionate share of assets, liabilities,
revenues and expenses associated with certain interests in gas and oil
partnerships and the Company's 45% ownership in Wildhorse are consolidated
within the accompanying financial statements. All significant intercompany
accounts and transactions have been eliminated. Certain reclassifications have
been made to amounts reported on previous years to conform to the 1996
presentation.
Inventories
Inventories consist of pipe and other production equipment. Inventories are
stated at the lower of cost (principally first-in, first-out) or estimated net
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33
TOM BROWN, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
realizable value.
Property and Equipment
The Company accounts for its natural gas and crude oil exploration and
development activities under the successful efforts method of accounting. Under
such method, costs of productive exploratory wells, development dry holes and
productive wells and undeveloped leases are capitalized. Gas and oil lease
acquisition costs are also capitalized. Exploration costs, including geological
and geophysical expenses and delay rentals for gas and oil leases, are charged
to expense as incurred. Exploratory drilling costs are initially capitalized,
but charged to expense if and when the well is determined not to have found
reserves in commercial quantities
Maintenance and repairs are charged to expense; renewals and
betterments are capitalized to the appropriate property and equipment accounts.
Upon retirement or disposition of assets, the costs and related accumulated
depreciation are removed from the accounts with the resulting gains or losses,
if any, reflected in results of operations.
Unproved properties with significant acquisition costs are assessed
quarterly on a property-by-property basis and any impairment in value is
charged to expense. Unproved properties whose acquisition costs are not
individually significant are aggregated, and the portion of such costs
estimated to be nonproductive, based on historical experience, is amortized
over the average holding period. If the unproved properties are determined to
be productive, the related costs are transferred to proved gas and oil
properties.
During 1995, the Company adopted Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-lived Assets..."
("SFAS 121"). SFAS 121 generally requires a separate assessment for potential
impairment of each of the Company's producing property cost centers, in
contrast to the Company's prior policy of evaluating the producing property
accounts for impairment in total. As a result, the Company recorded an $8.4
million non-cash charge during 1995 which reduced the carrying value of certain
of the Company's non-core properties to their estimated fair values.
The provision for depreciation, depletion and amortization of oil and
gas properties is calculated on a field-by-field basis using the
unit-of-production method. Included in such calculations are estimated future
dismantlement, restoration and abandonment costs, net of estimated salvage
values.
Other property and equipment is recorded at cost and depreciated using
the straight-line method based on estimated useful lives.
-33-
34
TOM BROWN, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
Natural Gas Revenues
The Company utilizes the accrual method of accounting for natural gas
revenues whereby revenues are recognized as the Company's entitlement share of
gas is produced based on its working interests in the properties. The Company
records a receivable (payable) to the extent it receives less (more) than its
proportionate share of gas revenues. At December 31, 1996, the Company had net
gas balancing liabilities of approximately $3,427,000 associated with
approximately 2.1 billion cubic feet ("Bcf") of gas.
Income Taxes
The Company provides for income taxes using the asset and liability
method under which deferred income taxes are recognized for the tax
consequences of "temporary differences" by applying enacted statutory tax rates
applicable to future years to differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities. The
effect on deferred taxes of a change in tax laws or tax rates is recognized in
income in the period such changes are enacted.
Stock-Based Compensation
The Company accounts for employee stock-based compensation using the
intrinsic value method prescribed by Accounting Principles Board (APB) Opinion
No. 25, "Accounting for Stock Issued to Employees". Accordingly, adoption of
SFAS No. 123, "Accounting for Stock-Based Compensation" had no effect on the
Company's results of operations but proforma disclosure is made of the effect
on Net Income had the accounting recommended by SFAS No. 123 been implemented
(See Note 7) in 1996.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements. Such estimates and assumptions also affect the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates. Significant estimates with regard to these financial
statements include the estimate of proved oil and gas reserve volumes and the
related present value of estimated future net revenues to be received therefrom
(see Note 13), as well as the valuation allowance for deferred taxes (see Note
5).
Net Income (Loss) Per Common Share
Net income per common share for the years 1996 and 1995 was calculated
based on the weighted average number of common shares and common equivalent
shares outstanding. For fiscal years prior to 1995, common stock equivalents
were antidilutive for purposes of calculating the net loss per common share.
-34-
35
TOM BROWN, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
Consolidated Statements of Cash Flows
The Company considers investments purchased with an original maturity
of three months or less to be cash equivalents. During the year ended December
31, 1996 the Company (i) issued 1.0 million shares of Preferred Stock and .9
million shares of Common Stock in connection with the KNPC Acquisition (see
Note 3), and (ii) issued 2.71 million shares of the Company's Common Stock and
converted its $51 million investment in Presidio GINs, purchased in June 1995,
into equity ownership, both in connection with the Presidio Acquisition (see
Note 3). Insofar as such transactions are non-cash, they are not reflected in
the Consolidated Statements of Cash Flows.
(3) ACQUISITIONS AND DIVESTITURES
Acquisition of KN Production Company
Pursuant to a letter of intent entered into in December 1995, the
Company and KN Energy, Inc. ("KNE") closed certain transactions on January 31,
1996 which resulted in (i) the Company's acquisition of all of the issued and
outstanding stock of KN Production Company ("KNPC"), a wholly owned subsidiary
of KNE, and (ii) Wildhorse being formed by the Company and KNE for the purpose
of providing gas gathering, processing, marketing, field and storage services,
(collectively the "KNPC Acquisition"). The price paid to KNE in connection with
the KNPC Acquisition was determined to be $36.25 million, of which $25 million
was paid in the form of 1,000,000 shares of the Company's $1.75 Convertible
Preferred Stock, Series A (the "Preferred Stock") and the remaining $11,250,000
was paid in the form of 918,367 shares of the Company's Common Stock, based on
a price per share of $12.25. The KNPC Acquisition has been recorded under the
purchase method of accounting.
As a result of the KNPC Acquisition, the Company acquired interests in
624 gross producing wells in Colorado and Wyoming, of which the Company became
operator of 308. The properties acquired by the Company include approximately
243,000 net undeveloped acres in Colorado, Wyoming, Kansas and Nebraska and
approximately 64,000 net developed acres located in Colorado and Wyoming.
An integral part of the KNPC Acquisition was the formation of
Wildhorse, which is owned fifty-five percent (55%) by KNE and forty-five
percent (45%) by the Company. The business and affairs of Wildhorse are managed
by KNE under the direction of an operating team consisting of two
representatives appointed by the Company and two representatives appointed by
KNE. The Company dedicated a significant amount of its Rocky Mountain gas
reserves to Wildhorse and KNE contributed gas marketing contracts.
The Company also acquired a natural gas storage facility in western Colorado
which was simultaneously contributed to Wildhorse.
The principal purpose of Wildhorse is to provide for the furnishing of
services related to natural gas, natural gas liquids and other natural gas
products, including gathering, processing and storage services, marketing
services and field services.
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36
TOM BROWN, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
Acquisition of Presidio Oil Company
On December 23, 1996, the Company completed the acquisition of Presidio
Oil Company and its subsidiaries (collectively, "Presidio"), following the
issuance by the U.S. Bankruptcy Court, District of Delaware, on December 10,
1996, of an Order confirming Presidio's reorganization under Chapter 11 of the
U.S. Bankruptcy Code. The purchase price was approximately $206.6 million
consisting of approximately $105 million in cash and 2.71 million shares of the
Company's Common Stock valued at $17.125 per share, including the assumption of
certain liabilities. Such amount does not include 2.64 million shares of the
Company's Common Stock which were not issued due to the Company's ownership of
$56.15 million principal amount of Presidio's Senior Gas Indexed Notes (the
"GINs"). The GINs were purchased in June 1995 for approximately $51 million as a
strategic part of the Company's efforts to acquire Presidio Oil Company. The
Presidio Acquisition has been accounted for using the purchase method. The cash
portion of the Presidio Acquisition was funded by borrowings under the Company's
loan agreement with its bank lender. The assets acquired consist primarily of
proved oil and gas properties and undeveloped acreage located in Wyoming, North
Dakota, Oklahoma and Louisiana. The Wyoming properties are concentrated in the
Green River and Powder River Basins of Wyoming.
Pro Forma Information
The following table presents the unaudited pro forma revenues, net
income and net income per share of the Company for the years ended December 31,
1996 and 1995 assuming that the KNPC Acquisition and the Presidio Acquisition
both occurred on January 1, 1995.
Years ended
------------------
1996 1995
---- ----
(in thousands, except for per share amounts)
Revenues $106,009 $ 84,821
======= ======
Net income 8,184 5,026
====== ======
Net income available to common
shareholders 6,512 3,276
====== ======
Net income per common share .26 .13
====== ======
Sale of Arkoma Assets
In September 1995, the Company sold its properties in the Arkoma Basin
in western Arkansas for $9.0 million. As a result of this sale, the Company
realized an after-tax book gain of $3.0 million. Proceeds from the sale of
these properties were used to repay a portion of the Company's outstanding
indebtedness under its Credit Facility.
-36-
37
TOM BROWN, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
(4) BANK DEBT
In September 1995, the Company entered into a bank credit agreement.
The credit agreement provided for a $65 million revolving credit facility (the
"Credit Facility") maturing in September 1998. Borrowings under the Credit
Facility are unsecured and bear interest, at the election of the Company, at a
rate equal to (i) the greater of the agent bank's prime rate or the federal
funds effective rate plus 1/2 of 1% or (ii) the agent bank's Eurodollar rate
plus a margin ranging from .75% to 1.00%. Interest on amounts outstanding under
the Credit Facility is due on the last day of each month in the case of loans
bearing interest at the prime rate or federal funds rate and, in the case of
loans bearing interest at the Eurodollar rate, interest payments are due on the
last day of each applicable interest period of one, two, three or six months,
as selected by the Company at the time of borrowing.
On November 13, 1995, the Company repaid the $51 million outstanding
under the Credit Facility primarily with funds generated from the Company's
public stock offering (see Note 6). At December 31, 1995, there was no
outstanding balance under the Credit Facility.
In connection with the Presidio Acquisition, on December 23, 1996, the
Company and its lenders entered into a Credit Agreement providing for a $125
million revolving credit facility, maturing December 1999. Pursuant to this
agreement, the Company repaid the existing indebtedness under the prior facility
with borrowings under the new Credit Agreement. The terms and conditions of the
new Credit Facility are substantially the same as the Credit Facility. At
December 31, 1996, the outstanding balance was $119 million at an interest rate
of 8.25%.
Financial covenants of the Credit Facility require the Company to
maintain a minimum consolidated tangible net worth of not less than $223 million
as of December 31, 1996. The Company is also required to maintain a ratio of (i)
earnings before interest expense, state and federal taxes and depreciation,
depletion and amortization to (ii) consolidated fixed charges, as defined in the
credit agreement, of not less than 2.5:1. Additionally, the Company is required
to maintain a ratio of consolidated debt to consolidated total capitalization of
less than 0.45:1 and a current ratio of not less than 1.1:1. The Company was in
compliance with all financial covenants at December 31, 1996.
(5) INCOME TAXES
The Company has not paid Federal income taxes due to its net operating
loss carryforward, but is required to pay alternative minimum tax ("AMT"). This
tax can be partially offset by an AMT net operating loss carryforward.
A U.S. Federal statutory rate applied to the Company's income (loss)
before income taxes of 35% in 1996 and 34% in 1995 and 1994 was used in the
following reconciliation of the Company's effective income tax expense:
-37-
38
TOM BROWN, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
Years Ended December 31,
---------------------------
1996 1995 1994
---- ---- ----
(in thousands)
Federal income tax provision (benefit)
at statutory rate $ 3,946 $(2,418) $ 35
Utilization of net operating loss carryforward - - (105)
Adjustment to valuation allowance (596) 2,357 -
Other (583) 33 70
------- ------- -------
2,767 (28) -
AMT provision 290 105 24
State income and franchise taxes 281 197 238
------- ------- -------
Income tax expense $ 3,338 $ 274 $ 262
======= ======= =======
The significant components which give rise to the Company's deferred
tax assets (liabilities) are as follows:
December 31,
-------------------
1996 1995
---- ----
(in thousands)
Net operating loss carryforwards..................... $ 18,689 $ 23,070
Gas and oil acquisition, exploration and development
costs deducted for tax purposes in excess of book.. (14,520) (8,074)
Investment tax credit carryforwards.................. 2,463 4,813
Option plan compensation............................. 1,559 1,507
Other................................................ 2,309 2,435
------ ------
Net deferred tax asset............................. 10,500 23,751
Valuation allowance.................................. (7,635) (10,581)
-------- --------
Recognized net deferred tax asset.................. $ 2,865 $ 13,170
======== ========
A valuation allowance of approximately $7.6 million and $10.6 million
at December 31, 1996 and 1995, respectively, has been provided against the
Company's net deferred tax assets based on management's estimate of the
recoverability of future tax benefits. The valuation allowance relates
primarily to the ability to use net operating loss and investment tax credit
carryforwards. The Company evaluated all appropriate factors to determine the
proper valuation allowance for these carryforwards, including any limitations
concerning their use, the year the carryforwards expire and the levels of
taxable income necessary for utilization. In this regard, full valuation
allowances were provided for investment tax credit carryforwards. Based on its
recent operating results and its expected levels of future earnings, the
Company believes it will, more likely than not, generate sufficient taxable
income to realize the benefit attributable to the net operating loss
carryforwards for which valuation allowances were not provided.
At December 31, 1996, the Company had investment tax credit
carryforwards of approximately $2.5 million and net operating loss
carryforwards of approximately
-38-
39
TOM BROWN, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
$53.4 million. The Company currently has no liability for deferred Federal
income taxes because of these net operating loss and investment tax credit
carryforwards. Realization of the benefits of these carryforwards is dependent
upon the Company's ability to generate taxable earnings in future periods. In
addition, the availability of these carryforwards is subject to various
limitations. The remainder of the carryforwards will expire between 1997 and
2004. Additionally, the Company has approximately $3.9 million of statutory
depletion carryforwards and $0.4 million of AMT credit carryforwards that may be
carried forward until utilized.
(6) STOCKHOLDERS' EQUITY
Common Stock
The Company's Common Stock is $.10 par value per share. There are
40,000,000 authorized shares of Common Stock of which 23,898,431 shares and
20,180,902 shares were outstanding as of December 31, 1996 and 1995,
respectively.
In November 1995, the Company sold 4,600,000 of Common Stock in a
public offering. The net proceeds of such offering totaled approximately $47.7
million and were used to repay indebtedness outstanding under the Credit
Facility.
The Company issued 918,367 shares of Common Stock in January 1996 in
connection with the KNPC Acquisition and 2.71 million shares of Common Stock in
December 1996 in connection with the Presidio Acquisition (See Note 3).
Rights Plan
On March 1, 1991, the Board of Directors adopted a Rights Plan designed
to help assure that all stockholders receive fair and equal treatment in the
event of a hostile attempt to take over the Company, and to help guard against
abusive takeover tactics. The Board of Directors declared a dividend of one
preferred share purchase right (a "Right") for each outstanding share of Common
Stock. The dividend was distributed on March 15, 1991 to the shareholders of
record on that date. Each Right entitles the registered holder to purchase, for
the $20 per share exercise price, shares of Common Stock or other securities of
the Company (or, under certain circumstances, of the acquiring person) worth
twice the per share exercise price of the Right.
The Rights will be exercisable only if a person or group acquires 20%
or more of the Company's Common Stock or announces a tender offer which would
result in ownership by a person or group of 20% or more of the Common Stock.
The date on wich the above occurs is to be known as the ("Distribution Date").
The Rights will expire on March 15, 2001, unless extended or redeemed earlier
by the Company.
At the time the Rights dividend was declared, the Board of Directors
further authorized the issuance of one Right with respect to each share of the
Company's Common Stock that shall become outstanding between March 15, 1991 and
the earlier of
-39-
40
TOM BROWN, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
the Distribution Date or the expiration or redemption of the Rights. Until the
Distribution Date occurs, the certificates representing shares of the Company's
Common Stock also evidence the Rights. Following the Distribution Date, the
Rights will be evidenced by separate certificates.
The provisions described above may tend to deter any potential
unsolicited tender offers or other efforts to obtain control of the Company
that are not approved by the Board of Directors and thereby deprive the
stockholders of opportunities to sell shares of the Company's Common Stock at
prices higher than the prevailing market price. On the other hand, these
provisions will tend to assure continuity of management and corporate policies
and to induce any person seeking control of the Company or a business
combination with the Company to negotiate on terms acceptable to the then
elected Board of Directors.
Preferred Stock
In January 1996, in connection with the KNPC acquisition, (see Note 3)
the Company issued 1,000,000 shares of its $1.75 Convertible Preferred Stock,
Series A (the "Preferred Stock"). There are 2,500,000 shares of Preferred Stock
authorized.
As the holder of the Preferred Stock, KNE is entitled to receive
cumulative dividends at the annual rate of $1.75 per share, payable in cash
quarterly on the fifteenth day of March, June, September and December in each
year. If full cumulative dividends on the Preferred Stock have not been
declared and paid or set apart for payment, the Company may not declare or pay
or set apart for payment any dividends or make any other distributions on, or
make any payment on account of the purchase, redemption or retirement of, the
Company's Common Stock, or any other stock of the Company ranking junior to the
Preferred Stock as to payment of dividends or distribution of assets on
liquidation, dissolution or winding up of the Company (other than, in the case
of dividends or distributions, dividends or distributions paid in shares of
Common Stock or such other junior ranking stock).
The Company has the option, at any time beginning on or after March 15,
2001, to redeem all or any part of the outstanding shares of Preferred Stock at
the redemption price of $25.00 per share, plus an amount equal to all accrued
and unpaid dividends on such shares of Preferred Stock to the date of
redemption.
Upon the occurrence of a change of control of the Company, KNE, as the
holder of the Preferred Stock, has the right to cause the Preferred Stock to be
redeemed by the Company, in whole or in part, at the redemption price of $25.50
per share, plus all accrued and unpaid dividends. Generally, for purposes of
the Preferred Stock, a "change of control" is any situation in which a majority
of the Board of Directors of the Company changes within a period of twelve
months or a new person or group of persons becomes in "control" of the Company,
within the meaning of rules of the Securities and Exchange Commission.
Each share of the Preferred Stock is convertible at the option of the
holder
-40-
41
TOM BROWN, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
thereof, at any time and from time to time prior to the redemption of such
share, into fully paid and nonassessable shares of Common Stock of the Company
at the initial conversion rate of 1.6660 shares of Common Stock for each share
of Preferred Stock, subject to customary adjustments.
The Preferred Stock is exchangeable, in whole or in part, at the option
of the Company on any dividend payment date at any time on or after March 15,
1999, and prior to March 15, 2001, for shares of Common Stock at the exchange
rate of 1.666 shares of Common Stock for each share of Preferred Stock;
provided that (i) on or prior to the date of exchange, the Company shall have
declared and paid or set apart for payment to the holders of Preferred Stock
all accumulated and unpaid dividends to the date of exchange, and (ii) the
current market price of the Common Stock is above $18.375 (the "Threshold
Price"). The exchange rate is subject to adjustment in the same manner and
under the same circumstances as the conversion rate is subject to adjustment,
and the Threshold Price is also subject to adjustment in the same manner and
under the same circumstances.
Upon the dissolution, liquidation or winding up of the Company, whether
voluntary or involuntary, the holders of the Preferred Stock are entitled to
receive out of the assets of the Company available for distribution to
stockholders, the amount of $25.00 per share plus an amount equal to all
dividends on such shares (whether or not earned or declared) accrued and unpaid
thereon to the date of final distribution, before any payment or distribution
may be made on the Common Stock or on any class of stock ranking junior to the
Preferred Stock with respect to distributions upon dissolution, liquidation or
winding up.
If at any time dividends payable on the Preferred Stock are in arrears
and unpaid in an amount equal to or exceeding the amount of dividends payable
thereon for four quarterly dividend periods, the total number of Directors on
the Company's Board of Directors will be limited to a maximum of nine and the
holders of the outstanding Preferred Stock will have the exclusive right,
voting separately as a class without regard to series, to designate a special
class of two Directors of the Company (the "Special Directors") at the next
annual or special meeting of stockholders of the Company irrespective of
whether such meeting otherwise would involve the election of directors, and the
membership of the Board of Directors of the Company shall be increased by the
number of the Special Directors so designated. Such right of the holders of
Preferred Stock to designate Special Directors continues until all dividends
accumulated and payable on the Preferred Stock have been paid in full, at which
time such right to designate Special Directors terminates, subject to
re-vesting in the event of a subsequent dividend payment arrearage.
In exercising the right to designate Special Directors or when
otherwise granted voting rights by operation of law, each share of Preferred
Stock shall be entitled to one vote, except as described below.
For so long as KNE owns 80% or more of the voting power of the
securities of the Company issued pursuant to the KNPC Acquisition, KNE has the
right to elect a special
-41-
42
TOM BROWN, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
class of two Directors to the Board of Directors of the Company, and for so
long as KNE owns securities of the Company issued pursuant to the KNPC
Acquisition possessing less than 80% of the voting power of the securities of
the Company issued pursuant to the KNPC Acquisition, but more than 30% of such
voting power, KNE has the right to elect a special class of one Director to the
Board of Directors of the Company.
The holders of the Preferred Stock are entitled to vote on all matters
upon which holders of the Company's Common Stock have the right to vote. In
such voting, each share of Preferred Stock is entitled to a number of votes per
share equivalent to the number of shares of Common Stock issuable upon
conversion of the Preferred Stock and shall vote together with the holders of
the outstanding shares of the Company's Common Stock as if a part of that
class.
(7) BENEFIT PLANS
1986 Grant
The Company granted nonqualified stock options to certain key officers
and employees for various terms and at prices not less than the market value of
the shares at the date of the grant. The exercise prices of the options
granted, which originally were set at prices ranging from $5.682 per share to
$7.50 per share, were reduced effective September 4, 1991 to $4.00 per share,
the market value at that date. The options expire ten years from the date of
grant.
1989 Plan
On September 28, 1990, shareholders approved the Company's 1989 Stock
Option Plan (the "1989 Plan"). The aggregate number of shares of Common Stock
that may be issued under the 1989 Plan is 1,400,000 shares. The exercise price
of the options granted to employees and employee directors prior to 1991, which
was originally set at $5.25 per share, was reduced effective September 4, 1991
to $4.00 per share, the market value at that date. The options expire ten years
from the date of grant.
1993 Plan
In May 1990 and March 1992, the Board of Directors adopted the 1990
Phantom Stock Option Plan and the 1992 Phantom Stock Option Plan for
Non-employee Directors (the "Phantom Plans").
In February 1993, the Board of Directors adopted the Company's 1993
Stock Option Plan (the "1993 Plan"). The 1993 Plan provides for issuance of
options to certain employees and directors to purchase shares of Common Stock.
In May 1996, the Board of Directors increased the aggregate number of shares of
Common Stock that may be issued under the 1993 Plan is 800,000 shares. The
exercise price, vesting and duration of the options may vary and will be
determined at the time of issuance. Also, in connection with the 1993 Plan,
employees and directors who were granted units pursuant to the Phantom Plans
surrendered those
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43
TOM BROWN, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
units for a like number of options under the 1993 Plan at the surrendered
units' exercise prices.
A summary of the status of the plans described above, as of the dates
indicated, and the changes during the years then ended, is presented in the
table and narrative below:
December 31,
-------------------------------------------------
1996 1995 1994
--------------- --------------- ---------------
(shares in thousands)
Wtd. Wtd. Wtd.
Shares Avg. Shares Avg. Shares Avg.
Under Exer. Under Exer. Under Exer.
Option Price Option Price Option Price
------ ------ ------ ------ ------ ------
Outstanding, beginning of year 1,525 $ 8.72 1,120 $ 6.51 1,099 $ 6.17
Granted 673 15.70 470 12.96 88 11.75
Exercised (88) 5.89 (60) 4.41 (67) 4.65
Forfeited 0 (5) 3.86 0
----- ----- -----
Outstanding, end of year 2,110 11.06 1,525 8.72 1,120 6.51
===== ===== -----
Exercisable, end of year 1,457 8.99 1,309 8.28 893 5.71
===== ===== =====
Available for grant, end of year 31 429 495
===== ===== =====
The weighted average fair value of options granted during the years
ended December 31, 1996 and 1995 was $9.19 and $6.71, respectively. The fair
value of each option is estimated as of the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995, respectively: (i) risk-free
interest rates of 6.35 and 7.59 percent; (ii) expected lives of seven years,
(iii) expected volatility of 45.4 and 46.9 percent , and (iv) no dividend
yields.
The following table summarizes information about stock options
outstanding at December 31, 1996:
Options Outstanding Options Exercisable
--------------------------------------- -----------------------
No. of Shs. Wtd. Avg. No. of Shs.
Range of Under Remaining Wtd. Avg. Under Wtd. Avg.
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices Options Life Price Options Price
- ---------------- ----------- ----------- --------- ----------- ---------
(shares in thousands)
$ 3.810 - 7.620 699 4.51 $ 4.26 694 $ 4.23
11.125 - 13.320 493 8.74 12.16 418 12.09
14.687 - 18.875 918 9.20 15.66 345 14.82
----- -----
2,110 7.54 11.06 1,457 8.99
===== =====
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44
TOM BROWN, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
The Company accounts for its stock-based compensation using the
intrinsic value method prescribed by APB Opinion No. 25 and related
interpretations, under which no compensation cost has been recognized for the
stock option plans. Alternatively, if compensation costs for these plans had
been determined in accordance with SFAS No. 123 ("SFAS 123"), the Company's net
income and net income per share would approximate the following pro forma
amounts:
Years ended December 31,
------------------------
1996 1995
------- -------
(in thousands, except per share amounts)
Net Income
As Reported........................ $ 6,263 $ 5,785
Pro Forma.......................... 4,729 5,105
Net Income per Common Share:
As Reported........................ $ 0.28 $ 0.34
Pro Forma.......................... 0.21 0.30
The pro forma amounts shown above may not be representative of future
results because the SFAS 123 method of accounting has not been applied to
options granted prior to January 1, 1995.
Profit Sharing, ESOP and KSOP Plans
Effective April 1, 1985, the Company adopted a profit sharing plan (the
"Profit Sharing Plan") for the benefit of all employees. Under the Profit
Sharing Plan, the Company may contribute to a trust either stock or cash in
such amounts as it may, from time to time, deem advisable. The Company
contributed $30,000 for 1995 to the Profit Sharing Plan. The Company did not
make a contribution to the Profit Sharing Plan for year 1994.
Effective April 1, 1986, the Company adopted an employee stock
ownership plan (the "ESOP") for the benefit of all employees. Under the ESOP,
the Company may contribute cash or the Company's Common Stock to a trust in
such amounts as the Company deems advisable. The Company contributed $30,000
and $60,000 to the trust for 1995 and 1994, respectively, for the purchase by
the trust of 2,110 and 4,750 shares of Common Stock.
Effective April 1, 1990, the Profit Sharing Plan was amended to provide
for voluntary employee contributions under Section 401(k) of the Internal
Revenue Code of 1986, as amended. The Profit Sharing Plan was further amended
to provide employees with the ability to give direct investment instructions to
the Profit Sharing Trustee for amounts held for their benefit.
Effective January 1, 1996 the Company adopted the KSOP ("KSOP")which is
a merger of the ESOP and the Profit Sharing Plan which contains 401(k) profit
sharing plan and employer stock ownership plan provisions for the benefit of
those persons who qualify
-44-
45
TOM BROWN, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
as participants. The Company contributed $100,000 to the KSOP for 1996.
(8) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair
value of financial instruments. The carrying values of trade receivables and
trade payables included in the accompanying Consolidated Balance Sheets
approximated market value at December 31, 1996 and 1995.
Cash and Cash Equivalents
The carrying amounts approximated fair value due to the short maturity
of these instruments.
Investments
At December 31, 1995, there was no quoted price for the Presidio GINs.
Consequently, the Company was unable to estimate the fair value of the GINs;
therefore, they remained valued at the Company's purchase price.
Bank Debt
The carrying value approximates fair value because the interest rate is
variable and is reflective of current market conditions.
(9) RELATED PARTIES AND SIGNIFICANT CUSTOMERS
Certain of the Company's officers and directors participate (either
individually or indirectly through various entities) with the Company and other
unrelated investors in the drilling, development and operation of gas and oil
properties. Related party transactions are non-interest bearing and are settled
in the normal course of business with terms which, in management's opinion, are
similar to those with other joint owners.
The Company has engaged from time to time two law firms, one of whose
partner serves as a director and one of whose partner serves as an officer. The
amounts paid to each of these firms for the years ended December 31, 1996, 1995
and 1994 were $56,000 and $268,000; $103,000 and $159,000; and $37,000 and
$70,000, respectively. The Company also paid $74,000, $35,000, and $35,000
during the years ended December 31, 1996, 1995 and 1994, respectively, to a
consulting firm which has a partner who serves as a director of the Company.
The Company participates in exploration activity with a partnership,
one of whose partner is a director of the Company. During the years ended
December 31, 1996, 1995, and 1994 the Company billed $239,000, $153,000 and
$6,000, respectively to such partnership for their share of certain leasehold
costs.
-45-
46
TOM BROWN, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
In addition, certain officers and directors of the Company are
directors of a former subsidiary. The Company and the former subsidiary make
available to each other certain personnel, office services and records with
each party being reimbursed for costs and expenses incurred in connection
therewith. During the years ended December 31, 1996, 1995 and 1994, the Company
charged the former subsidiary approximately $75,000, $70,000 and $64,000,
respectively, for such services. The former subsidiary performs drilling
services on certain wells operated by the Company and charged approximately
$42,000, $934,000 and $1,322,000 for such services during the years ended
December 31, 1996, 1995 and 1994, respectively. In management's opinion, the
above described transactions and services were provided on the same terms as
could be obtained from non-related sources.
Gas and oil sales to three purchasers, Coastal Oil and Gas, Conoco,
Inc. and KN Gas Marketing, Inc., accounted for 15%, 14% and 13%, respectively,
of gas and oil sales and marketing, gathering and processing revenues for the
year ended December 31, 1996 and 14%, 25% and 12%, respectively, for the year
ended December 31, 1995. For the year ended December 31, 1994, Montana-Dakota
Utilities Co. and KN Gas Marketing, Inc. accounted for 13% and 12%,
respectively, of gas and oil sales and marketing, gathering and processing
revenues. Because there are numerous other parties available to purchase the
Company's production, the Company believes the loss of these purchasers would
not materially affect its ability to sell natural gas or crude oil.
Concentration of Credit Risk
The Company's revenues are derived principally from uncollateralized
sales to customers in the gas and oil industry. The concentration of credit
risk in a single industry affects the Company's overall exposure to credit risk
because customers may be similarly affected by changes in economic and other
conditions. The Company has not experienced significant credit losses on such
receivables.
-46-
47
TOM BROWN, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
(10) SEGMENT INFORMATION
The Company operates in two reportable segments: (i) gas and oil
exploration and development and (ii) marketing, gathering and processing. The
segment results are presented in the following schedule:
Gas & Oil Marketing,
Exploration Gathering
& & Intercompany
Development Processing Sales & Other Total
----------- ----------- ------------- -----------
(in thousands)
Year ended
December 31, 1996
- -----------------
Assets $ 393,697 $ 14,923 $ (2,246) $ 406,374
Revenues 41,598 29,476 (4,354) 66,720
Income before taxes 7,417 3,856 -- 11,273
Capital expenditures 256,054 24,550 -- 280,604
Depreciation and amortization 13,762 1,378 -- 15,140
Year ended
December 31, 1995
- -----------------
Assets $ 157,928 $ 6,246 $ -- $ 164,174
Revenues 25,385 19,696 (4,028) 41,053
Income (loss) before taxes (9,060) 1,949 -- (7,111)
Capital expenditures 24,809 1,203 -- 26,012
Depreciation and amortization 9,785 209 -- 9,994
Year ended
December 31, 1994
- -----------------
Assets $ 106,144 $ 8,948 $ -- $ 115,092
Revenues 15,792 16,554 (3,275) 29,071
Income (loss) before taxes (1,414) 1,516 -- 102
Capital expenditures 22,359 651 -- 23,010
Depreciation and amortization 7,119 169 -- 7,288
(11) COMMITMENTS AND CONTINGENCIES
The Company's operations are subject to numerous Federal and state
government regulations which may give rise to claims against the Company. In
addition, the Company is a defendant in various lawsuits generally incidental
to its business. The Company does not believe that the ultimate resolution of
such litigation will have a material adverse effect on the Company's financial
position or results of operations.
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48
TOM BROWN, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
Lease Commitments
At December 31, 1996, the Company had long-term leases covering certain
of its facilities and equipment. The minimum rental commitments under
non-cancelable operating leases with lease terms in excess of one year are
approximately $562,000, $132,000 and $75,000 for 1997, 1998 and 1999,
respectively. Total rental expense incurred for the years ended December 31,
1996, 1995 and 1994 was approximately $394,000, $262,000 and $245,000,
respectively, all of which represented minimum rentals under non-cancelable
operating leases.
Firm Transportation Commitments
As of December 31, 1996, Wildhorse had entered into several contracts
for firm transportation on interstate pipelines. Based upon current rates and
using the Company's forty-five percent (45%) ownership in Wildhorse, the
Company's obligation for such firm transportation for the next five years and
thereafter is as follows:
Commitment
Years ending December 31, Amount
------------------------- ----------
(in thousands)
1997 $ 2,812
1998 4,866
1999 4,851
2000 4,778
2001 4,531
Thereafter 7,490
-------
$29,328
=======
Environmental Matters
A wholly-owned subsidiary of the Company is a party to an environmental
cleanup proceeding. The subsidiary's share of the estimated cleanup costs were
accrued in the consolidated financial statements at December 31, 1994. Based on
the amount of remediation costs estimated for this site and the Company's de
minimis contribution, if any, the Company believes that the outcome of this
proceeding will not have a material adverse effect on its financial position or
results of operations.
-48-
49
TOM BROWN, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
(12) QUARTERLY FINANCIAL DATA (UNAUDITED)
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -------
(in thousands, except per share amounts)
Year ended
December 31, 1996
- -------------------
Revenues $13,205 $14,071 $14,773 $24,671 $66,720
Gross profit (1) 7,300 7,999 6,407 13,875 $35,581
Net income 870 1,012 122 4,259 $ 6,263
Net income per
common share (3) .04 .05 .01 .19 $ .28
Year ended
December 31, 1995
- -------------------
Revenues $ 9,428 $ 9,162 $12,082 $10,381 $41,053
Gross profit (1) 3,814 4,101 3,765 4,254 $15,934
Net income (loss)(2) 4,530 273 1,500 (518) $ 5,785
Net income (loss) per
common share (3) .28 .02 .09 (.03) $ .34
(1) Gross Profit is computed as the excess of gas and oil revenues over
operating expenses. Operating expenses are those associated directly
with gas and oil revenues and include lease operations, gas and oil
related taxes and other expenses.
(2) Net income for the quarter ended March 31, 1995 includes the recognition
of deferred tax assets of $13,967,000 offset by an $8,368,000 charge
against earnings related to the early adoption of SFAS No. 121,
"Accounting for the Impairment of Long-lived Assets...". see Note 2.
(3) The sum of the individual quarterly net income (loss) per share may not
agree with year-to-date net income (loss) per share as each period's
computation is based on the weighted average number of common shares
outstanding during the period.
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50
TOM BROWN, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
(13) SUPPLEMENTAL INFORMATION RELATED TO GAS AND OIL ACTIVITIES (UNAUDITED)
The following tables set forth certain historical costs and operating
information related to the Company's gas and oil producing activities:
Capitalized Costs and Costs Incurred
December 31,
-----------------------------------
1996 1995 1994
--------- --------- ---------
(in thousands)
Capitalized costs
Proved gas and oil properties $ 392,192 $ 184,424 $ 212,218
Unproved gas and oil properties 44,687 2,200 2,233
--------- --------- ---------
Total gas and oil properties 436,879 186,624 214,451
Less: Accumulated depreciation,
depletion and amortization (118,635) (105,442) (132,512)
--------- --------- ---------
Net capitalized costs $ 318,244 $ 81,182 $ 81,939
========= ========= =========
Years ended December 31,
-----------------------------------
1996 1995 1994
--------- --------- ---------
(in thousands)
Costs incurred
Proved property
acquisition costs $ 194,869 $ 44 $ 256
Unproved property
acquisition costs 42,877 657 1,498
Exploration costs 3,471 3,144 3,177
Development costs 13,177 21,747 17,797
--------- --------- ---------
Total $ 254,394 $ 25,592 $ 22,728
========= ========= =========
Gas and Oil Reserve Information (Unaudited)
The following summarizes the policies used by the Company in preparing
the accompanying gas and oil reserve disclosures, Standardized Measure of
Discounted Future Net Cash Flows Relating to Proved Gas and Oil Reserves and
reconciliation of such standardized measure between years.
Estimates of proved and proved developed reserves at December 31, 1996,
1995 and 1994 were principally prepared by independent petroleum consultants.
Proved reserves are estimated quantities of natural gas and crude oil which
geological and engineering data demonstrate with reasonable certainty to be
recoverable in future years from known reservoirs under existing economic and
operating conditions. Proved developed reserves are proved reserves that can be
recovered through existing wells with existing equipment and operating methods.
All of the Company's gas and oil reserves are located in the United States.
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51
TOM BROWN, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
The standardized measure of discounted future net cash flows from
production of proved reserves was developed as follows:
1. Estimates are made of quantities of proved reserves and the future
periods during which they are expected to be produced based on year end
economic conditions.
2. The estimated future cash flows from proved reserves were determined
based on year end prices, except in those instances where fixed and
determinable price escalations are included in existing contracts.
3. The future cash flows are reduced by estimated production costs and
costs to develop and produce the proved reserves, all based on year end
economic conditions and by the estimated effect of future income taxes based on
the then-enacted tax law, the Company's tax basis in its proved gas and oil
properties and the effect of net operating loss, investment tax credit and
other carryforwards.
The standardized measure of discounted future net cash flows does not
purport to present, nor should it be interpreted to present, the fair value of
the Company's gas and oil reserves. An estimate of fair value would also take
into account, among other things, the recovery of reserves not presently
classified as proved, anticipated future changes in prices and costs and a
discount factor more representative of the time value of money and the risks
inherent in reserve estimates.
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52
TOM BROWN, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
Quantities of Gas and Oil Reserves (Unaudited)
The following table presents estimates of the Company's net proved and
proved developed natural gas and oil reserves (including natural gas liquids).
Reserve Quantities
------------------------
Gas Oil
Proved reserves: (MMcf) (MBbls)
--------- --------
Estimated reserves at December 31, 1993 130,995 3,300
Revisions of previous estimates (4,582) (288)
Purchase of minerals in place 659 19
Extensions and discoveries 60,593 1,775
Sales of minerals in place (128) (8)
Production (7,231) (276)
------- ------
Estimated reserves at December 31, 1994 180,306 4,522
Revisions of previous estimates (11,071) (476)
Purchase of minerals in place -- --
Extensions and discoveries 12,065 455
Sales of minerals in place (7,412) (46)
Production (10,585) (387)
------- ------
Estimated reserves at December 31, 1995 163,303 4,068
Revisions of previous estimates 10,249 (471)
Purchase of minerals in place 174,185 6,278
Extensions and discoveries 28,192 2,976
Production (16,762) (545)
------- ------
Estimated reserves at December 31, 1996 359,167 12,306
======= ======
Proved developed reserves:
December 31, 1993 86,153 2,357
December 31, 1994 114,061 2,877
December 31, 1995 109,267 2,862
December 31, 1996 257,241 8,994
-52-
53
TOM BROWN, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Gas
and Oil Reserves (Unaudited)
December 31,
-----------------------------------------
1996 1995 1994
----------- ----------- -----------
(in thousands)
Future cash flows $ 1,523,845 $ 308,965 $ 348,652
Future production costs (380,453) (86,735) (90,228)
Future development costs (62,124) (13,344) (17,596)
----------- ----------- -----------
Future net cash flows before tax 1,081,268 208,886 240,828
Future income taxes (265,260) (31,016) (38,950)
----------- ----------- -----------
Future net cash flows after tax 816,008 177,870 201,878
Annual discount at 10% (349,795) (74,523) (90,048)
----------- ----------- -----------
Standardized measure at
discounted future net cash flows $ 466,213 $ 103,347 $ 111,830
=========== =========== ===========
Discounted future net cash flows
before income taxes $ 608,746 $ 114,586 $ 124,942
=========== =========== ===========
Natural gas prices increased significantly during the fourth quarter of
1996 and subsequent to December 31, 1996 have declined significantly.
Accordingly, the discounted future net cash flows shown above would be
substantially lower if the standardized measure were calculated using prices in
effect at the end of the first quarter of 1997.
-53-
54
TOM BROWN, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
Changes in Standardized Measure of Discounted Future Net Cash Flows
(Unaudited)
Years ended December 31,
-----------------------------------
1996 1995 1994
--------- --------- ---------
(in thousands)
Gas and oil sales, net
of production costs $ (30,955) $ (13,509) $ (9,793)
Net changes in
anticipated prices
and production cost 129,492 (10,077) (29,733)
Extensions and
discoveries, less
related costs 81,675 10,803 51,231
Changes in estimated
future development
costs (1,985) 2,254 1,237
Previously estimated
development costs
incurred 428 4,152 667
Net change in income
taxes (131,293) 1,872 (3,706)
Purchase of minerals
in place 288,643 -- 485
Sales of minerals
in place (37) (6,133) (157)
Accretion of discount 11,458 12,494 10,575
Revision of quantity
estimates 16,993 (8,337) (3,515)
Changes in production
rates and other (1,553) (2,002) (1,808)
--------- --------- ---------
Change in
Standardized
Measure $ 362,866 $ (8,483) $ 15,483
========= ========= =========
-54-
55
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information regarding Directors of the Company will be included
in the Company's definitive proxy statement to be filed with the Securities and
Exchange Commission not later than 120 days after the end of the Company's
fiscal year covered by this Form 10-K and such information is incorporated by
reference to the Company's definitive proxy statement. Information concerning
the Executive Officers of the Company appears under Item I of this Annual
Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Certain information regarding compensation of executive officers of the
Company will be included in the Company's definitive proxy statement to be
filed with the Securities and Exchange Commission not later than 120 days after
the end of the Company's fiscal year covered by this Form 10-K and such
information is incorporated by reference to the Company's definitive proxy
statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Certain information regarding security ownership of certain beneficial
owners and management will be included in the Company's definitive proxy
statement to be filed with the Securities and Exchange Commission not later
than 120 days after the end of the Company's fiscal year covered by this Form
10-K and such information is incorporated by reference to the Company's
definitive proxy statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain information regarding transactions with management and other
related parties will be included in the Company's definitive proxy statement to
be filed with the Securities and Exchange Commission not later than 120 days
after the end of the Company's fiscal year covered by this Form 10-K and such
information is incorporated by reference to the Company's definitive proxy
statement.
-55-
56
PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(1) See Index to Consolidated Financial Statements under Item 8 of this
Annual Report on Form 10-K.
(2) None
(3) Exhibits:
( 2.1) Exchange Agreement dated August 5, 1996 by and among
Presidio Oil Company, Presidio Exploration, Inc., Presidio
West Virginia, Inc., Palisade Oil, Inc. and the Registrant
(Incorporated by reference to Exhibit No. 2.1 in the
Registrant's Quarterly Report on Form 10-Q for the six
months ended June 30, 1996).
( 2.2) First Amendment to Exchange Agreement dated August 20, 1996
by and among Presidio Oil Company, Presidio Exploration,
Inc., Presidio West Virginia, Inc., Palisade Oil, Inc. and
the Registrant (Incorporated by reference to Exhibit No.
2.2 in the Registrant's Form 8-K Report dated December 23,
1996 and filed with the Securities and Exchange Commission
on January 6, 1997).
( 2.3) Second Amendment to Exchange Agreement dated September 5,
1996 by and among Presidio Oil Company, Presidio
Exploration, Inc., Presidio West Virginia, Inc., Palisade
Oil, Inc. and the Registrant (Incorporated by reference to
Exhibit No. 2.3 in the Registrant's Form 8-K Report dated
December 23, 1996 and filed with the Securities and
Exchange Commission on January 6, 1997).
( 2.4) Third Amendment to Exchange Agreement dated November 20,
1996 by and among Presidio Oil Company, Presidio
Exploration, Inc., Presidio West Virginia, Inc., Palisade
Oil, Inc. and the Registrant (Incorporated by reference to
Exhibit No. 2.4 in the Registrant's Form 8-K Report dated
December 23, 1996 and filed with the Securities and
Exchange Commission on January 6, 1997).
( 3.1) Certificate of Incorporation, as amended, of the Registrant
(Incorporated by reference to
-56-
57
Exhibit No. 4 in the Registrant's Form 10-Q Report for the
quarterly period ended June 30, 1996 and filed with the
Securities and Exchange Commission on August 14, 1996).
( 3.2) Bylaws of the Registrant (Incorporated by reference to
Exhibit No. 3.2 in the Registrant's Form 8-B Registration
Statement dated July 15, 1987 and filed with the Securities
and Exchange Commission on July 17, 1987).
( 4.1) Specimen Common Stock Certificate (Incorporated by
reference to Exhibit No. 4.2 in the Registrant's Form 8-B
Registration Statement dated July 15, 1987 and filed with
the Securities and Exchange Commission on July 17, 1987).
( 4.2) Rights Agreement dated as of March 5, 1991 between the
Registrant and The First National Bank of Boston, successor
in interest to American Stock Transfer & Trust Company
(Incorporated by reference to Exhibit No. 4(a) in the
Registrant's Form 8-K Report dated March 12, 1991 and filed
with the Securities and Exchange Commission on March 15,
1991).
(10.1) Wind River Gathering Company Joint Venture Agreement
between Retex Gathering Company, Inc. and KN Gas Gathering,
Inc. dated March 18, 1991 (Incorporated by reference to
Exhibit No. 10.5 in the Registrant's Form S-1 Registration
Statement dated May 3, 1993 and filed with the Securities
and Exchange Commission on May 4, 1993).
(10.2) Asset Purchase Agreement dated November 2, 1992, between
Williston Basin Interstate Pipeline Company as Seller and
Wind River Gathering Company as Buyer (Incorporated by
reference to Exhibit No. 10.6 in the Registrant's Form S-1
Registration Statement dated May 3, 1993 and filed with the
Securities and Exchange Commission on May 4, 1993.)
(10.3) Letter Agreement dated as of June 27, 1995 and Demand
Promissory Note dated as of June 28, 1995 between the
Registrant and Chemical Bank (Incorporated by reference to
Exhibit No. 10.1 in the Registrant's Form 10-Q Quarterly
Report
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dated August 11, 1995).
(10.4) Agreement between the Registrant and Chemical Bank, dated
September 14, 1995 (Incorporated by reference to Form 8-K
Report dated September 27, 1995 and filed with the
Securities and Exchange Commission on September 28, 1995).
(10.5) Agreement and Plan of Reorganization, dated January 31,
1996, by and among the Registrant, TBI Acquisition, Inc.,
KN Production Company and KN Energy, Inc. (Incorporated by
reference to Exhibit No. 10.1 in the Registrant's Form 8-K
Report dated January 31, 1996 and filed with the Securities
and Exchange Commission on February 15, 1996).
(10.6) Limited Liability Company Agreement, dated January 31,
1996, of Wildhorse Energy Partners, LLC, between the
Registrant and KN Energy, Inc. (Incorporated by reference
to Exhibit No. 10.2 in the Registrant's Form 8-K Report
dated January 31, 1996 and filed with the Securities and
Exchange Commission on February 15, 1996).
(10.7) Registration Rights Agreement, dated January 31, 1996,
between the Registrant and KN Energy, Inc. (Incorporated by
reference to Exhibit No. 10.4 in the Registrant's Form 8-K
Report dated January 31, 1996 and filed with the Securities
and Exchange Commission on February 15, 1996).
(10.8)* Credit Agreement, dated as of December 23, 1996, among the
Registrant, The Chase Manhattan Bank and the other lenders
parties thereto.
Executive Compensation Plans and Arrangements (Exhibits
10.9 through 10.19):
(10.9) Non-qualified Stock Option Agreement dated December 24,
1986 between the Registrant and Pete Scherer (Incorporated
by reference to Exhibit No. 10.12 in the Registrant's Form
8-B Registration Statement dated July 15, 1987 and filed
with the Securities and Exchange Commission on July 17,
1987).
(10.10) Non-qualified Stock Option Agreement dated
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December 24, 1986 between the Registrant and Kim Harris
(Incorporated by reference to Exhibit No. 10.15 in the
Registrant's Form 8-B Registration Statement dated July 15,
1987 and filed with the Securities and Exchange Commission
on July 17, 1987).
(10.11) Non-qualified Stock Option Agreement dated December 24,
1986 between the Registrant and Donald L. Evans
(Incorporated by reference to Exhibit No. 10.16 in the
Registrant's Form 8-B Registration Statement dated July 15,
1987 and filed with the Securities and Exchange Commission
on July 17, 1987).
(10.12) 1989 Stock Option Plan (Incorporated by reference to
Exhibit No. 10.17 in the Registrant's Form S-1 Registration
Statement dated February 14, 1990 and filed with the
Securities and Exchange Commission on February 13, 1990).
(10.13) Employee Stock Ownership Plan and Trust
Agreement(Incorporated by reference to Exhibit 10.20 in the
Registrant's Form 10-K Report dated March 26, 1993 and
filed with the Securities and Exchange Commission on March
31, 1993).
(10.14) Tom Brown, Inc. 401(k) Profit Sharing Plan (Incorporated by
reference to Exhibit 10.21 in the Registrant's Form 10-K
Report dated March 26, 1993 and filed with the Securities
and Exchange Commission on March 31, 1993).
(10.15)* Second Amended and Restated Employment Agreement dated
January 1, 1997 between the Registrant and Donald L. Evans.
(10.16) 1992 Phantom Stock Option Plan for Non-employee Directors
(Incorporated by reference to Exhibit 10.23 in the
Registrant's Form 10-K Report dated March 26, 1993 and
filed with the Securities and Exchange Commission on March
31, 1993).
(10.17) Amendments to 1992 Phantom Stock Option Plan for
Non-employee Directors (Incorporated by reference to
Exhibit 10.24 in the Registrant's Form 10-K Report dated
March 26, 1993 and filed with the Securities and Exchange
Commission on March 31, 1993).
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(10.18) 1993 Stock Option Plan. (Incorporated by reference to
Exhibit 10.25 in the Registrant's Form 10-K Report dated
March 26, 1993 and filed with the Securities and Exchange
Commission on March 31, 1993.)
(10.19)* Tom Brown, Inc. KSOP Plan.
(11.1)* Computation of per share earnings.
(21.1)* Subsidiaries of the Registrant.
(23.1)* Consent of Arthur Andersen LLP
(23.2)* Consent of Williamson Petroleum Consultants, Inc.
(23.3)* Consent of Ryder Scott Company.
(27.1)* Financial Data Schedule
----------------
* Filed herewith
(4) Reports on Form 8-K:
None
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
TOM BROWN, INC.
By /s/ Donald L. Evans Date: March 25, 1997
----------------------------------
Donald L. Evans
Chairman of the Board of Directors
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Donald L. Evans Chairman of the Board and March 25, 1997
- -------------------------- Chief Executive Officer
Donald L. Evans
/s/ R. Kim Harris Controller and Principal March 25, 1997
- -------------------------- Financial Officer
R. Kim Harris
/s/ William R. Granberry President, Chief Operating March 25, 1997
- -------------------------- Officer and Director
William R. Granberry
/s/ Thomas C. Brown Director March 25, 1997
- --------------------------
Thomas C. Brown
/s/ Edward W. LeBaron, Jr. Director March 25, 1997
- --------------------------
Edward W. LeBaron, Jr.
/s/ Henry Groppe Director March 25, 1997
- --------------------------
Henry Groppe
/s/ Robert H. Whilden, Jr. Director March 25, 1997
- --------------------------
Robert H. Whilden, Jr.
/s/ James B. Wallace Director March 25, 1997
- --------------------------
James B. Wallace
/s/ David M. Carmichael Director March 25, 1997
- --------------------------
David M. Carmichael
/s/ George M. Simmons Director March 25, 1997
- --------------------------
George M. Simmons
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TOM BROWN, INC.
EXHIBITS
TO
ANNUAL REPORT ON FORM 10-K
FOR THE PERIOD ENDED
December 31, 1996
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INDEX TO EXHIBITS
Exhibit
No. Exhibit
- ------- -------
10.8 Credit Agreement dated as of December 23, 1996, among Tom Brown,
Inc., The Chase Manhattan Bank and the other lenders parties
thereto.
10.15 Second Amended and Restated Employment Agreement dated January 1,
1997 between the Registrant and Donald L. Evans.
10.19 Tom Brown, Inc. KSOP Plan.
11.1 Computation of per share earnings.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Williamson Petroleum Consultants, Inc.
23.3 Consent of Ryder Scott Company.
27.1 Financial Data Schedule.
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