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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, 1995
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..................
COMMISSION FILE NUMBER 0-3880
TOM BROWN, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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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)
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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, AND
PREFERRED SHARE PURCHASE RIGHTS
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(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
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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. [X]
The aggregate market value of the Registrant's Common Stock held by
non-affiliates (based upon the last sale price of $13.875 per share as quoted
on the NASDAQ National Market System) on March 25, 1996 was approximately
$269,090,000.
As of March 25, 1996, there were 21,114,144 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive proxy statement for the 1996 Annual
Meeting of Stockholders to be held on May 22, 1996 are incorporated by
reference into Part III.
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TOM BROWN, INC.
FORM 10-K
CONTENTS
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Part I Page
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Item 1. Business................................................ 3
Item 2. Properties.............................................. 12
Item 3. Legal Proceedings....................................... 15
Item 4. Submission of Matters to a Vote of
Security Holders................................. 15
Part II
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Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters.................. 16
Item 6. Selected Financial Data................................. 17
Item 7. Management's Discussion and Analysis of
Financial Condition and Results
of Operations.................................... 18
Item 8. Financial Statements and Supplementary Data............. 23
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure........... 51
Part III
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Item 10. Directors and Executive Officers of the
Registrant....................................... 51
Item 11. Executive Compensation.................................. 51
Item 12. Security Ownership of Certain Beneficial
Owners and Management............................ 51
Item 13. Certain Relationships and Related Transactions.......... 51
Part IV
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Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K.......................... 52
Signatures............................................................... 56
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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, marketing, production and sale of, natural gas and
crude oil. The Company's activities are conducted principally in the Wind
River Basin of Wyoming and the Permian Basin of west Texas. 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 (1) the exploration for, and the
acquisition, development and production of natural gas and crude oil, and (2)
the marketing, gathering, processing and sale of natural gas. See Note 9 of
Notes to Consolidated Financial Statements.
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.
CERTAIN DEVELOPMENTS IN 1995
Acquisition of KN Production Company. Pursuant to a letter of intent
entered into in December 1995, the Company and KN Energy, Inc. ("KNE") closed
joint 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, formerly a wholly owned subsidiary of KNE, and (ii) KNE's acquisition
of 1,000,000 shares of the Company's $1.75 Convertible Preferred Stock, Series
A (the "Series A Preferred Stock"), and 918,367 shares of the Company's Common
Stock. In addition, Wildhorse Energy Partners, LLC was formed by the Company
and KNE for the purpose of providing
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gas gathering, processing, marketing, field and storage services.
The transactions were consummated pursuant to (i) an Agreement and Plan of
Reorganization (the "Reorganization Agreement"), dated January 31, 1996, by and
among the Company and its wholly owned subsidiary, TBI Acquisition, Inc.
("TBIA"), and KNE and its wholly owned subsidiary, KN Production Company
("KNPC"), and (ii) a Limited Liability Company Agreement of Wildhorse Energy
Partners, LLC, a Delaware limited liability company of which the Company and
KNE are the sole members. The transactions have been recorded under the
purchase method of accounting.
As a result of these transactions, the Company acquired interests in 624
gross producing wells in Colorado and Wyoming, of which the Company became
operator of 308. The Company also acquired a natural gas storage facility in
western Colorado. Based on the December 31, 1995 estimates prepared by KNPC in
accordance with guidelines of the Securities and Exchange Commission, the gas
and oil reserves attributable to the properties acquired by the Company were
approximately 31.4 Bcf of natural gas and 519,000 barrels of oil. The
properties acquired by the Company include approximately 243,000 net
undeveloped acres in Colorado, Wyoming, Kansas and Nebraska and 64,000 net
developed acres located in Colorado and Wyoming.
Under terms of the Reorganization Agreement, TBIA was merged into KNPC (the
"Merger"), with KNPC being the surviving corporation and becoming a wholly
owned subsidiary of the Company. As part of the Merger, KNPC's name was
changed to TBI Production Company. The effective date of the Merger for
economic purposes was January 1, 1996. Upon consummating the Merger, all of
the issued and outstanding shares of common stock of KNPC held by KNE were
converted into and became 918,367 shares of the Company's Common Stock and
1,000,000 shares of Series A Preferred Stock. Simultaneously, all of the
issued and outstanding shares of common stock of TBIA held by the Company were
converted into and became 100,000 shares of common stock of KNPC.
After giving effect to the Merger and the assumed conversion of all of the
Series A Preferred Stock at the initial conversion rate of 1.6660 shares of
Common Stock for each share of Series A Preferred Stock, KNE became the
beneficial owner of 2,584,367 shares (approximately 11.34%) of the Company's
outstanding Common Stock. The purchase price of the transaction was negotiated
by the Company and KNE and 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 Series A
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.
In connection with the Merger, the Company and KNE also entered into a
Limited Liability Company Agreement creating Wildhorse Energy Partners, LLC,
(the "Joint Venture"). KNE owns a 55% interest in the Joint Venture and the
Company owns a 45% interest in the Joint Venture. The business and affairs of
the Joint Venture are managed by KNE under the direction of an operating team
(the "Operating Team") consisting of two representatives appointed by the
Company and two representatives appointed by KNE. The Manager acts at the
discretion of the Operating Team.
The principal purpose of the Joint Venture 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. Initially, the Joint Venture will perform field
services on properties
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located in Colorado which were acquired by the Company in the Merger.
As the holder of the Series A Preferred Stock, KNE is entitled to receive
cumulative dividends at the annual rate of $1.75 per share, payable in cash on
March 15, 1996, and thereafter quarterly on the fifteenth day of March, June,
September and December in each year. If full cumulative dividends on the
Series A 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 Series A 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 Series A 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 Series A Preferred Stock to the
date of redemption.
Upon the occurrence of a change of control of the Company, KNE, as the
holder of the Series A Preferred Stock, has the right to cause the Series A
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 Series A 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 Series A Preferred Stock is convertible at the option of
the holder 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 Series A Preferred Stock, subject to customary adjustments.
The Series A 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 Series A
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
Series A 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 Series A 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
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distribution, before any payment or distribution may be made on the Common
Stock or on any class of stock ranking junior to the Series A Preferred Stock
with respect to distributions upon dissolution, liquidation or winding up.
If at any time dividends payable on the Series A 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 Series A 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 Series A Preferred Stock to designate
Special Directors continues until all dividends accumulated and payable on the
Series A 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 arrearage.
In exercising the right to designate Special Directors or when otherwise
granted voting rights by operation of law, each share of Series A 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 Merger, KNE has the right to elect a
special 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 Merger
possessing less than 80% of the voting power of the securities of the Company
issued pursuant to the Merger, 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 Series A 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 Series A 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 Series A 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.
Presidio Oil Company. In May 1995, the Company announced its interest
in acquiring Presidio Oil Company ("Presidio"), a public company engaged in the
exploration for, and development and production of, natural gas and oil
primarily in the Rocky Mountain area. The Company also announced that, based on
publicly available information and various assumptions related to Presidio's gas
and oil reserves and subject to further review of Presidio's operations and gas
and oil properties and subject to other contingencies, it was willing to pay up
to $200 million to acquire Presidio. As a strategic part of its efforts to
acquire Presidio, in June 1995, the Company purchased approximately $56 million
of the $100 million outstanding principal amount of Presidio's Senior Gas
Indexed Notes due 2002 ("GINs") for approximately $51 million. The purchase of
the GINs was funded by the unsecured borrowing of $51 million from a bank.
Presidio was unable to meet the interest payment of the GINs due on May 15, 1995
and was therefore in default under the terms of the GINs. In August 1995,
Presidio announced that it was commencing an auction process in order
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to find a buyer for its assets or outstanding capital stock. Following such
announcement, the Company entered into a confidentiality agreement with
Presidio and conducted a review of Presidio's operations and gas and oil
properties. Thereafter, the Company submitted a proposal to acquire Presidio
for a combination of cash and securities. In November 1995, Presidio announced
that it had selected the Company as the party with which it would pursue
negotiations for the potential sale of substantially all of its assets. The
Company's offer for Presidio amounted to $180 million, subject to certain
adjustments, which would be paid in the form of a combination of cash and
securities.
The Company's proposed acquisition of Presidio is subject to a number of
significant contingencies, and the Company cannot predict whether it will be
successful in its efforts to acquire Presidio or, if successful, the actual
amount or form of consideration that the Company would pay in connection
therewith or the timing of any such event.
Credit Agreement. In September 1995, the Company and three banks entered
into a Credit Agreement (the "Credit Agreement") providing for a three-year,
$65 million unsecured revolving credit facility ("Credit Facility"). The
Company borrowed $51 million under the Credit Facility to repay all of the
indebtedness incurred in connection with the purchase of the GINs. Although
the Company repaid all of its outstanding bank debt in November 1995 with the
proceeds of its 1995 public stock offering, the Credit Facility remains in
effect.
Sale of Arkoma Assets. As part of its strategy to focus on its core
geographic areas, 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. During the first
six months of 1995, net daily production from these properties averaged 3.9
MMcf. Proceeds from the sale of these properties were used to repay a portion
of the Company's outstanding indebtedness under the Credit Facility.
Public Offering. In November 1995, the Company completed a public offering
of its Common Stock. The total number of shares sold was 4,600,000 shares of
Common Stock, which included 600,000 shares for the underwriter's
over-allotment option. The shares were sold at $11 per share and the Company's
proceeds, net of an underwriting discount of $2,668,000, were $47,932,000. The
net proceeds were used to repay all of the Company's bank debt outstanding
under its credit agreement and for general corporate purposes.
CUSTOMERS AND MARKETS
Substantially all of the Company's gas and oil production is sold at the
well site on an "as produced" basis.
During the year ended December 31, 1995, three purchasers, Conoco, Inc.,
Coastal Oil & Gas Corporation and KN Gas Marketing, Inc., accounted for 25%,
14% and 12%, respectively, of the Company's consolidated gas and oil sales and
marketing, gathering and processing revenues for such period. Because there
are numerous other companies available to purchase the Company's production,
the Company believes the loss of one or more of these purchasers would not
materially affect its ability to sell natural gas or crude oil.
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Prior to 1993, the Company's natural gas production from the Wind River
Basin was restricted as a result of only one pipeline being situated within
the immediate vicinity of the Company's wells. In November 1992, Retex
Gathering Company, Inc., a wholly-owned subsidiary of the Company, entered into
a joint venture with a wholly-owned subsidiary of KN Energy, Inc. to acquire
approximately 110 miles of natural gas pipeline, gathering system and related
field facilities from Williston Basin Interstate Pipeline ("WBI") (the
"Williston Pipeline Acquisition"). The Company and KN Energy, Inc. have 40.5%
and 55% interests in the joint venture, respectively. The Williston Pipeline
Acquisition was completed on June 2, 1993, and the Company's share of the total
acquisition cost and related expenditures was approximately $2.2 million.
Under the terms of the joint venture agreement, the parties have agreed on the
charges to be paid by the Company for utilization of the pipeline as well as
access for gas deliverability. The Company believes that the Williston
Pipeline Acquisition and the resulting interconnection with other major
interstate pipelines have greatly enhanced the marketability of the Company's
natural gas production.
VOLUMES AND PRICES
The following table sets forth certain information regarding the Company's
volumes and average prices received associated with its production and sales of
natural gas and crude oil for the years ended December 31, 1995, 1994 and 1993.
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Year ended December 31,
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1995 1994 1993
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Net Production Sold
Natural Gas (MMcf) 10,585 7,087 7,041
Crude Oil (MBbls) 387 276 317
Net Average Daily
Production Volumes
Natural Gas (Mcf) 29,000 19,416 19,290
Crude Oil (Bbls) 1,060 756 868
Average Sales Prices
Natural Gas ($/Mcf) $ 1.31 $ 1.62 $ 1.76
Crude Oil ($/Bbl) $ 16.80 $ 15.73 $ 16.91
Average Production
Cost per Mcfe $ .53 $ .69 $ .78
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"MMcf" means one million cubic feet.
"MBbls" means one thousand barrels.
"Mcf" means one thousand cubic feet.
"Bbls" means barrels.
"Mcfe" means one thousand cubic feet equivalent.
COMPETITION
The Company encounters strong competition from major oil companies and
independent operators in acquiring properties and leases for the exploration
for, 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
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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 both major oil companies and independent
operators.
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company at March 26, 1996 are as follows:
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Executive Officer
Name Age Position with Company Since
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Donald L. Evans 49 Chairman of the Board and
Chief Executive Officer 1976
William R. Granberry 53 President and
Chief Operating Officer 1996
Peter R. Scherer 39 Executive Vice President 1986
Clifford C. Drescher 43 Vice President - Operations 1991
Thomas E. Klauss 52 Vice President - Exploration -
Southern Division 1995
Christopher E. Mullen 35 Vice President - Exploration -
Northern Division 1995
Richard B. Porter 40 Vice President - Land 1995
R. Kim Harris 39 Controller 1986
B. Jack Reed 46 Treasurer 1990
James M. Alsup 59 Secretary 1973
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Each executive officer is elected annually by the Company's Board of
Directors to serve at the Board's discretion and until their respective
successors in office are elected and qualified.
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EMPLOYEES
At December 31, 1995, the Company had 58 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 production 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 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. None of the maximum lawful
prices for natural gas set forth in the NGPA could have been collected absent
contractual authority to do so and only after necessary approvals from the
appropriate governmental agencies were obtained. The NGPA also established
phased-in deregulation of natural gas prices which has been further affected by
the Natural Gas Wellhead Decontrol Act of 1989. Effective January 1, 1993,
natural gas prices were completely deregulated and sales of the Company's
natural gas may be 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 modifications 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
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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 establishes 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 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.
In December 1994 and December 1995, the Company and the Shoshone and
Northern Arapaho 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
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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.
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, 1995. The
Company, through its acquisition of KNPC in January 1996, acquired
approximately 124,560 gross (63,791 net) developed acres and 383,301 gross
(242,609 net) undeveloped acres which are excluded from the table. Also
excluded from the table are approximately 666,016 gross (399,610 net) acres in
Wyoming under gas and oil option agreements acquired from the Shoshone and
Northern Arapaho Tribes.
<TABLE>
<CAPTION>
Developed Undeveloped
------------------ ------------------
Gross Net Gross Net
----- ----- ----- -----
<S> <C> <C> <C> <C>
Colorado 480 58 19,128 7,022
Kansas 2,721 1,881 160 40
Louisiana 2,535 190 - -
Michigan 333 129 - -
Montana 4,166 627 - -
New Mexico 14,810 3,923 1,000 459
Oklahoma 7,456 1,451 2,075 673
Texas 123,849 42,723 57,666 10,760
Wyoming 48,656 20,636 91,730 78,147
------- ------ ------- ------
Total 205,006 71,618 171,759 97,101
======= ====== ======= ======
</TABLE>
-12-
<PAGE> 13
"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.
GAS AND OIL RESERVES
Estimates of the Company's gas and oil reserves at December 31, 1995, 1994
and 1993, including future net revenues and the present value of future net
cash flows, were made by Williamson Petroleum Consultants, Inc., independent
petroleum consultants, in accordance with guidelines established by the
Securities and Exchange Commission ("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 12
of notes to consolidated financial statements included herein.
The Company, through its acquisition of KNPC, acquired estimated proved
natural gas and oil reserves of approximately 31,359,000 Mcf and 519,000 Bbls
respectively, based on January 1, 1996 evaluations.
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, 1995.
<TABLE>
<CAPTION>
Productive Wells
-----------------------------------------
Gross Net
----------- ------------
Gas Oil Gas Oil
--- --- --- ---
<S> <C> <C> <C> <C>
Colorado 3 9 .38 1.44
Kansas 7 3 2.32 2.25
Louisiana 6 1 .28 .06
Michigan - 2 - -
Montana - 5 - .67
New Mexico 7 40 1.44 4.58
Oklahoma 44 3 4.39 .09
Texas 54 305 21.00 107.42
Wyoming 76 1 33.36 .39
--- --- ----- ------
197 369 63.17 116.90
=== === ===== ======
</TABLE>
-13-
<PAGE> 14
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.
Excluded from the above table are 593 gross (233 net) producing gas wells
and 31 gross (9 net) producing oil wells that were acquired by the Company
from KNPC in January 1996. See Item 1, Business - Certain Developments in 1995
- - Acquisition of KN Production Company.
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.
<TABLE>
<CAPTION>
Year ended Year ended Year ended
December 31, 1995 December 31, 1994 December 31, 1993
----------------- ----------------- -----------------
Type of well Gross Net Gross Net Gross Net
------------ ----- --- ----- --- ----- ---
<S> <C> <C> <C> <C> <C> <C>
Exploratory
Gas - - 1 .3 1 .5
Oil - - - - - -
Dry 3 1.1 1 .5 2 .6
-- ---- -- --- -- ---
3 1.1 2 .8 3 1.1
== ==== == === == ===
Development
Gas 34 9.7 19 8.2 14 2.8
Oil 3 1.5 2 1.0 6 1.6
Dry 10 3.9 2 1.0 4 2.3
-- ---- -- ---- -- ---
47 15.1 23 10.2 24 6.7
== ==== == ==== == ===
</TABLE>
At December 31, 1995, 6 gross (3 net) development wells and 1 gross (.3
net) exploratory wells were in various stages of drilling and completion in
Texas and New Mexico.
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 24,000 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 an office facility in Denver, Colorado, at a
monthly rate of $2,547.
-14-
<PAGE> 15
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 has been accrued in the Company's consolidated
financial statements at December 31, 1995. 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, 1995.
-15-
<PAGE> 16
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.
<TABLE>
<CAPTION>
Closing Sale Price
------------------
Quarter Ended High Low
------------- ---- ---
<S> <C> <C>
March 31, 1994 12 3/4 11
June 30, 1994 16 1/4 11 1/4
September 30, 1994 15 13/16 11 1/4
December 31, 1994 13 3/4 9 5/8
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
</TABLE>
On March 25, 1996, the last sale price of the Company's Common Stock, as
reported by the NASDAQ National Market System, was $13.875 per share.
The transfer agent for the Company's Common Stock is First National Bank of
Boston, Boston, Massachusetts.
On December 31, 1995, the outstanding shares of the Company's Common Stock
(20,180,902 shares) were held by approximately 3,000 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 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 $20 per share exercise price, shares of Common Stock or other
securities of the Company (or, under certain circumstances, of the acquiring
person) worth twice the per share exercise price of the Right.
-16-
<PAGE> 17
The Rights become exercisable on the date (the "Distribution Date") a
person or group acquires 20% or more of the Company's Common Stock or announces
a tender offer which would result in ownership by a person or group of 20% or
more of the Common Stock. The Rights will expire on March 15, 2001, unless
extended or redeemed earlier by the Company.
Item 6. SELECTED FINANCIAL DATA
The following tables set forth selected financial information for the
Company's continuing operations for the five years ended December 31, 1995,
1994, 1993, 1992 and 1991.
<TABLE>
<CAPTION>
Year ended
December 31,
--------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
($ in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Revenues (1) $ 41,053 29,071 28,708 18,597 18,928
======= ======= ======= ====== ======
Net income (loss) $ 5,785 (160) (2,318) (2,987) (6,536)
======= ======= ======= ====== ======
Weighted average
number of common
shares outstanding 16,852 15,464 11,898 7,515 7,503
======= ======= ======= ====== ======
Net income (loss)
per common share $ .34 (.01) (.19) (.40) (.87)
======= ======= ======= ====== ======
Total assets $ 164,174 115,092 108,084 76,866 82,078
======= ======= ======= ====== ======
Long-term debt,
net of current
maturities $ - - - 9,650 12,500
======= ======= ======= ====== ======
</TABLE>
___________________
(1) Certain reclassifications have been made to amounts reported in previous
years to conform to the 1995 presentation. See notes to consolidated
financial statements.
The following tables set forth selected information for the Company's gas
and oil sales volumes and proved reserves for the five years ended December 31,
1995, 1994, 1993, 1992 and 1991.
<TABLE>
<CAPTION>
Year ended
December 31,
--------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Sales:
- ------
Gas (MMcf) 10,585 7,087 7,041 4,393 3,016
Oil (MBbls) 387 276 317 377 559
Proved reserves
at period end:
--------------
Gas (MMcf) 163,303 180,306 130,995 104,955 74,317
Oil (MBbls) 4,068 4,522 3,300 3,803 5,558
</TABLE>
-17-
<PAGE> 18
Not included in the above table are estimated proved natural gas and oil
reserves of 31,359 MMcf and 519 MBbls, respectively, acquired through the
acquisition of KNPC on January 1, 1996.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The factors which most significantly affect the Company's results of
operations are (1) the sales prices of natural gas and crude oil, (2) the level
of total sales volumes and (3) the level and success of exploration and
development activity.
Selected Operating Data
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Revenues (in thousands):
Natural gas sales..................... $ 13,883 11,451 12,399
Crude oil sales....................... 6,502 4,341 5,360
Gain (loss) on sales of gas and oil
properties.......................... 4,402 13 (21)
Marketing, gathering and processing... 15,572 11,876 10,387
Interest income and other............. 694 1,390 583
-------- ------ ------
Total revenues................... $ 41,053 29,071 28,708
======== ====== ======
Net income (loss) (in thousands)........ $ 5,785 (160) (2,318)
Natural gas production sold (MMcf)...... 10,585 7,087 7,041
Crude oil production (MBbls)............ 387 276 317
Average natural gas sales price ($/Mcf). $ 1.31 1.62 1.76
Average crude oil sales price ($/Bbl)... $ 16.80 15.73 16.91
</TABLE>
Revenues. During 1995, revenues from gas and oil production increased $4.6
million to $20.4 million as compared to the same period 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. An increase in gas sales
volumes of 49% increased revenues by approximately $4.6 million. An increase in
average oil prices from $15.73 per Bbl to $16.80 per Bbl increased revenue
approximately $.3 million. The increase in oil sales volumes of 40% increased
revenues by approximately $1.9 million for 1995.
Natural gas sales volumes increased dramatically as the Company increased it
deliverability through exploration and development drilling in 1995. The
Company continued the curtailment of portions of its production due to low
natural gas prices. The increase in oil sales volumes for 1995 as compared to
1994 is due primarily to increased production from development drilling.
Marketing, gathering and processing revenues increased 31% in 1995 compared
to 1994 due to increased marketing revenues associated with the Company's
increased production and additional marketing of third party gas.
-18-
<PAGE> 19
Interest income and other revenues decreased approximately $.7 million due to
the investment of excess cash in operating activities.
During 1994, revenues from gas and oil production decreased $2.0 million to
$15.8 million as compared to the same period in 1993. A decrease in average gas
prices received by the Company from $1.76 per Mcf to $1.62 per Mcf decreased
revenues by approximately $1.0 million. A decrease in the average oil price
from $16.91 per Bbl to $15.73 per Bbl decreased revenues by approximately $.4
million. The decrease in oil sales volumes of 13% reduced revenues by
approximately $.6 million for 1994. Gas sales volumes remained constant.
The decrease in oil sales volumes for the year ended December 31, 1994 as
compared to the same period in 1993 is due primarily to property sales completed
throughout 1993 and 1994. Natural gas sales volumes remained relatively
constant as the Company increased its deliverability through its development
drilling in 1994, but curtailed portions of its production due to low natural
gas prices.
Marketing, gathering and processing revenues increased 14% in 1994 compared to
1993 due to a full year of revenue in 1994 from the Company's interest in the
Williston pipeline which was acquired in June 1993.
Costs and Expenses. Costs and expenses for 1995 increased 66% to $48.2 million
as compared to 1994. Gas and oil production expenses increased $.7 million due
to additional wells drilled in the Val Verde Basin in 1995. Taxes on gas and
oil production increased $.2 million as a result of increased gas production
levels. Cost of gas sold increased 31% in 1995 compared to 1994 reflecting a
higher level of gas purchased in 1995 by Retex Gathering Company, Inc.
("Retex"), the Company's gas marketing subsidiary. Exploration costs increased
$2.5 million as a result of exploratory 3-D seismic and dry hole costs in 1995.
Impairments of leasehold costs decreased $.3 million due to a lower inventory of
acreage during 1995. General and administrative expenses increased $.7 million
primarily as a result of increases in legal fees and salaries. Interest expense
increased $1.3 million as a result of the Company's debt borrowings made during
the year to finance the Company's investment in Presidio's GINs in June 1995.
Costs and expenses also increased in 1995 as a result of an $8.4 million
writedown of non-strategic properties due to the adoption of Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-lived Assets...", which 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. The $8.4 million charge reduced the carrying
value of a portion of the Company's non-core properties to their estimated fair
values.
Costs and expenses for 1994 decreased 6% to $29.0 million as compared to
1993. Gas and oil production expenses decreased $.8 million which reflect the
Company's disposition of certain high-cost oil producing properties in 1993.
Taxes on gas and oil production decreased $.2 million as a result of decreased
oil production levels. Cost of gas sold increased 21% in 1994 compared to 1993
reflecting a higher level of gas purchased in 1994 by Retex. Exploration
costs increased $.7 million as a result of exploratory 3-D seismic costs in
1994. Impairments of leasehold costs decreased $.6 million as a result of the
write down in 1993 of an uneconomic oil producing
-19-
<PAGE> 20
property due to low year end oil prices. General and administrative expenses
increased $.3 million primarily as a result of increases in insurance and
salaries. Interest expense decreased $.3 million as a result of the Company's
debt repayment in June 1993.
The Company recorded non-cash option plan compensation expense of $.1 million,
$.2 million and $2.9 million in 1995, 1994 and 1993, respectively, under certain
stock option and phantom stock option plans due to an increase in the market
value of the Common Stock over the exercise prices of such options. Compensation
expense related to the option plans is based on the ratably vested portion of
the difference between the exercise prices and the market value of the Common
Stock. Certain changes to the option plans during 1993 eliminated the need to
recognize option plan compensation expense, except for some minor vesting of
previously incurred expense. The Company expects future non-cash option plan
compensation expense to total approximately $.1 million, which will be
recognized over the remaining vesting period of the options (approximately one
year).
The Company incurred a current tax liability in the amount of $77,000, $24,000
and $129,000 in 1995, 1994 and 1993, 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 six years due to its net operating loss
carryforward. At December 31, 1995, such carryforward for tax purposes was
approximately $67.9 million.
The Company recognized in 1995 a net deferred tax asset in the amount of
$13,170,000 and corresponding credit to deferred income tax expense. 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 up until 1995. Based on recent additions to the Company's gas and oil
reserves, the resulting increases in anticipated future income and the absence
of significant option plan compensation charges to future income, the Company
now expects to realize a major portion of the future benefit of its net
operating loss carryforwards prior to their expiration. A valuation allowance
of approximately $10.6 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 monitored for potential
adjustments as future events so indicate.
In November 1995, the Financial Accounting Standards Board issued SFAS No.
123 "Accounting for Stock-Based Compensation". This statement requires all
companies to change what they disclose about their employee stock-based
compensation plans; it also recommends, but does not require, that companies
change how they account for these plans. Those companies who elect not to
change their accounting are required to disclose what their earnings would have
been if they had changed. The statement is effective for financial statements
issued for fiscal years beginning after December 15, 1995. The Company
accounts for its employee stock-based compensation plans using the intrinsic
value method prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees". Accordingly, the adoption of SFAS No. 123 in 1996 will have no
effect on the Company's results of operations.
-20-
<PAGE> 21
CAPITAL RESOURCES AND LIQUIDITY
The Company continues to operate under the strategy of maintaining a strong
balance sheet, adding value by increasing the Company's reserve base and
presence in significant natural gas areas and further developing the ability to
control and market the Company's production.
In May 1995, the Company announced that it had written to Presidio in order
to propose a business combination between the two companies. In June 1995, the
Company announced that it had purchased $56 million principal amount of the
$100 million principal amount outstanding of the GINs of Presidio. The
purchase closed on June 28, 1995 and was funded through a bank loan.
In September 1995, the Company entered into a Credit Agreement and borrowed
$51 million under its $65 million Credit Facility. The bank debt was incurred
primarily to refinance the Company's $51 million demand note issued by the
Company to one of the bank lenders in June 1995 to fund the purchase of the
Presidio GINs. The Credit Facility matures 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 0.50% or (ii) the agent bank's
eurodollar rate plus a margin ranging from 0.75% to 1.00%. At December 31,
1995, there was no outstanding balance under this Credit Facility.
Also in September 1995, the Company completed the sale of all of its
properties in Arkansas for approximately $9.0 million, effective July 1, 1995.
The net proceeds were used to reduce the outstanding bank debt.
In November 1995, the Company completed a public stock offering of
4,600,000 shares of Common Stock at $11.00 per share. Net proceeds to the
Company were $47.7 million, of which $46 million was used to repay all of the
Company's outstanding bank debt and $1.7 million was used for general corporate
purposes.
Also in November 1995, the Company was notified by Presidio that the
Company had been selected as the party with which it would pursue negotiations
for the potential sale of substantially all of Presidio's assets. The
Company's offer for Presidio amounted to $180 million, subject to certain
adjustments, of which the cash portion would be an amount sufficient to repay
the outstanding bank debt and senior secured indebtedness, plus accrued
interest, if any. The remainder is to be paid in Common Stock. Negotiations
regarding this acquisition are continuing.
Although management believes its investment in the GINs is a strategic part of
its efforts to gain control of Presidio, there can be no assurances as to when,
if ever, such control will be attained. A failure to gain control could result
in the Company not recovering its initial investment in the GINs. In addition,
the value of the Company's investment in the GINs may be adversely affected by
the results of operations and financial condition of Presidio, which is
dependent in large part on the prices Presidio realizes for its gas and oil
production, as well as the ultimate outcome of Presidio's efforts to restructure
its outstanding indebtedness or to be acquired by another party and the timing
thereof. There is not currently an active trading market for the GINs, and the
Company may experience difficulty in selling the GINs if it desires to do so in
the future.
-21-
<PAGE> 22
In December 1995, the Company and KN Energy, Inc. ("KNE") jointly announced
the execution of a letter of intent providing for the merger of KNE's
wholly-owned gas and oil subsidiary, KNPC, into the Company and the formation
of a new gas services company, Wildhorse Energy Partners, LLC ("Wildhorse").
On January 31, 1996, this transaction was completed with the Company issuing
1.0 million shares of Series A Preferred Stock and 0.9 million shares of Common
Stock.
The addition of the KNPC reserves will add approximately 34.5 Bcfe of
proved gas equivalent reserves.
Wildhorse was created to provide gathering, processing, marketing, storage
and field services to Rocky Mountain gas and oil producers and others. It will
also pursue the construction or acquisition of gathering, processing and
storage areas of 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.
Under Wildhorse, 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.
The Company's capital expenditures in 1995, 1994 and 1993 were $26.0
million, $23.0 million and $12.3 million, respectively. The increase during
1994 as compared to 1993 was due primarily to the developmental drilling
program in the Val Verde Basin where approximately $11.0 million was incurred.
The level of capital expenditures by the Company will vary in future
periods depending on energy market conditions and other related economic
factors. The Company has no material long-term commitments. Consequently, the
Company is able to adjust the level of its expenditures as circumstances
warrant.
Historically, the Company has funded capital expenditures and working
capital requirements with both internally generated cash and borrowings. Net
cash provided by operating activities was $8.8 million for 1995, $7.6 million
for 1994 and $9.7 million for 1993. Net cash and cash equivalents decreased
$14.2 million for 1995, decreased $9.4 million for 1994 and increased $27.4
million for 1993.
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 production of
natural gas. The Common Stock offering in November 1995, the purchase of KNPC
and the elimination of all debt served to strengthen the Company's balance
sheet. 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.
-22-
<PAGE> 23
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
Index to Consolidated Financial Statements Page
------------------------------------------ ----
<S> <C>
Report of Independent Public Accountants 24
Consolidated Balance Sheets,
December 31, 1995 and 1994 25
Consolidated Statements of Operations,
Years ended December 31, 1995, 1994 and 1993 27
Consolidated Statements of Changes in Stockholders' Equity,
Years ended December 31, 1995, 1994 and 1993 28
Consolidated Statements of Cash Flows,
Years ended December 31, 1995, 1994 and 1993 29
Notes to Consolidated Financial Statements 31
</TABLE>
-23-
<PAGE> 24
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, 1995 and 1994, 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, 1995. 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, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
As discussed in Note 2, the Company changed, in 1995, its method of accounting
for the impairment of long-lived assets to conform with the provisions of
Statement of Financial Accounting Standards No. 121.
ARTHUR ANDERSEN LLP
Houston, Texas
February 23, 1996
-24-
<PAGE> 25
TOM BROWN, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31,
<TABLE>
<CAPTION>
Assets 1995 1994
------ ---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,982,000 $ 19,147,000
Accounts receivable, net of allowance
for doubtful accounts of $58,000
and $428,000, respectively 7,408,000 7,293,000
Accounts receivable -
Wind River-Pavillion, Ltd. 62,000 1,038,000
Inventories 246,000 1,132,000
Other 190,000 178,000
----------- -----------
Total current assets 12,888,000 28,788,000
----------- -----------
Property and equipment, at cost:
Gas and oil properties, successful
efforts method of accounting 186,624,000 214,451,000
Other 12,056,000 10,954,000
----------- -----------
198,680,000 225,405,000
Less: Accumulated depreciation,
depletion and amortization 112,695,000 139,217,000
----------- -----------
Net property and equipment 85,985,000 86,188,000
----------- -----------
Senior gas indexed notes 51,093,000 -
Deferred income taxes, net 13,170,000 -
Other assets 1,038,000 116,000
----------- -----------
$ 164,174,000 $ 115,092,000
=========== ===========
</TABLE>
(continued)
See accompanying notes to consolidated financial statements.
-25-
<PAGE> 26
TOM BROWN, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31,
<TABLE>
<CAPTION>
Liabilities and Stockholders' Equity 1995 1994
- ------------------------------------ ---- ----
<S> <C> <C>
Current liabilities:
Accounts payable $ 5,979,000 $ 9,161,000
Accrued expenses 1,536,000 3,062,000
----------- -----------
Total current liabilities 7,515,000 12,223,000
----------- -----------
Commitments and contingencies
Stockholders' equity:
Common Stock, $.10 par value.
Authorized 30,000,000 shares;
Outstanding 20,180,902 shares and
15,522,129 shares, respectively 2,018,000 1,552,000
Additional paid-in capital 224,889,000 177,350,000
Accumulated deficit (70,248,000) (76,033,000)
----------- -----------
Total stockholders' equity 156,659,000 102,869,000
----------- -----------
$ 164,174,000 $ 115,092,000
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
-26-
<PAGE> 27
TOM BROWN, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31,
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Revenues:
Gas and oil sales $ 20,385,000 $ 15,792,000 $ 17,759,000
Gain (loss) on sales of gas
and oil properties 4,402,000 13,000 (21,000)
Marketing, gathering and
processing 15,572,000 11,876,000 10,387,000
Interest income and other 694,000 1,390,000 583,000
---------- ---------- ----------
Total revenues 41,053,000 29,071,000 28,708,000
---------- ---------- ----------
Costs and expenses:
Gas and oil production 4,834,000 4,130,000 4,899,000
Taxes on gas and oil production 2,043,000 1,869,000 2,074,000
Cost of gas sold 13,146,000 10,022,000 8,287,000
Exploration costs 3,644,000 1,184,000 440,000
Impairments of leasehold costs 582,000 910,000 1,462,000
General and administrative 4,087,000 3,339,000 3,047,000
Option plan compensation 97,000 207,000 2,879,000
Depreciation, depletion and
amortization 9,994,000 7,288,000 7,280,000
Writedown of properties 8,368,000 - -
Interest expense 1,369,000 20,000 319,000
---------- ---------- ----------
Total costs and expenses 48,164,000 28,969,000 30,687,000
---------- ---------- ----------
Income (loss) before income
taxes (7,111,000) 102,000 (1,979,000)
Income tax benefit (provision):
Recognition of deferred tax
asset 13,170,000 - -
Income tax expense (274,000) (262,000) (339,000)
---------- ---------- ----------
Net income (loss) $ 5,785,000 $ (160,000) $ (2,318,000)
========== ========== ==========
Weighted average number of common
shares outstanding 16,851,925 15,463,678 11,897,601
========== ========== ==========
Net income (loss) per common share $ .34 $ (.01) $ (.19)
=== === ===
</TABLE>
See accompanying notes to consolidated financial statements.
-27-
<PAGE> 28
TOM BROWN, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Additional Total
Preferred Common Paid-in Accumulated Stockholders'
Stock Stock Capital Deficit Equity
--------- ------ ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Balance at
December 31,
1992 110,000 756,000 $135,229,000 $(73,555,000) $ 62,540,000
Preferred
stock
conversion (110,000) 440,000 (330,000) - -
Common stock
issuance - 339,000 38,256,000 - 38,595,000
Stock issuance
costs - - (443,000) - (443,000)
Stock options
exercised - 9,000 343,000 - 352,000
Option plan
compensation - - 3,650,000 - 3,650,000
Net loss - - - (2,318,000) (2,318,000)
-------- --------- ----------- ----------- -----------
Balance at
December 31,
1993 - 1,544,000 176,705,000 (75,873,000) 102,376,000
Stock options
exercised - 7,000 304,000 - 311,000
Property
acquisition - 1,000 134,000 - 135,000
Option plan
compensation - - 207,000 - 207,000
Net loss - - - (160,000) (160,000)
-------- --------- ----------- ----------- -----------
Balance at
December 31,
1994 - 1,552,000 177,350,000 $(76,033,000) $102,869,000
Stock options
exercised - 6,000 255,000 - 261,000
Common stock
issuance - 460,000 47,472,000 - 47,932,000
Stock issuance
costs - - (285,000) - (285,000)
Option plan
compensation - - 97,000 - 97,000
Net income - - - 5,785,000 5,785,000
-------- --------- ----------- ----------- -----------
Balance at
December 31,
1995 - 2,018,000 $224,889,000 $(70,248,000) $156,659,000
======== ========= =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
-28-
<PAGE> 29
TOM BROWN, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended December 31,
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 5,785,000 $ (160,000) $ (2,318,000)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation, depletion and
amortization 9,994,000 7,288,000 7,280,000
Loss (gain) on sales of assets (4,402,000) (53,000) 21,000
Writedown of properties 8,368,000 - -
Recognition of deferred tax asset (13,170,000) - -
Option plan compensation 97,000 207,000 2,879,000
Exploration costs 3,644,000 1,184,000 440,000
Impairments of leasehold costs 582,000 910,000 1,462,000
Changes in operating assets
and liabilities:
Decrease (increase) in
accounts receivable 990,000 (1,682,000) (1,039,000)
Decrease (increase) in
inventories 886,000 (410,000) (487,000)
Decrease (increase) in
other current assets (12,000) 4,000 (48,000)
Increase (decrease) in
accounts payable (3,182,000) (21,000) 1,663,000
Increase (decrease) in accrued
expenses 132,000 327,000 (119,000)
Decrease (increase) in other
assets (922,000) 2,000 (10,000)
---------- ---------- ----------
Net cash provided by operating
activities $ 8,790,000 $ 7,596,000 $ 9,724,000
---------- ---------- ----------
</TABLE>
(continued)
See accompanying notes to consolidated financial statements.
-29-
<PAGE> 30
TOM BROWN, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended December 31,
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Cash flows from investing activities:
Proceeds from sales of assets $ 9,044,000 $ 295,000 $ 405,000
Investment in senior gas indexed
notes (51,093,000) - -
Capital and exploration expenditures (28,814,000) (17,558,000) (11,575,000)
---------- ---------- ----------
Net cash used in investing activities (70,863,000) (17,263,000) (11,170,000)
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from issuance of common
stock 47,932,000 - 38,595,000
Proceeds from issuance of long-term
debt 51,000,000 - 2,600,000
Repayments of long-term debt (51,000,000) - (12,250,000)
Proceeds from exercise of stock
options 261,000 311,000 352,000
Stock issuance costs (285,000) - (443,000)
---------- ---------- ----------
Net cash provided by financing
activities 47,908,000 311,000 28,854,000
---------- ---------- ----------
Net increase (decrease) in cash and
cash equivalents (14,165,000) (9,356,000) 27,408,000
Cash and cash equivalents at
beginning of year 19,147,000 28,503,000 1,095,000
---------- ---------- ----------
Cash and cash equivalents at end
of year $ 4,982,000 $ 19,147,000 $ 28,503,000
========== ========== ==========
Cash paid during the year for:
Interest $ 1,369,000 $ 20,000 $ 377,000
Income taxes 77,000 141,000 372,000
</TABLE>
See accompanying notes to consolidated financial statements.
-30-
<PAGE> 31
TOM BROWN, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 1995, 1994 and 1993
(1) Nature of Operations
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 (1) the
exploration for, and the acquisition, development and production of natural gas
and crude oil, and (2) the marketing, gathering and processing of natural gas.
All of the Company's operations are conducted in the United States. The
Company's operations are presently focused in the Wind River Basin of Wyoming,
and the Permian Basin of West Texas. 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, gas and natural gas liquids. Prices for natural gas and oil are subject
to wide fluctuation in response to relatively minor changes in the supply of
and demand for natural gas and oil, 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 the Middle East, the foreign supply of natural
gas and oil, 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 (82 percent in 1995 on a volumetric
equivalent basis) was natural gas.
(2) Summary of Significant Accounting Policies
Principles of Consolidation and Presentation
The accompanying consolidated financial statements include the accounts of
Tom Brown, Inc. and its wholly-owned subsidiaries (the Company). The Company's
proportionate share of assets, liabilities, revenues and expenses associated
with certain interests in gas and oil partnerships is consolidated within the
accompanying financial statements. All significant intercompany accounts and
transactions have been eliminated.
Cash Equivalents
The Company records as cash equivalents all highly liquid investments with
a maturity when purchased of three months or less.
Inventories
Inventories consist of pipe and other production equipment. Inventories
are
-31-
<PAGE> 32
TOM BROWN, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
stated at the lower of cost (principally first-in, first-out) or estimated net
realizable value.
Property and Equipment
The Company accounts for its natural gas and crude oil exploration and
production activities under the successful efforts method of accounting. Costs
of productive wells, development dry holes and productive leases are
capitalized and amortized over the life of remaining proved reserves on a
field-by-field basis using the unit-of-production method. Estimated future
dismantlement, restoration and abandonment costs, net of salvage values, are
taken into account. Gas and oil lease acquisition costs are capitalized when
incurred. 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.
Costs and expenses were also increased in 1995 as a result of an $8.4
million writedown of non-strategic properties due to the adoption of Statement
of Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-lived Assets...", which 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. The $8.4 million charge reduced the carrying
value of a portion of the Company's non-core properties to their estimated fair
values.
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 proved reserves. The Company
had one exploratory well in progress at December 31, 1994 and such costs of
approximately $1.0 million are classified as work-in-progress.
Other property and equipment is recorded at cost. Depreciation is computed
using the straight-line method based on estimated useful lives.
Maintenance and repairs are charged to expense; renewals and betterments
are charged to the appropriate property and equipment accounts. Upon
retirement or disposition of assets, the cost and related accumulated
depreciation are removed from the accounts with the resulting gains or losses,
if any, reflected in results of operations.
Natural Gas Revenues
The Company utilizes the accrual method of accounting for natural gas
revenues
-32-
<PAGE> 33
TOM BROWN, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
whereby revenues are recognized as the Company's entitlement share of gas is
produced based on its working interests in the properties.
Income Taxes
Effective January 1, 1993, 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, the adoption
of SFAS No. 123, "Accounting for Stock-Based Compensation" in 1996 will have no
effect on the Company's results of operations.
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
disclosure of contingent assets and liabilities at the date of the financial
statements and 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
estimates of proved oil and gas reserve volumes and the related present value of
estimated future net revenues therefrom (see Note 12), and the valuation
allowance for deferred taxes (see Note 5).
Net Income (Loss) Per Common Share
Net income per common share, in 1995, is based on the weighted average
number of common 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.
(3) Acquisitions and Divestitures
KN Production Company - In December 1995, the Company and KN Energy, Inc.
("KNE") jointly announced the execution of a letter of intent providing for the
merger of KNE's wholly-owned gas and oil subsidiary, KN Production Company
("KNPC"), into the Company and the formation of a new gas services company,
Wildhorse Energy Partners, LLC ("Wildhorse"). On January 31, 1996, this
transaction was completed with
-33-
<PAGE> 34
TOM BROWN, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
the Company issuing 1.0 million shares of 7% convertible Preferred Stock and .9
million shares of Common Stock.
The addition of the KNPC reserves will add approximately 34.5 Bcfe of
proved gas equivalent reserves. See Note 12 for a summary of pro forma effects
on costs incurred and gas and oil reserve volumes and values, as if such
transaction occurred on December 31, 1995.
Wildhorse was created to provide gathering, processing, marketing, storage
and field services to Rocky Mountain gas and oil producers and others. It will
also pursue the construction or acquisition of gathering, processing and
storage areas of 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.
Under Wildhorse, the Company has dedicated significant amounts of its Rocky
Mountain gas production to Wildhorse for gathering, processing and marketing.
KNE contributed substantial gas marketing contracts and storage assets in
western Colorado.
Presidio - In May 1995, the Company announced that it had written to
Presidio Oil Company ("Presidio") in order to propose a business combination
between the two companies. As a strategic part of its efforts to acquire
Presidio and for investment purposes, in June 1995, the Company purchased
approximately $56 million of the $100 million principal amount outstanding of
the Senior Gas Indexed Notes due 2002 ("GINs") of Presidio for approximately
$51 million. The GINs are secured by mortgages on certain of Presidio's oil
and gas properties. Interest is due quarterly based upon a Gas Index Price, as
defined, for the determination period. The interest rate for 1995 was 13.25%.
Due to Presidio's financial condition, interest has not been accrued for the
year ended December 31, 1995. The purchase of the GINs closed on June 28,
1995 and was funded through a bank loan.
Also in November 1995, the Company was notified by Presidio that the
Company had been selected as the party with which it would pursue negotiations
for the potential sale of substantially all of Presidio's assets. The
Company's offer for Presidio amounted to $180 million, subject to certain
adjustments, of which the cash portion would be an amount sufficient to repay
the outstanding bank debt and senior secured indebtedness, plus accrued
interest, if any. The remainder is to be paid in Common Stock. Negotiations
regarding this acquisition are continuing.
Although management believes its investment in the GINs is a strategic part
of its efforts to gain control of Presidio, there can be no assurances as to
when, if ever, such control will be attained. A failure to gain control could
result in the Company not recovering its initial investment in the GINs. In
addition, the value of the Company's investment in the GINs may be adversely
affected by the results of operations and financial condition of Presidio, which
is dependent in large part on the prices Presidio realizes for its gas and oil
production, as well as the ultimate outcome of Presidio's efforts to restructure
its outstanding indebtedness or to be acquired by another party and the timing
thereof. There is not currently an active trading market for the GINs, and the
Company may experience difficulty in selling the GINs if it desires to do so in
the future.
-34-
<PAGE> 35
TOM BROWN, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 the Credit Facility.
(4) Debt
In September 1995, the Company entered into a bank Credit Agreement and
borrowed $51 million from its bank lenders. The bank debt was incurred
primarily to refinance the Company's $51 million demand note issued by the
Company to one of the bank lenders in June, 1995. The proceeds of the June,
1995 demand note were used by the Company to make open market purchases of
approximately $56 million principal amount of the outstanding $100 million
principal amount of Senior Gas Indexed Notes due 2002 issued by Presidio Oil
Company. The Credit Agreement provides 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.
The Company repaid all of its outstanding bank debt on November 13, 1995
and, as of December 31, 1995, there was no outstanding balance. The Credit
Agreement remains in effect to finance future obligations of the Company.
(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.
-35-
<PAGE> 36
TOM BROWN, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
A reconciliation of the Company's income tax expense calculated at the U.S.
Federal statutory rate of 34% of income (loss) before income taxes follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Federal income tax provision (benefit)
at statutory rate $(2,418,000) $ 35,000 $ (673,000)
Deferred compensation 33,000 70,000 979,000
Adjustment to valuation allowance 2,357,000 - -
Utilization of net operating loss
carryforward - (105,000) (306,000)
AMT at statutory rate 959,000 725,000 1,207,000
Utilization of AMT net operating loss
carryforward (863,000) (657,000) (1,090,000)
Overpayments (refunds) of AMT paid 9,000 (44,000) 12,000
--------- --------- ---------
AMT provision 77,000 24,000 129,000
State income and franchise taxes 197,000 238,000 210,000
--------- --------- ---------
Income tax expense $ 274,000 $ 262,000 $ 339,000
========= ========= =========
</TABLE>
As discussed in the Summary of Significant Accounting Policies, effective
January 1, 1993, the Company adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" (the "Statement"). The
Statement requires a balance sheet approach to the calculation of deferred
income taxes. The Company adopted the Statement cumulatively which had no
material impact on the Company's financial statements.
Based on 1993 and 1994 additions to the Company's gas and oil reserves and
the resulting increases in anticipated future income, the Company expects to
realize a major portion of the future benefit of its net operating loss
carryforwards prior to their expiration. Accordingly, that portion of the
valuation allowance was reversed in the first quarter of 1995. A valuation
allowance of approximately $10.6 million has been retained against the
Company's net deferred tax assets at December 31, 1995 based on management's
estimate of the recoverability of future tax benefits.
Temporary differences and carryforwards which gave rise to significant
portions of deferred tax assets (liabilities) are as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1995 1994
------------ ------------
<S> <C> <C>
Net operating loss carryforwards..................... $ 23,070,000 $ 24,397,000
Gas and oil acquisition, exploration and development
costs deducted for tax purposes in excess of book.. (8,074,000) (12,734,000)
Investment tax credit carryforwards.................. 4,813,000 6,183,000
Option plan compensation............................. 1,507,000 1,474,000
Other................................................ 2,435,000 1,649,000
---------- ----------
Net deferred tax asset............................. 23,751,000 20,969,000
Valuation allowance.................................. (10,581,000) (20,969,000)
---------- ----------
Recognized net deferred tax asset.................. $ 13,170,000 $ -
========== ==========
</TABLE>
-36-
<PAGE> 37
TOM BROWN, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The valuation allowance listed above relates primarily to 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 valuations 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, 1995, the Company had investment tax credit carryforwards
of approximately $4.8 million and net operating loss carryforwards of
approximately $67.9 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 1996 and 2005. 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 indefinitely.
(6) Stockholders' Equity
(a) Common Stock
In November 1995, the Company sold 4,600,000 shares of its common stock in
a public offering with net proceeds of approximately $47.7 million that were
used to repay indebtedness outstanding under the Credit Facility.
(b) Options and Stock Appreciation Rights
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. At
December 31, 1995, 185,625 of such options are exercisable.
-37-
<PAGE> 38
TOM BROWN, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following sets forth certain information concerning the options:
<TABLE>
<CAPTION>
Number of Option Price
Options Per Share
--------- ------------
<S> <C> <C>
Outstanding December 31,1992 249,250 $ 4.00
Exercised (38,250) 4.00
------- ---------
Outstanding December 31, 1993 211,000 4.00
Exercised (1,750) 4.00
------- ---------
Outstanding December 31, 1994 209,250 4.00
Forfeited (1,375) 4.00
Exercised (22,250) 4.00
------- ---------
Outstanding December 31, 1995 185,625 $ 4.00
======= =========
</TABLE>
1989 Plan
On September 28, 1990, shareholders approved the Company's 1989 Stock
Option Plan ("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. At December 31, 1995, 718,325 of such options
are exercisable.
At December 31, 1992, certain of the options contained stock appreciation
rights ("SAR") which allowed for cash or Common Stock (or any combination
thereof) to be distributed in an amount equal to the difference between the
exercise price and the market value of the Common Stock on the exercise date in
lieu of purchasing shares of Common Stock. Effective December 31, 1992, the
Board of Directors amended the 1989 Plan to remove the SAR feature of these
options. Non-cash compensation expense related to the SAR feature in the
amount of $9,000, $18,000 and $40,000 was recorded for the years ended December
31, 1995, 1994 and 1993, respectively, based on the ratably vested portion of
the difference between the exercise prices of the options and the market value
of the Common Stock at December 31, 1992. Non-cash compensation expense
totaling approximately $12,000 will be recognized ratably over the remaining
vesting period of outstanding options (approximately two years), based on the
difference between the exercise prices and the market value of the Common Stock
at December 31, 1992. At December 31, 1995, 406,750 options were available for
future grants. Of that amount, 100,000 options have been granted since
December 31, 1995.
-38-
<PAGE> 39
TOM BROWN, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following sets forth certain information concerning the 1989 Plan
options:
<TABLE>
<CAPTION>
Number of Option Price
Options Per Share
--------- ------------
<S> <C> <C>
Outstanding December 31, 1992 292,550 $ 3.625 - 5.25
Granted 200,000 14.6875
Exercised (43,200) 3.625 - 4.00
------- -------------
Outstanding December 31, 1993 449,350 3.625-14.6875
Granted 27,500 11.125-11.875
Exercised (33,600) 3.875 - 5.25
------- -------------
Outstanding December 31, 1994 443,250 3.625-14.6875
Granted 470,000 11.37 - 15.00
Exercised (10,900) 3.875 -11.125
------- -------------
Outstanding December 31, 1995 902,350 $ 3.625 - 15.00
======= ===============
</TABLE>
Phantom Stock Option Plans
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"). A total of 447,000 units was outstanding
under the Phantom Plans at December 31, 1992. During 1993, these units were
surrendered in exchange for a like number of options under the Tom Brown, Inc.
1993 Stock Option Plan (the "1993 Plan") at the surrendered units' exercise
prices (see below). Non-cash compensation expense related to the units in the
amount of $88,000, $189,000 and $2,839,000 was recorded for the years ended
December 31, 1995, 1994 and 1993, respectively, based on the ratably vested
portion of the difference between the exercise prices and the market value of
the Common Stock at the surrender date. The cash distribution election
previously available to participants in the Phantom Plans has been cancelled.
Accordingly, all of the option plan compensation liability accrued at December
31, 1992 was reversed and credited to additional paid-in capital during 1993.
Non-cash compensation expense totaling approximately $.1 million will be
recognized ratably over the remaining vesting period of options granted
(approximately two years) in exchange for surrendered units, based on the
difference between the exercise price of the surrendered units and the market
value of the Common Stock on the date surrendered.
1993 Plan
In February 1993, the Board of Directors adopted the 1993 Plan. The 1993
Plan provides for issuance of options to certain employees and directors to
purchase shares of Common Stock. The aggregate number of shares of Common
Stock that may be issued under the 1993 Plan is 525,000 shares. The exercise
price, vesting and duration of the options may vary and will be determined at
the time of issuance. All employees and directors who were granted units
pursuant to the
Phantom Plans surrendered those units for a like number of options under the
1993 Plan at the surrendered units' exercise prices. At December 31, 1995,
405,250 of such options are exercisable, and 21,750 options were available for
future grants.
-39-
<PAGE> 40
TOM BROWN, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following sets forth certain information concerning the 1993 Plan:
<TABLE>
<CAPTION>
Number of Option Price
Options Per Share
--------- ------------
<S> <C> <C>
Outstanding December 31, 1992 - $ -
Granted 447,000 3.81 - 7.62
Exercised (8,000) 3.81
------- -----------
Outstanding December 31, 1993 439,000 3.81 - 7.62
Granted 60,000 11.875
Exercised (31,750) 3.81 - 7.62
------- -----------
Outstanding December 31, 1994 467,250 3.81-11.875
Forfeited (3,750) 3.81
Exercised (26,250) 3.81 - 7.62
------- -----------
Outstanding December 31, 1995 437,250 $3.81-11.875
======= ============
</TABLE>
(c) ESOP and Profit Sharing Plan
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 Common Stock of the Company to a trust in such
amounts as the Company deems advisable. The Company contributed $30,000,
$60,000 and $30,000 to the trust for 1995, 1994 and 1993, respectively, for the
purchase of 2,110, 4,750 and 2,530 shares of Common Stock.
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 and $30,000 for 1993 to the Profit Sharing Plan.
The Company did not make a contribution to the Profit Sharing Plan for year
1994.
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. Although contributions made by the Company are
deductible, employees will not include such contributions as income until such
time as they receive distributions. The Profit Sharing Plan was further
amended to provide employees with the ability to direct the Profit Sharing
Trustee to separate all or a portion of such employee's vested interest so that
each employee may give direct investment instructions to the Profit Sharing
Trustee.
(d) Common Shareholder 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
-40-
<PAGE> 41
TOM BROWN, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 which the above occurs is to be known as the "Distribution Date".
The Rights are not exercisable until the Distribution Date. The Rights
will expire on March 15, 2001, unless extended or redeemed earlier by the
Company.
(7) 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 Sheet approximated
market value at December 31, 1995 and 1994.
Cash and Cash Equivalents - The carrying amounts approximated fair value
due to the short maturity of these instruments.
Investments - There are no quoted market prices for the GINs.
Consequently, the Company is unable to estimate the fair value of the
GINs.
(8) 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, 1995,
1994 and 1993 were $103,000 and $159,000, $37,000 and $70,000 and $215,000 and
$53,000, respectively. The Company also paid $35,000, $35,000 and $32,000
during the years ended December 31, 1995, 1994 and 1993, 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 year ended December 31,
1995, the Company billed $153,000 to such partnership for their share of
certain leasehold
-41-
<PAGE> 42
TOM BROWN, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
costs.
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, 1995, 1994 and 1993, the Company charged the former
subsidiary approximately $70,000, $64,000 and $65,000, respectively, for such
services. The former subsidiary performs drilling services on certain wells
operated by the Company and charged approximately $934,000, $1,322,000 and
$964,000 for such services during the years ended December 31, 1995, 1994 and
1993, 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, Conoco, Inc., Coastal Oil & Gas
Corporation and KN Gas Marketing, Inc., accounted for 25%, 14% and 12%,
respectively, of gas and oil sales and marketing, gathering and processing
revenues 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.
Wind River-Pavillion, Ltd., a partnership wherein the Company has a 20%
interest, owns interests in the Company- operated Pavillion field in Wyoming.
At December 31, 1995, the partnership owed the Company $62,000 for drilling
costs and lease operating expenses.
-42-
<PAGE> 43
TOM BROWN, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(9) Segment Information
The Company operates in two reportable segments: gas and oil exploration
and development and marketing, gathering and processing. The segment results
are presented in the following schedule (in thousands):
<TABLE>
<CAPTION>
Gas & Oil Marketing,
Exploration Gathering
& & Intercompany
Development Processing Sales & Other Total
----------- ---------- ------------- -----
<S> <C> <C> <C> <C>
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
Year ended
December 31, 1993
- -----------------
Assets $ 100,344 $ 7,740 $ - $ 108,084
Revenues 17,759 15,527 (4,578) 28,708
Income (loss) before taxes (3,719) 1,740 - (1,979)
Capital expenditures 10,107 2,234 - 12,341
Depreciation and amortization 7,172 108 - 7,280
</TABLE>
(10) 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.
In November 1993, the Company and the Shoshone and Northern Arapaho Tribes
finalized the negotiations of six gas and oil option agreements, which in
addition to one acquired earlier in 1993, encompass approximately 666,000 gross
acres (400,000 net acres) in Fremont County, located in the Wind River Basin of
Wyoming. The
-43-
<PAGE> 44
TOM BROWN, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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. The Company paid approximately $.6
million for its share of this option.
Lease Commitments
At December 31, 1995, 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 $183,000, $141,000 and $8,000 for 1996, 1997 and 1998,
respectively. Total rental expense incurred for the years ended December 31,
1995, 1994 and 1993 was approximately $262,000, $245,000 and $239,000,
respectively, all of which represented minimum rentals under non-cancelable
operating leases.
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 was
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.
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.
-44-
<PAGE> 45
TOM BROWN, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(11) Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
(In thousands except per share amounts)
----------------------------------------------------
Year ended December 31, 1995
----------------------------
1st 2nd 3rd 4th Total
--- --- --- --- -----
<S> <C> <C> <C> <C> <C>
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
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31, 1994
----------------------------
1st 2nd 3rd 4th Total
--- --- --- --- -----
<S> <C> <C> <C> <C> <C>
Revenues $ 9,536 7,741 5,034 6,760 $29,071
Gross profit (1) $ 3,804 3,143 2,097 2,602 $11,646
Net income (loss) $ 574 731 (257) (1,208) $ (160)
Net income (loss)
per common share $ .04 .05 (.02) (.08) $ (.01)
</TABLE>
__________________
(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.
-45-
<PAGE> 46
TOM BROWN, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(12) 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 and pro
forma information which includes estimated amounts related to the January 1996
acquisition of KNPC as if it occurred on December 31, 1995. See Note 3 of
Notes to Consolidated Financial Statements:
Capitalized Costs and Costs Incurred
<TABLE>
<CAPTION>
Pro Forma Historical
----------- --------------------------------
December 31, December 31, December 31,
1995 1995 1994
----------- ------------ ------------
(in thousands)
<S> <C> <C> <C>
Capitalized costs
-----------------
Proved gas and oil properties $ 205,474 $ 184,424 $ 212,218
Unproved gas and oil properties 11,200 2,200 2,233
------- ------- -------
Total gas and oil properties 216,674 186,624 214,451
Less: Accumulated depreciation,
depletion and
amortization (105,442) (105,442) (132,512)
------- ------- -------
Net capitalized costs $ 111,232 $ 81,182 $ 81,939
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Pro Forma Historical
--------- ---------------------------------------
Year ended Year ended Year ended Year ended
December 31, December 31, December 31, December 31,
1995 1995 1994 1993
----------- ----------- ------------ ------------
(in thousands)
<S> <C> <C> <C> <C>
Costs incurred
--------------
Proved property
acquisition costs $ 21,094 $ 44 $ 256 $ 25
Unproved property
acquisition costs 9,657 657 1,498 2,347
Exploration costs 3,144 3,144 3,177 1,825
Development costs 21,747 21,747 17,797 5,818
------ ------ ------ ------
Total $ 55,642 $25,592 $22,728 $10,015
====== ====== ====== ======
</TABLE>
Of the $36,250,000 purchase price for KNPC, $9 million was allocated to
unproved property acquisition costs, $21.05 million was allocated to proved
property acquisition costs and $6.2 million was allocated to a pipeline and
storage facility. This allocation was based on best available information and
is subject to change as additional information, including the amounts of
deferred tax liabilities which were assumed, becomes available.
Gas and Oil Reserve Information (Unaudited)
The following summarizes the policies used by the Company in preparing the
-46-
<PAGE> 47
TOM BROWN, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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, 1995,
December 31, 1994 and December 31, 1993 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.
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.
-47-
<PAGE> 48
TOM BROWN, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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).
<TABLE>
<CAPTION>
Reserve Quantities
-----------------------------------
Gas Oil
Proved reserves: (Mcf) (Bbls)
----------- -----------
<S> <C> <C>
Estimated reserves at December 31, 1992 104,955,000 3,803,000
Revisions of previous estimates (6,283,000) (734,000)
Purchase of minerals in place 150,000 21,000
Extensions and discoveries 39,874,000 563,000
Sales of minerals in place (544,000) (36,000)
Production (7,157,000) (317,000)
----------- ---------
Estimated reserves at December 31, 1993 130,995,000 3,300,000
Revisions of previous estimates (4,582,000) (288,000)
Purchase of minerals in place 659,000 19,000
Extensions and discoveries 60,593,000 1,775,000
Sales of minerals in place (128,000) (8,000)
Production (7,231,000) (276,000)
----------- ---------
Estimated reserves at December 31, 1994 180,306,000 4,522,000
Revisions of previous estimates (10,837,000) (457,000)
Purchase of minerals in place - -
Extensions and discoveries 11,831,000 436,000
Sales of minerals in place (7,412,000) (46,000)
Production (10,585,000) (387,000)
----------- ---------
Estimated reserves at December 31, 1995 163,303,000 4,068,000
=========== =========
Proved developed reserves:
December 31, 1992 75,161,000 2,565,000
December 31, 1993 86,153,000 2,357,000
December 31, 1994 114,061,000 2,877,000
December 31, 1995 109,267,000 2,862,000
Pro forma -- Amounts related to KNPC Acquisition - See Note 3
- -------------------------------------------------------------
KN Production Company:
Proved reserves
at December 31, 1995 31,359,000 519,000
Proved developed reserves
at December 31, 1995 27,352,000 419,000
</TABLE>
-48-
<PAGE> 49
TOM BROWN, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved
Gas and Oil Reserves (Unaudited)
<TABLE>
<CAPTION>
Pro Forma Historical
----------- ----------------------------------------------
December 31, December 31, December 31, December 31,
1995 1995 1994 1993
----------- ----------- ------------ -----------
(in thousands)
<S> <C> <C> <C> <C>
Future cash flows $ 357,444 $ 308,965 $ 348,652 $ 324,813
Future production
costs (105,523) (86,735) (90,228) (81,655)
Future development
costs (16,444) (13,344) (17,596) (12,665)
------- ------- ------- -------
Future net cash flows
before tax 235,477 208,886 240,828 230,493
Future income taxes (32,016) (31,016) (38,950) (34,443)
------- ------- ------- -------
Future net cash flows
after tax 203,461 177,870 201,878 196,050
Annual discount at 10% (84,939) (74,523) (90,048) (99,703)
------- ------- ------- -------
Standardized measure
at discounted
future net cash
flows $ 118,522 $ 103,347 $ 111,830 $ 96,347
======= ======= ======= =======
</TABLE>
-49-
<PAGE> 50
TOM BROWN, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Changes in Standardized Measure of Discounted Future Net Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Pro Forma Historical
----------- --------------------------------------------
December 31, December 31, December 31, December 31,
1995 1995 1994 1993
----------- ----------- ------------ ------------
(in thousands)
<S> <C> <C> <C> <C>
Gas and oil sales, net
of production costs $ (13,509) $(13,509) $ (9,793) $(10,786)
Net changes in
anticipated prices
and production cost (10,077) (10,077) (29,733) 12,028
Extensions and
discoveries, less
related costs 10,803 10,803 51,231 37,343
Changes in estimated
future development
costs 2,254 2,254 1,237 (438)
Previously estimated
development costs
incurred 4,152 4,152 667 1,564
Net change in income
taxes 1,664 1,872 (3,706) (6,787)
Purchase of minerals
in place 15,383 - 485 126
Sales of minerals
in place (6,133) (6,133) (157) (590)
Accretion of discount 12,494 12,494 10,575 7,367
Revision of quantity
estimates (8,337) (8,337) (3,515) (7,736)
Changes in production
rates and other (2,002) (2,002) (1,808) (6,791)
------ ------ ------ ------
Change in
Standardized
Measure $ 6,692 $ (8,483) $ 15,483 $ 25,300
====== ======= ======= ======
</TABLE>
-50-
<PAGE> 51
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 on page five 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.
-51-
<PAGE> 52
PART IV
Item 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a)1. See Index to Consolidated Financial Statements at Item 8
(a)2. Consolidated Financial Statement Schedules,
Years ended December 31, 1995, 1994 and 1993
All other schedules are omitted as the required information is inapplicable or
the information is presented in the Consolidated Financial Statements or related
notes.
<TABLE>
<CAPTION>
(a)3. Exhibits:
<S> <C>
( 3.1) Certificate of Incorporation of the Registrant. (Incorporated by reference to
Exhibit No. 3.1 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.)
( 3.2) Certificate of Amendment to the Certificate of Incorporation of Registrant, as
amended September 7, 1988. (Incorporated by reference to Exhibit No. 3.1 in the
Registrant's Form 10-K Report dated June 27, 1989 and filed with the Securities
and Exchange Commission on June 29, 1989.)
( 3.3) Certificate of Amendment to the Certificate of Incorporation of Registrant, as
amended June 5, 1990. (Incorporated by reference to Exhibit No. 3.3 in the
Registrant's Form 10-K Report dated March 26, 1993 and filed with the Securities
and Exchange Commission on March 31, 1993.)
( 3.4) Certificate of Amendment to the Certificate of Incorporation of Registrant, as
amended May 25, 1994. (Incorporated by reference to Exhibit No. 4.4 in the
Registrant's Form S-3 Registration Statement dated and filed with the Securities
and Exchange Commission on October 5, 1995.)
( 3.5) 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.)
( 4.2) 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.)
</TABLE>
-52-
<PAGE> 53
<TABLE>
<S> <C>
( 4.5) Rights Agreement dated as of March 5, 1991 between Tom Brown, Inc. 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 March 15, 1991.)
(10.5) 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.)
(10.6) 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.)
(10.13) Letter Agreement dated as of June 27, 1995 and Demand Promissory Note dated as of
June 28, 1995 between Tom Brown, Inc. and Chemical Bank. (Incorporated by
reference to Exhibit No. 10.1 in the Registrant's Form 10-Q Quarterly Report dated
August 11, 1995.)
(10.14) Agreement between Tom Brown, Inc. 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.)
Executive Compensation Plans and Arrangements
---------------------------------------------
(Exhibits 10.15 through 10.26):
-------------------------------
(10.15) 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.)
(10.16) Non-qualified Stock Option Agreement dated December 24, 1986 between the
Registrant and Clark Mueller. (Incorporated by reference to Exhibit
No. 10.13 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.)
(10.17) Non-qualified Stock Option Agreement dated 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.)
</TABLE>
-53-
<PAGE> 54
<TABLE>
<S> <C>
(10.18) 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.)
(10.19) 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.)
(10.21) 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.)
(10.22) Tom Brown, Inc. Profit Sharing 401(k) 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.)
(10.23) First Amended and Restated Employment Agreement dated May 21, 1992 between
the Registrant and Donald L. Evans. (Incorporated by reference to Exhibit 10.22
in the Registrant's Form 10-K Report dated March 26, 1993 and filed with the
Securities and Exchange Commission on March 31, 1993.)
(10.24) 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.)
(10.25) 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.)
(10.26) 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.)
</TABLE>
-53-
<PAGE> 55
<TABLE>
<S> <C> <C>
(21) * Subsidiaries of the Registrant.
(23) * Consent of Independent Public Accountants.
(27) * Financial Data Schedule
</TABLE>
________________
* Filed herewith
(b). Reports on Form 8-K:
The Company filed two reports on Form 8-K during the fourth quarter of
1995. One report, dated September 27, 1995, was filed with the Securities and
Exchange Commission (the "SEC") on September 28, 1995. Such report disclosed,
under "Item 5, Other Events", the Company's bank borrowings in connection with
the financing of the Company's purchase of approximately $56 million principal
amount of Senior Gas Indexed Notes due 2002 issued by Presidio Oil Company.
The second Form 8-K Report filed by the Company in the fourth quarter of 1995
was dated December 19, 1995 and filed with the SEC on December 19, 1995. Under
"Item 5, Other Events", the Company reported the letter of intent entered into
with KN Energy, Inc. regarding the Company's merger and acquisition of KN
Production Company. For a further description of the transactions reported in
these two Form 8-K Reports, see Item 1, Business - Certain Developments in
1995, of this Form 10-K Report.
-55-
<PAGE> 56
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.
<TABLE>
<S> <C>
TOM BROWN, INC.
By /s/ Donald L. Evans March 26, 1996
-------------------------------------
Donald L. Evans
Chairman of the Board of Directors
and Chief Executive Officer
</TABLE>
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.
<TABLE>
<S> <C>
/s/ Donald L. Evans March 26, 1996
- ------------------------------------------
Donald L. Evans
Chairman of the Board of Directors
and Chief Executive Officer
/s/ R. Kim Harris March 26, 1996
- ------------------------------------------
R. Kim Harris, Controller
and Principal Financial Officer
</TABLE>
-56-
<PAGE> 57
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.
<TABLE>
<S> <C>
/s/ William R. Granberry March 26, 1996
- --------------------------------------------
William R. Granberry, President and Director
</TABLE>
-57-
<PAGE> 58
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.
<TABLE>
<S> <C>
/s/ Thomas C. Brown March 26, 1996
- ------------------------------------------
Thomas C. Brown, Director
</TABLE>
-58-
<PAGE> 59
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.
<TABLE>
<S> <C>
/s/ Edward W. LeBaron, Jr. March 26, 1996
- -------------------------------------------
Edward W. LeBaron, Jr., Director
</TABLE>
-59-
<PAGE> 60
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.
<TABLE>
<S> <C>
/s/ Henry Groppe March 26, 1996
- -------------------------------------------
Henry Groppe, Director
</TABLE>
-60-
<PAGE> 61
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.
<TABLE>
<S> <C>
/s/ Robert H. Whilden, Jr. March 26, 1996
- -------------------------------------------
Robert H. Whilden, Jr., Director
</TABLE>
-61-
<PAGE> 62
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.
<TABLE>
<S> <C>
/s/ James B. Wallace March 26, 1996
- -------------------------------------------
James B. Wallace, Director
</TABLE>
-62-
<PAGE> 63
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.
<TABLE>
<S> <C>
/s/ David M. Carmichael March 26, 1996
- ------------------------------------------
David M. Carmichael, Director
</TABLE>
-63-
<PAGE> 64
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.
<TABLE>
<S> <C>
/s/ George M. Simmons March 26, 1996
- -------------------------------------------
George M. Simmons, Director
</TABLE>
-64-
<PAGE> 65
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
No. Exhibit
- ------- -------
<S> <C>
3.1 Certificate of Incorporation of the Registrant. (Incorporated by reference to
Exhibit No. 3.1 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.)
3.2 Certificate of Amendment to the Certificate of Incorporation of Registrant, as
amended September 7, 1988. (Incorporated by reference to Exhibit No. 3.1 in the
Registrant's Form 10-K Report dated June 27, 1989 and filed with the Securities and
Exchange Commission on June 29, 1989.)
3.3 Certificate of Amendment to the Certificate of Incorporation of Registrant, as
amended June 5, 1990. (Incorporated by reference to Exhibit No. 3.3 in the
Registrant's Form 10-K Report dated March 26, 1993 and filed with the Securities and
Exchange Commission on March 31, 1993.)
3.4 Certificate of Amendment to the Certificate of Incorporation of Registrant, as
amended May 25, 1994. (Incorporated by reference to Exhibit No. 4.4 in the
Registrant's Form S-3 Registration Statement dated and filed with the Securities and
Exchange Commission on October 5, 1995.)
3.5 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.)
4.2 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.)
4.5 Rights Agreement dated as of March 5, 1991 between Tom Brown, Inc. 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 March 15, 1991.)
</TABLE>
-65-
<PAGE> 66
<TABLE>
<CAPTION>
Exhibit
No. Exhibit
- ------- -------
<S> <C>
10.5 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.)
10.6 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.)
10.13 Letter Agreement dated as of June 27, 1995 and Demand Promissory Note dated as of
June 28, 1995 between Tom Brown, Inc. and Chemical Bank. (Incorporated by reference
to Exhibit No. 10.1 in the Registrant's Form 10-Q Quarterly Report dated August 11,
1995.)
10.14 Agreement between Tom Brown, Inc. 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.)
Executive Compensation Plans and Arrangements
---------------------------------------------
(Exhibits 10.15 through 10.26):
-------------------------------
10.15 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.)
10.16 Non-qualified Stock Option Agreement dated December 24, 1986 between the Registrant
and Clark Mueller. (Incorporated by reference to Exhibit No. 10.13 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.)
</TABLE>
-66-
<PAGE> 67
<TABLE>
<CAPTION>
Exhibit
No. Exhibit
- ------- -------
<S> <C>
10.17 Non-qualified Stock Option Agreement dated 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.)
10.18 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.)
10.19 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.)
10.21 Employee Stock Ownership Plan and Trust Agreement. (Incorporated by reference to
Exhibit No. 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.)
10.22 Tom Brown, Inc. Profit Sharing 401(k) Plan. (Incorporated by reference to Exhibit
No. 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.)
10.23 First Amended and Restated Employment Agreement dated May 21, 1992 between the
Registrant and Donald L. Evans. (Incorporated by reference to Exhibit No. 10.22 in
the Registrant's Form 10-K Report dated March 26, 1993 and filed with the Securities
and Exchange Commission on March 31, 1993.)
10.24 1992 Phantom Stock Option Plan for Non-employee Directors. (Incorporated by
reference to Exhibit No. 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.)
</TABLE>
-67-
<PAGE> 68
<TABLE>
<CAPTION>
Exhibit
No. Exhibit
- ------- -------
<S> <C>
10.25 Amendments to 1992 Phantom Stock Option Plan for Non-employee Directors.
(Incorporated by reference to Exhibit No. 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.)
10.26 1993 Stock Option Plan. (Incorporated by reference to Exhibit No. 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.)
21 * Subsidiaries of the Registrant
23 * Consent of Independent Public Accountants.
27 * Financial Data Schedule
</TABLE>
________________
* Filed herewith
-68-
<PAGE> 1
EXHIBIT 21
TOM BROWN, INC.
Subsidiaries of Registrant
December 31, 1995
<TABLE>
<CAPTION>
Percent
Name of Subsidiary State of Incorporation of Ownership
- ------------------ ---------------------- ------------
<S> <C> <C>
Retex Gathering Company, Inc. Wyoming 100%
Rocno Corporation Texas 100%
TBI Acquisition, Inc. Delaware 100%
</TABLE>
-70-
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
by reference of our report included in this Form 10-K, into Tom Brown, Inc.'s
previously filed Registration Statements on Form S-8 Nos. 33-42991, 33-44225,
33-60191 and 33-60842.
ARTHUR ANDERSEN LLP
March 25, 1996
-71-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 4,982
<SECURITIES> 0
<RECEIVABLES> 7,470
<ALLOWANCES> 58
<INVENTORY> 246
<CURRENT-ASSETS> 12,888
<PP&E> 198,680
<DEPRECIATION> 112,695
<TOTAL-ASSETS> 164,174
<CURRENT-LIABILITIES> 7,515
<BONDS> 0
<COMMON> 2,018
0
0
<OTHER-SE> 154,641
<TOTAL-LIABILITY-AND-EQUITY> 164,174
<SALES> 24,787
<TOTAL-REVENUES> 41,053
<CGS> 20,023
<TOTAL-COSTS> 48,164
<OTHER-EXPENSES> 4,184
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,369
<INCOME-PRETAX> (7,111)
<INCOME-TAX> 12,896
<INCOME-CONTINUING> 5,785
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,785
<EPS-PRIMARY> .34
<EPS-DILUTED> 0
</TABLE>
