<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
(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.
---------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 95-1949781
------------------------------- ------------------
(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
--------------------------------------- ---------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
915-682-9715
---------------------------------------------------------
(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
-------------------------------
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [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.
<PAGE> 2
TOM BROWN, INC.
FORM 10-K
CONTENTS
<TABLE>
<CAPTION>
Part I Page
- ------ ----
<S> <C> <C>
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
- -------
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
- --------
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
- -------
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K.......................... 52
Signatures............................................................... 56
</TABLE>
-2-
<PAGE> 3
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> 4
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> 5
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> 6
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> 7
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> 8
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> 9
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> 10
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> 11
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> 12
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> 13
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> 14
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. 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> 15
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> 16
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> 17
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> 18
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> 19
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> 20
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> 21
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> 22
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> 23
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> 24
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> 25
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> 26
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> 27
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> 28
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> 29
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> 30
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> 31
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 April 3, 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 April 3, 1996
- ------------------------------------------
Donald L. Evans
Chairman of the Board of Directors
and Chief Executive Officer
/s/ R. Kim Harris April 3, 1996
- ------------------------------------------
R. Kim Harris, Controller
and Principal Financial Officer
</TABLE>
-56-
<PAGE> 32
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 April 3, 1996
- --------------------------------------------
William R. Granberry, President and Director
</TABLE>
-57-
<PAGE> 33
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 April 3, 1996
- ------------------------------------------
Thomas C. Brown, Director
</TABLE>
-58-
<PAGE> 34
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. April 3, 1996
- -------------------------------------------
Edward W. LeBaron, Jr., Director
</TABLE>
-59-
<PAGE> 35
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 April 3, 1996
- -------------------------------------------
Henry Groppe, Director
</TABLE>
-60-
<PAGE> 36
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. April 3, 1996
- -------------------------------------------
Robert H. Whilden, Jr., Director
</TABLE>
-61-
<PAGE> 37
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 April 3, 1996
- -------------------------------------------
James B. Wallace, Director
</TABLE>
-62-
<PAGE> 38
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 April 3, 1996
- ------------------------------------------
David M. Carmichael, Director
</TABLE>
-63-
<PAGE> 39
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 April 3, 1996
- -------------------------------------------
George M. Simmons, Director
</TABLE>
-64-
<PAGE> 40
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> 41
<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> 42
<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> 43
<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 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
April 3, 1996
