<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 12, 1997
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM S-3
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
---------------------
TOM BROWN, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 1311 95-1949781
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
P.O. BOX 2608
500 EMPIRE PLAZA BUILDING
MIDLAND, TEXAS 79701
(915) 682-9715
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
DONALD L. EVANS
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
500 EMPIRE PLAZA BUILDING
MIDLAND, TEXAS 79701
(915) 682-9715
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
COPIES TO:
<TABLE>
<C> <C>
ROBERT H. WHILDEN, JR. THOMAS P. MASON
VINSON & ELKINS L.L.P. ANDREWS & KURTH L.L.P.
1001 FANNIN 4200 TEXAS COMMERCE TOWER
HOUSTON, TEXAS 77002 HOUSTON, TEXAS 77002
(713) 758-2320 (713) 220-4368
(713) 615-5160 (FAX)
</TABLE>
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after this Registration Statement becomes
effective.
If any of the securities registered on this Form are being offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
=============================================================================================================================
PROPOSED PROPOSED
TITLE OF EACH CLASS OF AMOUNT TO BE MAXIMUM OFFERING MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PRICE PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.10 par
value(3)................... 4,600,000 shares $24.86 $114,356,000 $34,653
</TABLE>
================================================================================
(1) Includes 600,000 shares to cover the Underwriters' over-allotment option.
(2) Estimated solely for purpose of calculating the registration fee based on
the average of the high and low sales prices of the shares of Common Stock
reported on the Nasdaq National Market on September 5, 1997.
(3) Including associated preferred stock purchase rights. Prior to the
occurrence of certain events, the preferred stock purchase rights will not
be evidenced or traded separately from the Common Stock.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY
NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE
REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR
SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH
OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED SEPTEMBER 12, 1997
4,000,000 SHARES
TOM BROWN, INC.
COMMON STOCK
[LOGO] (PAR VALUE $.10 PER SHARE)
---------------------
All of the shares of Common Stock offered hereby are being sold by Tom
Brown, Inc.
The last reported sale price of the Common Stock, which is quoted under the
symbol "TMBR" on the Nasdaq National Market, on September 11, 1997, was $25.0625
per share. See "Price Range of Common Stock".
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR CERTAIN CONSIDERATIONS RELEVANT
TO AN INVESTMENT IN THE COMMON STOCK.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------
<TABLE>
<CAPTION>
INITIAL PUBLIC UNDERWRITING PROCEEDS TO
OFFERING PRICE DISCOUNT(1) COMPANY(2)
---------------------- ---------------------- ----------------------
<S> <C> <C> <C>
Per Share............................... $ $ $
Total(3)................................ $ $ $
</TABLE>
- ---------------
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933. See
"Underwriting".
(2) Before deducting estimated expenses of $ payable by the Company.
(3) The Company has granted to the Underwriters an option for 30 days to
purchase up to an additional 600,000 shares of Common Stock at the initial
public offering price per share, less the underwriting discount, solely to
cover over-allotments. If such option is exercised in full, the total
initial public offering price, underwriting discount and proceeds to Company
will be $ , $ and $ , respectively. See
"Underwriting".
---------------------
The shares of Common Stock offered hereby are offered severally by the
Underwriters, as specified herein, subject to receipt and acceptance by them and
subject to their right to reject any order in whole or in part. It is expected
that certificates for the shares will be ready for delivery in New York, New
York on or about October , 1997, against payment therefor in immediately
available funds.
GOLDMAN, SACHS & CO.
HOWARD, WEIL, LABOUISSE, FRIEDRICHS
INCORPORATED
PETRIE PARKMAN & CO.
SALOMON BROTHERS INC
---------------------
The date of this Prospectus is , 1997.
<PAGE> 3
A map of Texas, Oklahoma, Colorado, Wyoming and Montana is shown to depict the
Company's areas of operations. Basins within these states in which the Company
holds acreage are shown as shaded areas and are labeled by name. In a box next
to the map is a table showing gross acreage and reserves by basin. Below the map
is a pie chart which shows the percentage of the Company's reserves attributable
to the Company's regions of operations.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH
SECURITIES, AND THE IMPOSITION OF A PENALTY BID IN CONNECTION WITH THE OFFERING.
IN ADDITION, CERTAIN UNDERWRITERS (AND SELLING GROUP MEMBERS, IF ANY) ALSO MAY
ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ
NATIONAL MARKET, IN ACCORDANCE WITH RULE 103 UNDER THE SECURITIES EXCHANGE ACT
OF 1934. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING".
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere in this Prospectus or
incorporated by reference herein. Unless otherwise indicated, the information in
this Prospectus assumes that the Underwriters' over-allotment option will not be
exercised. Certain oil and gas industry terms used in this Prospectus are
defined in "Certain Definitions."
THE COMPANY
GENERAL
Tom Brown, Inc. (together with its subsidiaries, the "Company" or "Tom
Brown") is an independent natural gas and crude oil exploration and production
company with core areas of activity in the Rocky Mountains and Texas. As of
December 31, 1996, the Company had net proved reserves of 433 Bcfe with a
reserve life of 11.2 years based on net production for the six months ended June
30, 1997. Approximately 83% of the Company's net proved reserves were natural
gas and approximately 72% were classified as proved developed as of December 31,
1996.
Through exploration, development and acquisitions, Tom Brown has been able
to significantly increase reserves, production volumes and cash flow. Over the
five-year period ended December 31, 1996, the Company's reserves, production and
cash flow from operating activities (before changes in working capital) grew at
compound annual growth rates of 32%, 26%, and 48%, respectively. For the six
months ended June 30, 1997, the Company's average daily net production increased
98% to 107 Mmcfe from 54 Mmcfe during the same period in 1996.
Tom Brown focuses its operations in areas where it has developed
significant geologic expertise and established critical mass through the
strategic accumulation of large, contiguous acreage positions. The Company's
principal exploration, development and production activities are conducted in
the Rocky Mountains and Texas, including the Wind River, Green River and Big
Horn Basins of Wyoming; the Piceance Basin of Colorado; and the Val Verde and
Permian Basins and the Cotton Valley Pinnacle Reef Trend of Texas. At December
31, 1996, 85% of the Company's proved reserves were in the Rocky Mountains and
Texas. The Company seeks to serve as operator of properties in its core areas.
In its key Rocky Mountains area, the Company owned working interests in 1,035
producing wells and operated 648, or 63%, of these wells as of June 30, 1997.
As of June 30, 1997, Tom Brown held leases on 2,962,255 gross acres
(including lease options) which provide the Company with substantial exploration
and development opportunities. In order to further exploit this inventory of
drilling prospects, the Company has increased its drilling budget from $22
million in 1996 to an estimated $48 million in 1997, approximately 30% of which
will be spent on exploratory drilling. The Company expects its drilling
expenditures to increase to $60 million in 1998, with approximately 25% expected
to be dedicated to exploratory drilling.
Tom Brown also engages in the gathering, processing, marketing and
transportation of natural gas through Wildhorse Energy Partners, L.L.C.
("Wildhorse"), a joint venture with KN Energy, Inc. ("KNE") which is owned 45%
by the Company and 55% by KNE. Wildhorse's gathering and processing assets
overlap with many of the Company's core properties located in the Rocky
Mountains. Through Wildhorse, the Company has contracted for firm transportation
for substantially all of its current natural gas production from the Rocky
Mountains.
3
<PAGE> 5
BUSINESS STRATEGY
For over ten years, Tom Brown has concentrated on exploring, developing and
adding to its long-lived reserve base, building a team of professionals capable
of maximizing its assets and opportunities, and maintaining a strong balance
sheet. This has resulted in the accumulation of a substantial inventory of
exploration and development opportunities and has positioned the Company to
pursue the following strategic objectives:
- - Focus on Domestic Onshore with Concentrations in the Rocky Mountains and
Texas. With approximately 62% of its net proved reserves located in the Rocky
Mountains area and approximately 23% located in Texas, the Company is focusing
its operations in select oil and gas basins characterized by multiple pay
sands and significant amounts of potential reserves in place. This strategy
has allowed Tom Brown to develop specialized geologic expertise and achieve
economies of scale, enabling the Company to find, develop and produce oil and
gas reserves at competitive costs.
- - Capitalize on Extensive Land Position. The Company has increased its lease
acreage position significantly in recent years through acquisitions and
leasing activity, resulting in the Company holding, or having options on,
546,492 gross (209,307 net) developed and 2,415,763 gross (1,395,311 net)
undeveloped acres of land as of June 30, 1997. Approximately 78% of this gross
acreage position is located in the Rocky Mountains, making the Company one of
the largest holders of lease acreage in this area. Much of the Company's
recently acquired undeveloped acreage is contiguous to its existing operations
and is located in basins where the Company has significant geologic expertise.
These holdings provide Tom Brown with substantial opportunities for its future
exploration and development activities.
- - Growth through Exploration and Development Drilling. While Tom Brown has
pursued acquisitions on a selective basis, the Company's growth strategy is
founded primarily on exploration and development drilling. Over the three
years ended December 31, 1996, Tom Brown replaced 285% of its production
through drilling activities at an average finding cost of $0.53 per Mcfe. The
Company maintains a large portfolio of higher risk, higher potential
exploration prospects complemented by lower risk development projects. The
Company has allocated approximately 85% of both its $55 million 1997 capital
expenditure budget and its $70 million expected 1998 capital expenditures to
drilling activities to exploit these opportunities.
- - Transfer of Advanced Technology. In order to effectively exploit the potential
of its assets, Tom Brown seeks to apply technology that has proven effective
in other regions to its significant undeveloped land position and producing
properties, particularly in the Rocky Mountains. Such technology includes
magnetic resonance imaging logging tools, advanced tight gas sand stimulation
techniques, modern 3-D seismic acquisition and interpretation methods and
other techniques.
- - Pursue Opportunistic Acquisitions. Tom Brown will continue to selectively
pursue acquisitions of oil and gas properties, leasehold acreage and gas
gathering and processing assets which complement operations in its core areas
of activity. During 1996, the Company completed two significant acquisitions
which added 212 Bcfe of proved reserves and 1,172,000 gross leasehold acres.
These acquisitions served to augment Tom Brown's substantial presence in the
Rocky Mountains area.
- - Expand Participation in the Growing Midstream Segment of the Rocky
Mountains. Through its Wildhorse joint venture, the Company has strengthened
its ability to control and market its gas production in the Rocky Mountains.
Wildhorse performs gas gathering, processing, marketing and transportation
services for the Company and for a number of third parties. In addition,
Wildhorse is expected to continue to pursue the construction or acquisition of
gathering, processing and storage assets in the Rocky Mountains. Wildhorse
provides a vehicle through which Tom Brown is able to participate in the
growing midstream segment of the oil and gas
4
<PAGE> 6
industry in the Rocky Mountains area. In 1996, the Company's interest in
Wildhorse generated approximately $1.8 million in net income and $3.1 million
in cash flow from operating activities.
- - Financial Flexibility. The Company emphasizes maintaining a strong balance
sheet in order to provide operating and financial flexibility. The Company
will use proceeds from this offering to repay all outstanding indebtedness
under its revolving credit facility. Tom Brown believes that its strengthened
balance sheet and increased borrowing capacity under its credit facility as a
result of this offering will allow the Company to take advantage of its
significant exploration and development prospects and selectively pursue
acquisition opportunities.
THE OFFERING (1)
Common Stock offered by the
Company............................. 4,000,000 shares
Common Stock to be outstanding after
the offering........................ 28,162,554 shares(2)
Use of proceeds..................... To repay all outstanding indebtedness
under the Company's revolving credit
facility ($90.0 million at August 31,
1997), thereby creating additional
borrowing capacity which, together with
the remaining net proceeds, will be
used to fund the Company's planned
exploration and development activities
and possible future acquisitions, as
well as other general corporate
purposes. See "Use of Proceeds."
Nasdaq National Market symbol....... TMBR
- ---------------
(1) Assumes that the Underwriters' over-allotment option is not exercised. See
"Underwriting."
(2) Based on the number of shares of Common Stock outstanding as of August 31,
1997. Does not include (i) 1,666,000 shares issuable upon conversion of the
Company's outstanding $1.75 Convertible Preferred Stock, Series A ("Series A
Preferred Stock") at a conversion rate of 1.666 shares of Common Stock for
each share of such preferred stock or (ii) 1,957,490 shares issuable upon
exercise of outstanding stock options under the Company's stock option plans
as of such date.
5
<PAGE> 7
SUMMARY GAS AND OIL RESERVE INFORMATION
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
----------------------------------
DEVELOPED UNDEVELOPED TOTAL
--------- ----------- ------
<S> <C> <C> <C>
Net proved reserves:
Gas (Bcf).............................................. 257.2 101.9 359.2
Oil (MmBbls)........................................... 9.0 3.3 12.3
------ ------ ------
Total (Bcfe)................................... 311.2 121.8 433.0
Present value of estimated future net revenues before
income taxes discounted at 10% ($ in millions)(1)...... $437.5 $171.2 $608.7
</TABLE>
- ---------------
(1) The present value of estimated future net revenues is based on weighted
average prices of $3.42 per Mcf of gas and $24.03 per Bbl of oil realized by
the Company at December 31, 1996. Subsequent to December 31, 1996, natural
gas prices have declined. Accordingly, the present value of estimated future
net revenues would be lower if it were calculated using prices in effect at
the end of the second quarter of 1997.
SUMMARY PRODUCTION, PRICE AND COST DATA
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------- ----------------
1994 1995 1996(1) 1996(1) 1997
------ ------ ------- ------- ------
<S> <C> <C> <C> <C> <C>
Total production:
Gas (Bcf).................................... 7.1 10.6 16.8 8.2 15.6
Oil (MmBbls)................................. 0.3 0.4 0.5 0.3 0.6
Total (Bcfe)......................... 8.7 12.9 20.0 9.8 19.4
Average daily net production:
Gas (Mmcf/d)................................. 19.4 29.0 45.8 45.4 85.9
Oil (MmBbls/d)............................... 0.8 1.1 1.5 1.4 3.5
Total (Mmcfe/d)...................... 24.0 35.4 54.7 54.0 107.1
Average sales prices:
Gas ($/Mcf).................................. 1.62 1.31 1.77 1.45 2.30
Oil ($/Bbl).................................. 15.73 16.80 20.45 18.80 18.98
Average production costs ($/Mcfe)(2)........... 0.69 0.53 0.49 0.44 0.61
</TABLE>
- ---------------
(1) Includes production volumes, sales prices and costs from the effective date
of acquisition for properties acquired in the Company's acquisitions of (i)
KN Production Company, a subsidiary of KNE, effective January 1, 1996 and
(ii) Presidio Oil Company effective December 23, 1996.
(2) Includes lease operating expenses and production taxes.
6
<PAGE> 8
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The consolidated financial data of the Company as of and for each of the
three years in the period ended December 31, 1996, has been derived from the
Company's audited consolidated financial statements. The consolidated financial
data as of and for the six months ended June 30, 1996 and 1997, has been derived
from the unaudited consolidated financial statements of the Company that in the
opinion of management reflect all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of its financial
condition and results of operations as of such dates and for such periods. The
results for the six months ended June 30, 1997, are not necessarily indicative
of the results that may be expected for the full year. The financial information
set forth below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements and notes thereto appearing elsewhere in this Prospectus and in the
documents incorporated herein by reference.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
---------------------------- ---------------------
1994 1995 1996 1996 1997
------- ------- ------- ------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Total revenues........................... $29,071 $41,053 $66,720 $27,276 $63,238
Cost of gas sold......................... 10,022 13,146 20,496 7,486 11,884
Production costs(1)...................... 5,999 6,877 9,834 4,261 11,885
Depreciation, depletion and
amortization........................... 7,288 9,994 15,140 7,697 17,351
Exploration costs........................ 1,184 3,644 3,471 926 2,648
General and administrative expenses...... 3,546 4,184 5,786 2,757 5,061
Interest expense......................... 20 1,369 389 17 3,667
Income (loss) before income taxes........ 102 (7,111)(2) 11,273 4,065 10,382
Income tax expense (benefit)............. 262 (12,896) 3,338 1,386 3,240
Net income (loss)........................ (160) 5,785 7,935 2,679 7,142
Preferred stock dividends................ -- -- (1,672) (797) (875)
Net income (loss) attributable to common
stock.................................. (160) 5,785 6,263 1,882 6,267
Net income (loss) per common share....... $(0.01) $0.34 $0.28 $0.09 $0.25
Weighted average number of common shares
outstanding(3)......................... 15,464 16,852 22,223 21,117 25,110
OTHER FINANCIAL DATA:
EBITDAX(4)............................... $ 8,594 $16,264 $30,273 $12,705 $34,048
Cash flows from operating activities
before changes in working capital(4)... 9,376 10,898 27,661 11,789 29,412
Capital and exploration
expenditures(5)........................ 17,558 28,814 33,929 9,658 23,013
</TABLE>
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<TABLE>
<CAPTION>
AT DECEMBER 31, AT JUNE 30, 1997
------------------------------ -------------------------
1994 1995 1996 ACTUAL AS ADJUSTED(6)
-------- -------- -------- -------- --------------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents....... $ 19,147 $ 4,982 $ 20,504 $ 10,658
Working capital................. 16,565 5,373 20,252 12,230
Total assets.................... 115,092 164,174 406,374 375,038
Long-term debt.................. -- -- 119,000 90,000
Stockholders' equity(7)......... 102,869 156,659 246,136 254,185
</TABLE>
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(1) Includes lease operating expenses and production taxes.
(2) Includes a writedown of properties of $8.4 million taken in 1995.
(3) Includes common stock equivalents as applicable.
(4) EBITDAX reflects income before income taxes, plus interest expense,
depreciation, depletion and amortization expense and exploration costs.
EBITDAX and cash flows from operating activities before changes in working
capital are not measures determined pursuant to generally accepted
accounting principles ("GAAP") and are not intended to be used in lieu of
GAAP presentations of net income or cash flows from operating activities.
EBITDAX for 1995 excludes an $8.4 million writedown of properties, which
writedown was a non-cash charge.
(5) Does not include amounts expended in connection with the Company's
acquisition of (i) KN Production Company, a subsidiary of KNE, in January
1996 or (ii) Presidio Oil Company in December 1996. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
(6) As adjusted to reflect the offering of 4,000,000 shares of Common Stock
hereby and the application of the estimated net proceeds therefrom to repay
outstanding indebtedness under the Company's credit facility. See "Use of
Proceeds."
(7) Includes the Company's Series A Preferred Stock. See "Description of Capital
Stock -- Preferred Stock."
8
<PAGE> 10
RISK FACTORS
In addition to the other information contained in or incorporated by
reference in this Prospectus, prospective purchasers of the shares of Common
Stock offered hereby should carefully consider the following factors relating to
the business of the Company and the Common Stock. The information contained in
or incorporated by reference in this Prospectus may include "forward-looking
statements" and information that are based on management's belief as well as
assumptions made by and information currently available to management. When used
in this document, the words "anticipate," "estimate," "expect," and similar
expressions are intended to identify forward-looking statements. Although the
Company believes that the expectations reflected in such forward-looking
statements are reasonable, no assurance can be given that such expectations will
prove to have been correct. Such statements are subject to certain risks,
uncertainties and assumptions. The following cautionary statements identify
certain important risks and uncertainties that could cause actual results to
vary materially. In addition, prospective purchasers should consider carefully
the information set forth under the captions "Business -- Markets,"
" -- Competition," and "-- Regulation" in Part I of the Company's Annual Report
on Form 10-K for the year ended December 31, 1996 (the "Form 10-K"), which is
incorporated herein by reference. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those anticipated, estimated or
expected.
VOLATILITY OF GAS AND OIL PRICES
The Company's revenues, profitability and rate of growth are substantially
dependent upon prevailing prices for natural gas and oil. Natural gas and oil
prices can be extremely volatile and in recent years have been depressed by
excess total domestic and imported supplies. Prices are also affected by actions
of state and local agencies, the United States and foreign governments and
international cartels. All of these factors are beyond the control of the
Company. These external factors and the volatile nature of the energy markets
make it difficult to estimate future prices of natural gas and oil. Any
substantial or extended decline in the price of natural gas would have a
material adverse effect on the Company's financial condition and results of
operations, including reduced cash flow and borrowing capacity.
For the year ended December 31, 1996, the Company's production and reserve
base were approximately 84% and 83% natural gas, respectively, on an energy
equivalent basis. As a result, the Company's earnings and cash flow are more
sensitive to fluctuations in the price of natural gas than to fluctuations in
the price of oil. When natural gas prices are deemed by the Company to be too
low, the Company may curtail production from certain wells, which further
restricts the Company's cash flow. Natural gas and oil prices are generally
lower in the summer, leading to substantial differences in revenues and cash
flows between seasons.
The marketability of the Company's production depends in part upon the
availability, proximity and capacity of natural gas gathering systems, pipelines
and processing facilities. Federal and state regulation of natural gas and oil
production and transportation, general economic conditions and changes in supply
and demand all could adversely affect the Company's ability to produce and
market its natural gas and oil. If market factors were to change dramatically,
the financial impact on the Company could be substantial. The availability of
markets and the volatility of product prices are beyond the control of the
Company and thus, represent a significant risk.
GENERAL RISKS OF NATURAL GAS AND OIL OPERATIONS
The Company competes in areas of natural gas and oil exploration,
development and transportation with other companies, many of which have
substantially greater financial and other resources. The natural gas and oil
business also involves a variety of risks, including the risks of operating
hazards such as fires, explosions, cratering, blow-outs and encountering
formations with abnormal pressures, the occurrence of any of which could result
in losses to the Company. Operation of
9
<PAGE> 11
natural gas gathering systems also involves certain risks, including explosions
and environmental hazards caused by pipeline leaks and ruptures. Drilling for
natural gas and oil involves a high degree of risk, and is often marked by
unprofitable efforts, not only from dry holes but from wells that, though
productive, do not produce natural gas and oil in sufficient quantities to
return a profit on the amounts expended. The Company maintains insurance against
some, but not all, of these risks in amounts that management believes to be
reasonable in accordance with customary industry practices. The occurrence of a
significant event, however, that is not fully insured could have a material
adverse effect on the Company's financial condition and results of operations.
The Company's strategy includes increasing its production and revenues
primarily through exploration and development drilling. There can be no
assurance that the Company's planned exploration and development projects will
result in additional reserves or that the Company will have future success in
drilling productive wells. Except to the extent that the Company acquires
properties containing proved reserves or conducts successful exploration and
development activities, or both, the proved reserves of the Company will decline
as reserves are produced.
ESTIMATES OF PROVED RESERVES AND FUTURE NET REVENUES
This Prospectus contains estimates of the Company's natural gas and oil
reserves and the future net revenues therefrom prepared by the Company's
independent petroleum engineers. Petroleum engineering is not an exact science
and includes estimates based on various assumptions and, therefore, is
inherently imprecise. Actual future production, reserves, taxes, development
expenditures, operating expenses and quantities of recoverable natural gas and
oil reserves may vary substantially from those assumed in the estimates. In
addition, the Company's proved reserves may be subject to downward or upward
revision, based upon production history, results of future exploration and
development, prevailing natural gas and oil prices and other factors. Estimates
of reserves are very sensitive to market prices for natural gas and oil.
Subsequent to December 31, 1996, natural gas prices declined and as a result,
the estimated reserves and future net reserves shown in this Prospectus would be
lower if they were calculated using prices in effect at the end of the second
quarter of 1997.
ACQUISITION RISKS
In connection with acquisitions of gas and oil properties, the Company
makes an assessment of recoverable reserves, future oil and natural gas prices,
operating costs, potential environmental and other liabilities and other
factors. Such assessments are necessarily inexact and their accuracy inherently
uncertain. In connection with such an assessment, the Company performs a review
of the subject properties that it believes to be generally consistent with
industry practices, which generally includes on-site inspections and the review
of reports filed with various regulatory entities. Such a review, however, will
not reveal all existing or potential problems nor will it permit a buyer to
become sufficiently familiar with the properties to fully assess their
deficiencies and capabilities. Inspections may not always be performed on every
well, and structural and environmental problems are not necessarily observable
even when an inspection is undertaken. Even when problems are identified, the
seller may be unwilling or unable to provide effective contractual protection
against all or part of such problems. There can be no assurances that any
acquisition of gas and oil property interests by the Company will be successful
and, if unsuccessful, that such failure will not have a material adverse effect
on the Company's future results of operations and financial condition.
SUBSTANTIAL CAPITAL REQUIREMENTS
The Company makes, and will continue to make, substantial expenditures for
the development, exploration, acquisition and production of oil and gas
reserves. The Company made capital expenditures of $25.2 million during 1995 and
$30.5 million ($281 million including the acquisition of KN Production Company
and Presidio Oil Company) during 1996. The Company plans to make capital
expenditures of approximately $55 million in 1997 and $70 million in 1998, none
of which
10
<PAGE> 12
amounts include expenditures for future acquisition costs. Management believes
that the cash provided by operating activities, borrowings under the credit
facility and the proceeds from this offering will be sufficient to fund planned
capital expenditures in 1997 and 1998. However, if revenues or cash flows from
operating activities decrease as a result of lower natural gas and oil prices,
operating difficulties or other factors, many of which are beyond the control of
the Company or if the Company's borrowing capacity is reduced due to a
redetermination of its borrowing base as the result of lower natural gas or oil
prices or other factors, the Company may not have sufficient capital from such
sources to fund all of its planned expenditures relating to its drilling
program, or it may be forced to raise additional debt or equity proceeds to fund
such expenditures. There can be no assurance that additional debt or equity
financing will be available to fund these planned expenditures. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
GOVERNMENT REGULATION AND ENVIRONMENTAL RISKS
The Company's business is regulated by certain federal, state and local
laws and regulations relating to the development, production, marketing and
transmission of natural gas and oil, as well as environmental and safety
matters. Certain of these laws and regulations have adversely affected the
Company's operations in the past, and there is no assurance that laws and
regulations enacted in the future will not adversely affect the Company's
exploration for, and the production and marketing of, natural gas and oil. See
"Business and Properties -- Regulation" in the Form 10-K.
NO DIVIDENDS
The Company has never declared or paid any cash dividends to holders of
Common Stock and has no present intention to pay cash dividends to holders of
Common Stock in the future. Under the terms of its credit facility, the Company
is prohibited from paying cash dividends without the written consent of the
banks. Although the proceeds from this offering will be used to repay all
amounts presently outstanding under the credit facility, the Company intends to
maintain the credit facility and, consequently, will be prohibited from paying
dividends without the banks' prior written consent. In addition, the Company is
required to pay annual dividends of $1.75 million on its Series A Preferred
Stock owned by KNE prior to the payment of any cash dividends to holders of
Common Stock. See "Description of Capital Stock -- Preferred Stock."
ANTI-TAKEOVER PROVISIONS
Certain provisions of the Delaware General Corporation Law, the Company's
Certificate of Incorporation and By-laws as well as the Company's Rights Plan
may have the effect of discouraging, delaying or preventing an unsolicited
acquisition proposal or a change in control of the Company. See "Description of
Capital Stock."
THE COMPANY
The Company was incorporated in Nevada in 1931 and was reincorporated in
Delaware in April 1987. The executive offices of the Company are located at 508
W. Wall St., 500 Empire Plaza, Midland, Texas 79701, and its telephone number is
(915) 682-9715.
11
<PAGE> 13
USE OF PROCEEDS
The proceeds to the Company from this offering, after deducting
underwriting discounts and estimated offering expenses, will be approximately
$ million ($ million if the Underwriters' over-allotment option is
exercised in full) based on the last reported sales price of $ for the
Common Stock on September , 1997 on The Nasdaq National Market. The Company
intends to use a portion of the net proceeds to repay the outstanding
indebtedness under its credit facility ($90.0 million at August 31, 1997),
thereby creating additional borrowing capacity which, together with the
remaining net proceeds, will be used to fund the Company's planned exploration
and development activities and possible future acquisitions, as well as other
general corporate purposes.
The Company's credit agreement with commercial lenders provides for a $125
million facility with a current borrowing base of $125 million that matures in
December 1999 (the "Credit Facility"). The amount of the borrowing base at any
time is determined by reference to the collateral value of the Company's proved
reserves. 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%. On
August 31, 1997, the interest rate on the outstanding borrowings under the
Credit Facility was 6.7% per annum. Amounts currently outstanding under the
Credit Facility were incurred primarily to fund the Company's acquisition of
Presidio Oil Company in December 1996. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Capital Resources and
Liquidity."
12
<PAGE> 14
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company as of June 30, 1997, and as adjusted to reflect the issuance and sale of
4,000,000 shares of Common Stock by the Company and the application of the
estimated net proceeds therefrom as described in "Use of Proceeds." This table
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements and
notes thereto appearing elsewhere in this Prospectus and in the documents
incorporated herein by reference.
<TABLE>
<CAPTION>
JUNE 30, 1997
-------------------------------
ACTUAL AS ADJUSTED(1)
-------------- --------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents................................... $ 10,658 $
======== ========
Long-term debt (including current maturities)............... $ 90,000 $ --
Stockholders' equity:
Convertible Preferred Stock, $.10 par value per share;
2,500,000 shares authorized; 1,000,000 shares issued
and outstanding with a liquidation preference of
$25,000,000............................................ 100 100
Common Stock, $.10 par value per share; 40,000,000 shares
authorized; 24,135,714 shares issued and outstanding;
28,135,714 shares issued and outstanding, as
adjusted(2)............................................ 2,414 2,814
Additional paid-in capital................................ 309,389
Accumulated deficit....................................... (57,718) (57,718)
-------- --------
Total stockholders' equity........................ $254,185 $
-------- --------
Total capitalization.............................. $344,185 $
======== ========
</TABLE>
- ---------------
(1) Assumes the Underwriters' over-allotment option is not exercised.
(2) Does not include (i) 1,666,000 shares issuable upon conversion of the
Company's outstanding Series A Preferred Stock at a conversion of 1.666
shares of Common Stock for each share of such preferred stock or (ii)
1,983,830 shares issuable upon exercise of outstanding stock options under
the Company's stock option plans as of such date.
13
<PAGE> 15
PRICE RANGE OF COMMON STOCK
The Common Stock is traded on The Nasdaq National Market under the symbol
"TMBR." The following table sets forth, on a per share basis for the periods
indicated, the range of high and low closing sales prices of the Common Stock as
reported by The Nasdaq National Market during the periods shown.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
1995
First Quarter............................................. $15.500 $10.875
Second Quarter............................................ 15.750 13.875
Third Quarter............................................. 16.625 13.125
Fourth Quarter............................................ 15.375 11.000
1996
First Quarter............................................. $15.375 $12.125
Second Quarter............................................ 17.875 12.875
Third Quarter............................................. 19.250 14.250
Fourth Quarter............................................ 22.375 16.875
1997
First Quarter............................................. $23.625 $16.875
Second Quarter............................................ 20.750 17.250
Third Quarter (through September 11, 1997)................ 25.250 19.625
</TABLE>
On September 11, 1997, the last sale price for the Common Stock as reported
by The Nasdaq National Market was $25.0625 per share. On September 8, 1997, the
outstanding shares of the Common Stock were held by approximately 2,376 holders
of record.
DIVIDEND POLICY
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 Credit Facility, the
Company is prohibited from paying cash dividends to the holders of Common Stock
without the written consent of the banks. In addition, the Company's outstanding
Series A Preferred Stock prohibits payment of cash dividends to holders of
Common Stock unless full cumulative dividends on the Series A Preferred Stock
has been paid. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources" and "Description
of Capital Stock -- Preferred Stock."
14
<PAGE> 16
SELECTED CONSOLIDATED FINANCIAL DATA
The consolidated financial data of the Company as of and for each of the
three years in the period ended December 31, 1996, has been derived from the
Company's audited consolidated financial statements. The consolidated financial
data as of and for the six months ended June 30, 1996 and 1997, has been derived
from the unaudited consolidated financial statements of the Company that in the
opinion of management reflect all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of its financial
condition and results of operations as of such dates and for such periods. The
results for the six months ended June 30, 1997, are not necessarily indicative
of the results that may be expected for the full year. The selected consolidated
financial data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operation" and the financial
statements and notes thereto appearing elsewhere in this Prospectus and in the
documents incorporated herein by reference.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
----------------------------- -----------------
1994 1995 1996 1996 1997
------- ------- ------- ------- -------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Total revenues............................. $29,071 $41,053 $66,720 $27,276 $63,238
Cost of gas sold........................... 10,022 13,146 20,496 7,486 11,884
Production costs(1)........................ 5,999 6,877 9,834 4,261 11,885
Depreciation, depletion and amortization... 7,288 9,994 15,140 7,697 17,351
Exploration costs.......................... 1,184 3,644 3,471 926 2,648
General and administrative expenses........ 3,546 4,184 5,786 2,757 5,061
Interest expense........................... 20 1,369 389 17 3,667
Income (loss) before income taxes.......... 102 (7,111)(2) 11,273 4,065 10,382
Income tax expense (benefit)............... 262 (12,896) 3,338 1,386 3,240
Net income (loss).......................... (160) 5,785 7,935 2,679 7,142
Preferred stock dividends.................. -- -- (1,672) (797) (875)
Net income (loss) attributable to common
stock.................................... (160) 5,785 6,263 1,882 6,267
Net income (loss) per common share......... $(0.01) $0.34 $0.28 $0.09 $0.25
Weighted average number of common
shares outstanding(3).................... 15,464 16,852 22,223 21,117 25,110
OTHER FINANCIAL DATA:
EBITDAX(4)................................. $ 8,594 $16,264 $30,273 $12,705 $34,048
Cash flows from operating activities before
changes in working capital(4)............ 9,376 10,898 27,661 11,789 29,412
Capital and exploration expenditures(5).... 17,558 28,814 33,929 9,658 23,013
</TABLE>
15
<PAGE> 17
<TABLE>
<CAPTION>
AT JUNE 30, 1997
AT DECEMBER 31, ----------------------
------------------------------ AS
1994 1995 1996 ACTUAL ADJUSTED(6)
-------- -------- -------- -------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.............. $ 19,147 $ 4,982 $ 20,504 $ 10,658
Working capital........................ 16,565 5,373 20,252 12,230
Total assets........................... 115,092 164,174 406,374 375,038
Long-term debt......................... -- -- 119,000 90,000
Stockholders' equity(7)................ 102,869 156,659 246,136 254,185
</TABLE>
- ---------------
(1) Includes lease operating expenses and production taxes.
(2) Includes a writedown of properties of $8.4 million taken in 1995.
(3) Includes common stock equivalents as applicable.
(4) EBITDAX reflects income before income taxes plus interest expense,
depreciation, depletion and amortization expense and exploration costs.
EBITDAX and cash flows from operating activities before changes in working
capital are not measures determined pursuant to GAAP and are not intended to
be used in lieu of GAAP presentations of net income or cash flows from
operating activities. EBITDAX for 1995 excludes an $8.4 million writedown of
properties, which writedown was a non-cash charge.
(5) Does not include amounts expended in connection with the Company's
acquisition of (i) KN Production Company, a subsidiary of KNE, in January
1996 or (ii) Presidio Oil Company in December 1996. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
(6) As adjusted to reflect the offering of 4,000,000 shares of Common Stock
hereby and the application of the estimated net proceeds therefrom to repay
outstanding indebtedness under the Company's credit facility. See "Use of
Proceeds."
(7) Includes the Company's Series A Preferred Stock. See "Description of Capital
Stock -- Preferred Stock."
16
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion of the Company's financial condition, results of
operations, capital resources and liquidity should be read in conjunction with
the financial statements and notes thereto appearing elsewhere in this
Prospectus and in the documents incorporated herein by reference.
The Company's total assets have grown from $115 million at December 31,
1994 to $375 million at June 30, 1997. From December 31, 1994 to December 31,
1996, the Company's proved gas and oil reserves increased from 207 Bcfe to 433
Bcfe. The growth of the Company is the result of its successful exploration and
development drilling program, which added approximately 54 Bcfe of proved
reserves during the two years ended December 31, 1996, and two significant
acquisitions, the acquisition of KN Production Company, a wholly owned
subsidiary of KNE, and the acquisition of Presidio Oil Company which added
approximately 212 Bcfe of proved reserves.
The Company completed the acquisition of Presidio Oil Company and its
subsidiaries (collectively, "Presidio") on December 23, 1996, following the
issuance by the U.S. Bankruptcy Court, District of Delaware, of an Order
confirming Presidio's reorganization under Chapter 11 of the U.S. Bankruptcy
Code (the "Presidio Acquisition"). The assets acquired consist primarily of
proved gas and oil reserves and undeveloped and developed acres located in
Wyoming, North Dakota, Oklahoma and Louisiana. The Wyoming properties are
concentrated in the Green River and Powder River Basins of Wyoming. The purchase
price was approximately $207 million consisting of the payment of $105 million
in cash, the issuance of approximately 2.71 million shares of the Company's
Common Stock, the assumption of certain liabilities and the $51 million paid by
the Company to purchase $56.1 million principal amount of Presidio's Senior Gas
Indexed Notes (the "GINS") in June 1995. The GINS were purchased as a strategic
part of the Company's efforts to acquire Presidio. In connection with the
bankruptcy proceeding, the GINS were canceled. The Presidio Acquisition has been
accounted for using the purchase method.
In January 1996, the Company and KNE closed transactions that resulted in
the Company's acquisition of all of the issued and outstanding stock of KN
Production Company ("KNPC"), a wholly owned subsidiary of KNE (the "KNPC
Acquisition"). The properties acquired by the Company include undeveloped and
developed acres in Colorado, Wyoming, Kansas and Nebraska. In connection with
the acquisition, Wildhorse, a joint venture owned 45% by the Company and 55% by
KNE, was created to provide gas gathering, processing, marketing and storage
services in the Rocky Mountains region. In connection with the formation of
Wildhorse, the Company dedicated significant amounts of its Rocky Mountain gas
production to Wildhorse for gathering, processing and marketing, and KNE
contributed gas marketing contracts and storage assets in western Colorado.
Wildhorse is operated by KNE under the direction of an operating team with equal
representation from the Company and KNE. The price paid to KNE in connection
with the KNPC Acquisition was $36.25 million, $25 million of which was paid by
the issuance of 1.0 million shares of the Company's Series A Preferred Stock,
and the remaining $11.25 million was paid by the issuance of 918,367 shares of
the Company's Common Stock. The KNPC Acquisition has been accounted for using
the purchase method.
As part of the expansion of its facilities in November 1996, Wildhorse
purchased the gathering and processing assets of Williams Field Services located
in western Colorado and eastern Utah. As a result, the assets of Wildhorse
currently include approximately 1,065 miles of natural gas gathering lines, two
processing plants, a carbon dioxide plant and a dew point control plant. These
facilities are currently processing and treating more than 70 Mmcf of natural
gas per day from more than 700 wells. In August 1997, KNE announced that it had
entered into a binding agreement to acquire Interenergy Corp. ("Interenergy") in
exchange for shares of its common stock. Interenergy's assets include
approximately 650 miles of natural gas gathering lines and two natural gas
liquids processing facilities, one in Wyoming and one in North Dakota.
Interenergy's gathering capacity is approximately 53 Mmcf per day and its
natural gas liquids processing capacity is
17
<PAGE> 19
approximately 35 Mmcf per day. Pursuant to the terms of the Wildhorse joint
venture, each party is obligated to offer to Wildhorse any natural gas gathering
and processing facilities acquired by it in the Rocky Mountains area. As a
result, if the Interenergy transaction is consummated, the Company believes that
Wildhorse will have an opportunity to acquire certain of the Interenergy assets
and will do so if the pricing terms are determined to be acceptable by the
Company. If Wildhorse acquires these properties, the Company will be required to
fund a portion of the acquisition cost based on its ownership share in
Wildhorse. There can be no assurance, however, that the transaction will be
consummated or that Wildhorse will acquire any of Interenergy's assets.
The Company continues to pursue opportunities which will add value by
increasing its reserve base and presence in its core natural gas areas and
further developing the Company's ability to control and market the production of
natural gas from these areas. Wildhorse is expected to continue to pursue the
construction or acquisition of gathering, processing and storage assets in the
Rocky Mountains region.
RESULTS OF OPERATIONS
The Company's results of operations have been materially affected by the
acquisitions described above, making comparisons of individual line items
between periods less meaningful.
The following table sets forth selected financial and operating data for
the periods presented:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------ -----------------
1994 1995 1996 1996 1997
------ ------ ------ ------- -------
<S> <C> <C> <C> <C> <C>
Revenues (in millions):
Natural gas sales....................... $ 11.4 $ 13.9 $ 29.6 $ 11.9 $ 35.7
Oil sales............................... 4.3 6.5 11.2 4.9 12.1
Marketing, gathering and processing..... 11.9 15.6 25.1 10.3 14.5
Other................................... 1.4 5.0 0.8 0.2 0.9
------ ------ ------ ------ ------
Total revenues.................. $ 29.0 $ 41.0 $ 66.7 $ 27.3 $ 63.2
====== ====== ====== ====== ======
Net income (loss) attributable to common
stock (in millions)..................... $ (0.2) $ 5.8 $ 6.3 $ 1.9 $ 6.3
Natural gas production (Bcf).............. 7.1 10.6 16.8 8.2 15.6
Oil production (MmBbls)................... 0.3 0.4 0.5 0.3 0.6
Average natural gas sales price ($/Mcf)... 1.62 1.31 1.77 1.45 2.30
Average crude oil sales price ($/Bbl)..... 15.73 16.80 20.45 18.80 18.98
Average production costs ($/Mcfe)......... 0.69 0.53 0.49 0.44 0.61
</TABLE>
Revenues. During the six months ended June 30, 1997, revenues from natural
gas and oil production increased $31.1 million to $47.8 million compared to the
same period in 1996. The increase in natural gas and oil revenues was the result
of (i) an 89% increase in natural gas sales volumes which increased revenues by
approximately $16.9 million, (ii) an increase in average natural gas prices
received by the Company from $1.45 per Mcf to $2.30 per Mcf which increased
revenues by approximately $7.0 million, and (iii) a 148% increase in oil sales
volumes which increased revenues by approximately $7.2 million, and (iv) an
increase in the average crude oil sales price from $18.80 per Bbl to $18.98 per
Bbl.
Marketing, gathering and processing revenues increased $4.2 million for the
six months ended June 30, 1997 as a result of increased activity in Wildhorse's
natural gas marketing operations and the addition of gathering revenues from the
November 1996 purchase of gathering facilities from Williams Field Services.
18
<PAGE> 20
Other revenues reflect the fact that there were no significant property
sales in the six months ended June 30, 1997 or in 1996 or 1994, but in 1995, the
Company sold all of its properties in Arkansas for a gain of approximately $4.1
million.
During 1996, revenues from gas and oil production increased 100% to $40.8
million from $20.4 million in 1995. The increase in gas and oil revenues was the
result of (i) an increase in average gas prices received by the Company from
$1.31 per Mcf to $1.77 per Mcf which increased revenues by approximately $4.9
million, (ii) a 58% increase in gas sales volumes which increased revenues by
approximately $10.9 million, (iii) an increase in average oil prices received
from $16.80 per barrel to $20.45 per barrel which increased revenues by
approximately $1.4 million, and (iv) a 41% increase in oil sales volumes which
increased revenues by approximately $3.2 million. The increase in gas and oil
production levels was primarily due to the KNPC Acquisition and to a lesser
extent, successful drilling results, primarily in the Val Verde Basin of west
Texas.
During 1995, revenues from gas and oil production increased by $4.6 million
to a total of $20.4 million as compared to $15.8 million in 1994. A decrease in
average gas prices received by the Company, from $1.62 per Mcf to $1.31 per Mcf,
decreased revenues by approximately $2.2 million. This decrease was more than
offset by (i) a 49% increase in gas sales volumes which increased revenues by
approximately $4.6 million, (ii) an increase in average oil prices from $15.73
per barrel to $16.80 per barrel which increased revenues by approximately $0.3
million, and (iii) a 40% increase in oil sales volumes which increased revenues
by approximately $1.9 million. Natural gas and oil sales volumes increased
dramatically as the Company increased its deliverability through successful
development drilling in 1995.
Marketing, gathering and processing revenues increased 61% in 1996 as
compared to 1995 and 31% in 1995 as compared to 1994. The 1996 increase was due
to higher gas prices and higher volumes of gas marketed as a result of the
Company's increased production and marketing of additional third party gas. A
significant factor contributing to the increase in 1996 was the formation of
Wildhorse in January 1996 and the related expansion of gathering, processing,
marketing and storage capacity. The 1995 increase was due to higher volumes of
gas marketed.
Costs and Expenses. Total costs and expenses for the six months ended June
30, 1997, increased to $52.9 million from $23.2 million in the same period in
1996. Natural gas and oil production expense increased to $8.2 million or $0.42
per Mcfe for the six months ended June 30, 1997 from $3.1 million or $0.32 per
Mcfe for the comparable period in 1996. The increase was due to the higher
average costs of operations for the properties acquired in the Presidio
Acquisition. The Company has sold certain of the higher cost properties acquired
in the Presidio Acquisition and has implemented changes to increase the
operating efficiencies on the remaining acquired properties to reduce unit
production expenses going forward. Taxes on gas and oil production increased
$2.5 million to $3.7 million or 8% of gas and oil sales for the six months ended
June 30, 1997, compared to $1.2 million or 7% of gas and oil sales for the
comparable period in 1996 principally due to increased gas production.
Exploration costs increased $1.7 million in the first half of 1997 compared to
the comparable period in 1996 primarily as a result of an exploratory dry hole
and related cost incurred in the second quarter of 1997. Compared to the first
six months of 1996, general and administrative expenses increased $2.3 million,
depreciation, depletion and amortization increased $9.7 million, and interest
expense increased $3.7 million for the six months ended June 30, 1997, in each
case primarily as a result of the Presidio Acquisition.
Expenses related to gas and oil production, production taxes, and
depreciation, depletion and amortization increased in each of 1996 and 1995 due
to increased production and revenue levels resulting from successful drilling
operations as well as the KNPC Acquisition in January 1996. On an Mcfe basis,
the Company's costs decreased during the past two years as a result of operating
efficiencies obtained by the Company. Costs of gas and oil production declined
to $.33 per Mcfe in 1996, as compared to $.37 per Mcfe and $.47 per Mcfe in 1995
and 1994, respectively. Taxes on gas and oil production, which are generally
calculated as a percentage of gas and oil sales, have also
19
<PAGE> 21
decreased during the last two years. Taxes on gas and oil production have
declined to 8% of gas and oil sales in 1996 as compared to 10% and 12% of gas
and oil sales during 1995 and 1994, respectively. Such decline is due to the
increase of natural gas and oil produced in the Val Verde Basin where the
Company experiences lower production tax rates as compared to its other areas of
operation.
The Company's depletion, depreciation and amortization rate remained
relatively unchanged on an Mcfe basis from 1995 to 1996 totaling $.77 and $.76
per Mcfe, respectively. The Company's depletion, depreciation and amortization
rate dropped from $.83 per Mcfe in 1994 to $.77 per Mcfe in 1995 due to the
Company's $8.4 million writedown of gas and oil properties in the first quarter
of 1995.
The cost of gas sold in connection with the Company's marketing, gathering
and processing operations has increased in each of the last two years,
consistent with the increases in the associated revenues. The gross profit
percentage increased slightly to 18% of revenues in 1996 as compared to 16% in
both 1995 and 1994.
Costs associated with exploration activities and impairments of leasehold
costs remained relatively unchanged in 1996 as compared to 1995.
General and administrative expenses increased in each of the last two years
as a result of the Company's significantly higher level of operations, due in
part to the KNPC Acquisition in January 1996. The Company has benefitted from
the economies of scale in its growth, resulting in a decrease in general and
administrative expenses on an Mcfe of production basis to $.29 in 1996 as
compared to $.32 and $.41 per Mcfe of production in 1995 and 1994, respectively.
Interest expense increased in 1995 as compared to 1994 as a result of the
debt incurred in connection with the purchase of the Presidio GINs in June 1995.
Interest expense then decreased in 1996 as such debt was repaid in November 1995
with the proceeds from the sale of 4.6 million shares of the Company's Common
Stock.
Total costs and expenses for 1995 were $48.2 million as compared to $29.0
million for 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.
The 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.
A valuation allowance of approximately $7.8 million and $7.6 million at
June 30, 1997 and December 31, 1996, respectively, has been provided against the
Company's net deferred tax assets based on management's estimate of the
recoverability of future tax benefits. The valuation allowance relates primarily
to the ability to use net operating loss and investment tax credit
carryforwards. The Company evaluated all appropriate factors to determine the
proper valuation allowance for these carryforwards, including any limitations
concerning their use, and the levels of
20
<PAGE> 22
taxable income necessary for utilization. In this regard, full valuation
allowances were provided for investment tax credit carryforwards. Based on its
recent operating results and its expected levels of future earnings, the Company
believes it will, more likely than not, generate sufficient taxable income to
realize the benefit attributable to the net operating loss carryforwards for
which valuation allowances were not provided. The deferred tax assets and
related valuation allowance will be adjusted as future events so warrant.
The Company incurred a current tax liability in the amount of $290,000,
$77,000 and $24,000 in 1996, 1995 and 1994, respectively, as a result of the
application of the alternate minimum tax rules as provided under the Internal
Revenue Code. The Company had not paid, prior to the year ended December 31,
1990, Federal income taxes for the past seven years due to its net operating
loss carryforward. At December 31, 1996, such carryforward for tax purposes was
approximately $53.4 million.
CAPITAL RESOURCES AND LIQUIDITY
The Company's capital expenditures increased to $30.5 million ($281 million
including the KNPC and Presidio Acquisitions) for 1996 as compared to capital
expenditures of $25.2 million and $16.4 million for 1995 and 1994, respectively.
The Company's capital expenditures for the six months ended June 30, 1997 were
approximately $20.4 million as compared to $8.7 million in the same period in
1996. Through August 31, 1997, the Company estimates that it has made capital
expenditures of approximately $25.0 million and anticipates approximately $30.0
million of capital expenditures for the remainder of 1997. Of the Company's $55
million total 1997 capital expenditure budget, $48 million is allocated for
drilling activities and the remainder is for acquisitions of leasehold acreage,
gas gathering lines and other facilities. The Company expects its capital
expenditures for 1998 to be approximately $70 million of which approximately $60
million is allocated for drilling activities.
The property acquisitions over the last several years, together with the
KNPC and Presidio Acquisitions, have given the Company significant opportunities
to explore for and develop new reserves. As a result, the Company significantly
increased its drilling activity in 1997 and plans to drill or participate in the
drilling of approximately 100 wells in 1997. In the first eight months of 1997,
the Company drilled, or was in the process of drilling or completing, 43 wells.
The timing of most of the Company's capital expenditures is discretionary
and there are no material long-term commitments associated with the Company's
capital expenditure plans. Consequently, the Company has significant flexibility
to adjust the level of its capital expenditures as circumstances warrant. The
level of capital expenditures by the Company will vary in future periods
depending on energy market conditions and other related economic factors.
The Company has historically funded capital expenditures and working
capital requirements with internally generated cash and borrowings. During the
six months ended June 30, 1997, net cash provided by operating activities was
$29.3 million as compared to $11.3 million for the same period of 1996. Net cash
provided by operating activities increased to $24.9 million in 1996 as compared
to $8.8 million and $7.6 million in 1995 and 1994, respectively.
The Company's Credit Facility provides for a $125 million revolving line of
credit with a current borrowing base of $125 million. The amount of the
borrowing base is determined by reference to the collateral value of the
Company's proved reserves. At August 31, 1997, the aggregate outstanding balance
under the Credit Facility was $90 million, bearing interest at 6.7% per annum,
and the Company was in compliance with the covenants contained in the Credit
Facility. The Company intends to repay the outstanding balance under its Credit
Facility with a portion of the net proceeds from the offering of Common Stock
described in this Prospectus. Borrowings under the Credit Facility are unsecured
and bear interest, at the election of the Company, at (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%.
21
<PAGE> 23
In connection with the KNPC Acquisition, the Company issued 1.0 million
shares of its Series A Preferred Stock. KNE, as the holder of the Series A
Preferred Stock, is entitled to receive dividends at an annual rate of $1.75 per
share, payable in cash quarterly in March, June, September and December. Shares
of the Series A Preferred Stock are convertible into shares of Common Stock at
the option of the holder at any time at the initial conversion rate of 1.666
shares of Common Stock for each share of Series A Preferred Stock, subject to
adjustment under certain circumstances. In addition, under certain circumstances
after March 15, 1999 the Company may exchange the Series A Preferred Stock for
shares of Common Stock and after March 15, 2001 may redeem all or any part of
the Series A Preferred Stock at a redemption price of $25.00 per share, plus
accrued and unpaid dividends. See "Description of Capital Stock -- Preferred
Stock" and Note 6 to Notes to Consolidated Financial Statements of the Company
included elsewhere herein.
After the completion of the offering of Common Stock and application of a
portion of the net proceeds to repay the outstanding balance under the Credit
Facility, the Company will have $125 million of availability under the Credit
Facility. This availability, combined with available cash (including the portion
of the net proceeds from this offering of Common Stock not used to repay amounts
outstanding under the Credit Facility), and cash generated from operations are
expected to be sufficient to fund preferred stock dividend requirements, the
Company's operations, planned exploration and development program and other
capital expenditures for the foreseeable future.
RECENT ACCOUNTING PRONOUNCEMENTS
In October 1996 the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position No. 96-1 ("SOP 96-1") which provides
authoritative guidance intended to improve and narrow the manner in which
existing accounting literature is applied to the recognition, measurement,
display, and disclosure of environmental remediation liabilities arising
pursuant to existing federal, state and local laws and regulations. SOP 96-1
addresses the nature of items that are to be included in the measurement of a
company's liability related to any environmental remediation efforts it is
currently undertaking or required to complete in the future. In this regard, SOP
96-1 requires that all incremental direct third party costs, as well as any
internal compensation costs (including benefits) for employees expected to
devote a significant amount of the time directly to remediation efforts, should
be included in the determination of the estimated liability. The term
"remediation effort" is defined in SOP 96-1 to include such things as remedial
risk assessment, feasibility studies and operations and maintenance associated
with corrective actions. The Company adopted SOP 96-1 in the first quarter of
1997. The adoption of SOP 96-1 had no impact on the Company's financial
position, results of operations or liquidity for the first six months of 1997,
and the Company does not expect SOP 96-1 to have a material impact on the
Company's financial position, results of operations or liquidity in the future.
In March 1997, the Financial Accounting Standards Board ("FASB") issued
FASB Statement 128, Earnings per Share, which is effective for financial
statements for both interim and annual periods ending after December 15, 1997.
This Statement requires all entities who have issued common stock or potential
common stock (e.g., options, convertible securities, etc.) to calculate basic
EPS which replaces primary EPS, and diluted EPS which replaces fully diluted
EPS. Basic EPS for the six month period ended June 30, 1997 was $.26. Diluted
EPS for the six month period ended June 30, 1997 was $.25.
22
<PAGE> 24
BUSINESS AND PROPERTIES
GENERAL
Tom Brown is an independent natural gas and crude oil exploration and
production company with core areas of activity in the Rocky Mountains and Texas.
As of December 31, 1996, the Company's net proved reserves were 433 Bcfe with a
reserve life of 11.2 years based on net production for the six months ended June
30, 1997. Approximately 83% of the Company had net proved reserves of natural
gas and approximately 72% were classified as proved developed as of December 31,
1996.
Through exploration, development and acquisitions, Tom Brown has been able
to significantly increase reserves, production volumes and cash flow. Over the
five-year period ended December 31, 1996, the Company's reserves, production and
cash flow from operating activities (before changes in working capital) grew at
compound annual growth rates of 32%, 26%, and 48%, respectively. For the six
months ended June 30, 1997, the Company's average daily net production increased
98% to 107 Mmcfe from 54 Mmcfe during the same period in 1996.
Tom Brown focuses its operations in areas where it has developed
significant geologic expertise and established critical mass through the
strategic accumulation of large, contiguous acreage positions. The Company's
principal exploration, development and production activities are conducted in
the Rocky Mountains and Texas, including the Wind River, Green River and Big
Horn Basins of Wyoming; the Piceance Basin of Colorado; and the Val Verde and
Permian Basins and the Cotton Valley Pinnacle Reef Trend of Texas. At December
31, 1996, 85% of the Company's proved reserves were in the Rocky Mountains and
Texas. The Company seeks to serve as operator of properties in its core areas.
In its key Rocky Mountains area, the Company owned working interests in 1,035
producing wells and operated 648, or 63%, of these wells as of June 30, 1997.
As of June 30, 1997, Tom Brown held leases on 2,962,255 gross acres
(including lease options) which provide the Company with substantial exploration
and development opportunities. In order to further exploit this inventory of
drilling prospects, the Company has increased its drilling budget from $22
million in 1996 to an estimated $48 million in 1997, approximately 30% of which
will be spent on exploratory drilling. The Company expects its drilling
expenditures to increase to $60 million in 1998, with approximately 25% expected
to be dedicated to exploratory drilling.
Tom Brown also engages in the gathering, processing, marketing and
transportation of natural gas through Wildhorse, a joint venture with KNE which
is owned 45% by the Company and 55% by KNE. Wildhorse's gathering and processing
assets overlap with many of the Company's core properties located in the Rocky
Mountains. Through Wildhorse, the Company has contracted for firm transportation
for substantially all of its current natural gas production from the Rocky
Mountains.
BUSINESS STRATEGY
For over ten years, Tom Brown has concentrated on exploring, developing and
adding to its long-lived reserve base, building a team of professionals capable
of maximizing its assets and opportunities, and maintaining a strong balance
sheet. This has resulted in the accumulation of a substantial inventory of
exploration and development opportunities and has positioned the Company to
pursue the following strategic objectives:
- - Focus on Domestic Onshore with Concentrations in the Rocky Mountains and
Texas. With approximately 62% of its net proved reserves located in the Rocky
Mountains area and approximately 23% located in Texas, the Company is focusing
its operations in select oil and gas basins characterized by multiple pay
sands and significant amounts of potential reserves in place. This strategy
has allowed Tom Brown to develop specialized geologic expertise and achieve
econo-
23
<PAGE> 25
mies of scale, enabling the Company to find, develop and produce oil and gas
reserves at competitive costs.
- - Capitalize on Extensive Land Position. The Company has increased its lease
acreage position significantly in recent years through acquisitions and
leasing activity, resulting in the Company holding, or having options on,
546,492 gross (209,307 net) developed and 2,415,763 gross (1,395,311 net)
undeveloped acres of land as of June 30, 1997. Approximately 78% of this gross
acreage position is located in the Rocky Mountains, making the Company one of
the largest holders of lease acreage in this area. Much of the Company's
recently acquired undeveloped acreage is contiguous to its existing operations
and is located in basins where the Company has significant geologic expertise.
These holdings provide Tom Brown with substantial opportunities for its future
exploration and development activities.
- - Growth through Exploration and Development Drilling. While Tom Brown has
pursued acquisitions on a selective basis, the Company's growth strategy is
founded primarily on exploration and development drilling. Over the three
years ended December 31, 1996, Tom Brown replaced 285% of its production
through drilling activities at an average finding cost of $0.53 per Mcfe. The
Company maintains a large portfolio of higher risk, higher potential
exploration prospects complemented by lower risk development projects. The
Company has allocated approximately 85% of both its $55 million 1997 capital
expenditure budget and its $70 million expected 1998 capital expenditures to
drilling activities to exploit these opportunities.
- - Transfer of Advanced Technology. In order to effectively exploit the potential
of its assets, Tom Brown seeks to apply technology that has proven effective
in other regions to its significant undeveloped land position and producing
properties, particularly in the Rocky Mountains. Such technology includes
magnetic resonance imaging logging tools, advanced tight gas sand stimulation
techniques, modern 3-D seismic acquisition and interpretation methods and
other techniques.
- - Pursue Opportunistic Acquisitions. Tom Brown will continue to selectively
pursue acquisitions of oil and gas properties, leasehold acreage and gas
gathering and processing assets which complement operations in its core areas
of activity. During 1996, the Company completed two significant acquisitions
which added 212 Bcfe of proved reserves and 1,172,000 gross leasehold acres.
These acquisitions served to augment Tom Brown's substantial presence in the
Rocky Mountains area.
- - Expand Participation in the Growing Midstream Segment of the Rocky
Mountains. Through its Wildhorse joint venture, the Company has strengthened
its ability to control and market its gas production in the Rocky Mountains.
Wildhorse performs gas gathering, processing, marketing and transportation
services for the Company and for a number of third parties. In addition,
Wildhorse is expected to continue to pursue the construction or acquisition of
gathering, processing and storage assets in the Rocky Mountains. Wildhorse
provides a vehicle through which Tom Brown is able to participate in the
growing midstream segment of the oil and gas industry in the Rocky Mountains
area. In 1996, the Company's interest in Wildhorse generated approximately
$1.8 million in net income and $3.1 million in cash flow from operating
activities.
- - Financial Flexibility. The Company emphasizes maintaining a strong balance
sheet in order to provide operating and financial flexibility. The Company
will use proceeds from this offering to repay all outstanding indebtedness
under its Credit Facility. Tom Brown believes that its strengthened balance
sheet and increased borrowing capacity under its credit facility as a result
of this offering will allow the Company to take advantage of its significant
exploration and development prospects and selectively pursue acquisition
opportunities.
24
<PAGE> 26
AREAS OF ACTIVITY
The Company's oil and gas activities are concentrated in the Rocky
Mountains and in Texas. In addition, the Company conducts oil and gas activities
in certain other domestic areas. The following table sets forth certain
information concerning these areas of activity:
<TABLE>
<CAPTION>
AVERAGE DAILY NET
PRODUCTION DURING
NET PROVED THE SIX MONTHS
RESERVES AT ENDED ACREAGE AT JUNE 30, 1997 1997 DRILLING
DECEMBER 31, JUNE 30, 1997 ------------------------ BUDGET
LOCATION 1996 (BCFE) (MMCFE/D) GROSS NET (IN MILLIONS)
-------- ------------ ----------------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Rocky Mountains:
Wind River Basin........ 132.1 16.6 1,066,508(1) 637,947(1) $19.2
Green River Basin....... 81.0 19.8 490,346 279,930 4.1
Piceance Basin.......... 24.3 6.8 282,105 152,195 8.8
Paradox Basin........... 1.6 0.6 128,814 126,079 1.4
Big Horn Basin.......... -- -- 51,260 51,052 --
Powder River Basin...... 16.9 7.3 71,244 21,938 0.8
Other................... 12.7 3.0 235,876 85,359 --
Texas:
Val Verde Basin......... 53.0 34.9 37,323 18,332 9.2
Permian Basin........... 34.4 3.0 88,087 26,442 --
Cotton Valley Pinnacle
Reef Trend........... -- -- 92,600 39,070 1.5
Other................... 13.2 1.8 22,801 6,986 --
Other areas............... 63.8 13.3 395,291 159,288 2.5
----- ------- --------- --------- -----
Total........... 433.0 107.1 2,962,255 1,604,618 $47.5
===== ======= ========= ========= =====
</TABLE>
- ---------------
(1) Includes 942,175 gross (536,343 net) acres under option.
The Company's most significant areas of activity within the Rocky Mountains
and Texas are the Wind River, Green River, Piceance, Val Verde and Permian
Basins and the Cotton Valley Pinnacle Reef Trend.
Wind River Basin. The Wind River Basin, located in Wyoming, is the major
focus of the Company's current and anticipated exploration and development
activities and accounted for approximately 31% of the Company's proved reserves
as of December 31, 1996. The Company's primary properties in this basin are in
the Muddy Ridge, Pavillion and Frenchie Draw Fields, each of which the Company
operates. Production in these fields is primarily from the Wind River, Fort
Union and Mesa Verde formations at depths ranging from 3,500 to 13,000 feet.
Other prospective zones in these fields include the Lance and Meeteetsee and
deeper Cody, Frontier and Madison formations at depths ranging from 16,000 feet
to 21,000 feet.
As of December 31, 1996, the Company had net proved reserves in the Wind
River Basin of 129 Bcf of natural gas and 505 MBbls of oil. As of August 31,
1997, the Company operated 80 wells and had leases on approximately 28,000 gross
(14,250 net) developed acres and had leases or options to lease approximately
1,039,000 gross (624,000 net) undeveloped acres in this basin. The Company's
average working interest in the producing fields in this basin is approximately
50%. Of the 942,175 gross option acres, the Company has a 50% working interest
in 300,000 acres and a 60% working interest in 642,175 acres. The Company's net
cost of this option acreage was approximately $3.00 per acre. For future
drilling, the Company can exercise its option to lease in increments of 640
acres by paying its share of $50.00 per acre.
25
<PAGE> 27
The Company plans to spend approximately $41.5 million for capital
expenditures in this basin during 1997 and 1998 to drill 16 exploratory and 37
development wells. Currently, three exploratory wells are being drilled.
Green River Basin. The Company acquired its interest in the Green River
Basin in the Presidio Acquisition. The Company's net proved reserves in this
basin were 76.3 Bcf of gas and 785 MBbls of oil, or approximately 19% of the
Company total, at December 31, 1996. The Company controls approximately 490,000
gross (280,000 net) acres with a 30% average working interest. Geologic
structures in the Moxa Arch and Red Desert areas of the basin, where the Company
operates, are similar to those in the Company's Wind River Basin properties. As
a result, the Company may be able to transfer proven technology and recovery
techniques between the Wind River Basin and the Green River Basin. The Company
estimates that it will spend approximately $11.3 million on capital expenditures
in this basin in 1997 and 1998 to drill three exploratory wells and 45
development wells.
Piceance Basin. The Company's position in the Piceance Basin was
established through the KNPC Acquisition in early 1996. The Company's net proved
reserves in this basin were 23.7 Bcf of gas and 95 MBbls of oil, or
approximately 6% of the Company total, at December 31, 1996. In this basin, the
Company controls approximately 282,000 gross (152,000 net) acres with a 31%
average working interest. The Company's operations in this basin include the
Rulison, White River Dome, and Parachute fields. The main producing horizons are
the Mesa Verde and the Dakota at depths of 2,500 to 8,000 feet and 6,000 to
9,000 feet respectively. In 1997 and 1998, the Company plans to spend
approximately $31 million to drill 76 development wells in the basin.
In addition, through Wildhorse, the Company and its joint venture partner
control approximately 955 miles of gathering lines as well as three processing
plants. These assets serve third party and Company owned production in the
Piceance and Uinta basins and strengthen the Company's ability to control and
market production in this region.
Val Verde Basin. Approximately 12% of the Company's proved reserves
totalling 42.9 Bcf of gas and 1.7 MmBbls of oil as of December 31, 1996 were
located in the Val Verde Basin of west Texas. The Company holds a 50% working
interest in 28 producing wells and approximately 37,300 gross (18,300 net) acres
in this basin. Production is from the Wolfcamp, Thrusted Penn Sand and Thrusted
Strawn formations at depths ranging from 5,000 to 12,000 feet. The Company
expects to spend $9.2 million in 1997 to drill 10 development wells.
Permian Basin. Approximately 8% of the Company's proved reserves totalling
12 Bcf of gas and 3.7 MmBbls of oil as of December 31, 1996 were located in the
Permian Basin of west Texas, principally within the Spraberry Field. At August
31, 1997, the Company operated 101 wells and had approximately 26,400 net acres
in this basin.
Cotton Valley Pinnacle Reef Trend. The Cotton Valley Pinnacle Reef Trend is
in the East Texas Salt Basin. Recent exploration has focused on reef anomalies
identified primarily through 3-D seismic data, and current production comes from
a three county area in the southwestern part of the trend. The Company entered
this area in January 1996 and now controls approximately 92,000 gross (39,000
net) acres in three prospect areas (Lake Tyler, Mt. Selman, and Lost Prairie) in
the eastern part of the field. After analyzing 2-D seismic data, the Company
commenced a 77 square mile 3-D survey over the Lost Prairie area. This data is
currently being analyzed, and the Company plans to begin drilling its first
exploratory well in the Lost Prairie area in the fourth quarter of 1997. The
Company plans to spend approximately $2.2 million for capital expenditures in
this trend in 1998.
In December of 1996, the Company announced a joint venture with American
Exploration which covers the Lost Prairie and Lake Tyler prospects. American
Exploration has purchased a 40% working interest in these lands. The Company
retains the remaining 60% working interest and serves as operator of the
properties.
26
<PAGE> 28
Other Areas of Activity. In addition to the areas discussed above, the
Company conducts exploration and development activities in other parts of the
Rocky Mountains and Texas as well as in other areas of the continental United
States, including Kansas, Louisiana, Mississippi, Nebraska, New Mexico, Oklahoma
and West Virginia. At December 31, 1996, the Company's proved reserves in these
areas consisted of 72.1 Bcf of gas and 2.9 MmBbls of oil.
GAS GATHERING, PROCESSING AND MARKETING
The Company's gathering, processing and marketing of natural gas produced
by the Company and third parties is conducted through Wildhorse, a joint venture
owned 45% by the Company and 55% by KNE. Wildhorse was formed in January 1996 in
conjunction with the acquisition by the Company of KNE's oil and gas subsidiary
and is managed by KNE under the direction of an operating team with equal
representation from KNE and the Company. In connection with this transaction,
the Company dedicated significant amounts of its Rocky Mountain gas production
to Wildhorse and KNE contributed gas marketing contracts and storage assets in
western Colorado. Wildhorse currently owns gathering and processing assets in
Wyoming, western Colorado and eastern Utah. The assets include approximately
1,065 miles of natural gas gathering lines, two processing plants, a carbon
dioxide treatment plant and a dew point control plant. These facilities
currently gather, process and treat more than 100 Mmcf of natural gas per day
from more than 800 wells.
In August 1997, KNE announced that it had entered into a binding agreement
to acquire Interenergy in exchange for shares of its common stock. Interenergy's
assets include approximately 650 miles of natural gas gathering lines and two
natural gas liquids processing facilities, one in Wyoming and one in North
Dakota. Interenergy's gathering capacity is approximately 53 Mmcf per day and
its natural gas liquids processing capacity is 35 Mmcf per day. Pursuant to the
terms of the Wildhorse joint venture, each party is obligated to offer to
Wildhorse any natural gas gathering and processing facilities acquired by it in
the Rocky Mountains area. As a result, if the Interenergy transaction is
consummated the Company believes that Wildhorse will have an opportunity to
acquire certain of the Interenergy assets and will do so if the pricing terms
are determined to be acceptable by the Company. If Wildhorse acquires these
properties, the Company will be required to fund a portion of the acquisition
cost based on its share of ownership of Wildhorse. There can be no assurance,
however, that the transaction will be consummated or that Wildhorse will acquire
any of Interenergy's assets.
27
<PAGE> 29
PRODUCTION VOLUMES, UNIT PRICES AND COSTS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------- ----------------
1994 1995 1996(1) 1996(1) 1997
------ ------ ------- ------- ------
<S> <C> <C> <C> <C> <C>
Total production:
Gas (Bcf).................................... 7.1 10.6 16.8 8.2 15.6
Oil (MmBbls)................................. 0.3 0.4 0.5 0.3 0.6
Total (Bcfe)......................... 8.7 12.9 20.0 9.8 19.4
Average daily net production:
Gas (Mmcf)................................... 19.4 29.0 45.8 45.4 85.9
Oil (MmBbls)................................. 0.8 1.1 1.5 1.4 3.5
Total (Mmcfe)........................ 24.0 35.4 54.7 54.0 107.1
Average sales prices:
Gas ($/Mcf).................................. 1.62 1.31 1.77 1.45 2.30
Oil ($/Bbl).................................. 15.73 16.80 20.45 18.80 18.98
Average Production Cost ($/Mcfe)(2)............ 0.69 0.53 0.49 0.44 0.61
</TABLE>
- ---------------
(1) Includes production volumes, sales prices and costs for properties acquired
in the Presidio and KNPC Acquisitions from the effective date of such
acquisitions.
(2) Includes production costs and taxes on production.
PRODUCTIVE WELLS
The following table sets forth the gross and net productive gas and oil
wells in which the Company owned an interest at June 30, 1997.
<TABLE>
<CAPTION>
PRODUCTIVE WELLS
--------------------------------
GROSS NET
-------------- ------------
GAS OIL GAS OIL
----- --- --- ---
<S> <C> <C> <C> <C>
Colorado................................................. 431 59 134 36
Louisiana................................................ 36 38 13 14
New Mexico............................................... 35 28 7 12
Oklahoma................................................. 128 35 31 10
Texas.................................................... 76 251 36 94
West Virginia............................................ 51 -- 17 --
Wyoming.................................................. 422 153 128 40
Other.................................................... 71 77 22 15
----- --- --- ---
Total.......................................... 1,250 641 388 221
===== === === ===
</TABLE>
28
<PAGE> 30
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 DECEMBER 31, SIX MONTHS
----------------------------------------- ENDED
1994 1995 1996 JUNE 30, 1997
------------ ------------ ----------- -------------
TYPE OF WELL GROSS NET GROSS NET GROSS NET GROSS NET
------------ ----- ---- ----- ---- ----- --- ------ ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Exploratory
Gas................................ 1 .3 -- -- -- -- 1 .4
Oil................................ -- -- -- -- -- -- -- --
Dry................................ 1 .5 3 1.1 5 2.8 -- --
-- ---- -- ---- -- --- -- ---
Total...................... 2 .8 3 1.1 5 2.8 1 .4
== ==== == ==== == === == ===
Development
Gas................................ 19 8.2 34 9.7 14 3.9 7 3.4
Oil................................ 2 1.0 3 1.5 -- -- -- --
Dry................................ 2 1.0 10 3.9 5 1.7 -- --
-- ---- -- ---- -- --- -- ---
Total...................... 23 10.2 47 15.1 19 5.6 7 3.4
== ==== == ==== == === == ===
</TABLE>
In the first eight months of 1997, the Company drilled, or was in the
process of drilling or completing, 43 wells. In 1997, the Company plans to drill
or participate in the drilling of a total of 100 wells.
GAS AND OIL RESERVES
Estimates of the Company's gas and oil reserves at December 31, 1994, 1995
and 1996 including future net revenues and the present value of future net cash
flows, were made by Williamson Petroleum Consultants, Inc. and by Ryder Scott
Company at December 31, 1996 (both are independent petroleum consultants), in
accordance with guidelines established by the Securities and Exchange Commission
(the "Commission"). 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 Commission 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.
29
<PAGE> 31
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Net proved reserves:
Gas (Bcf)................................................. 180.3 163.3 359.2
Oil (MmBbls).............................................. 4.5 4.1 12.3
------ ------ ------
Total (Bcfe)...................................... 207.4 187.7 433.0
Gas reserves as a percentage of proved reserves............. 87% 87% 83%
Proved developed reserves (Bcfe)............................ 131.3 126.4 311.2
Gas price as of December 31 ($/Mcf)......................... 1.53 1.44 3.42
Oil price as of December 31 ($/Bbl)......................... 16.26 18.34 24.03
Present value of future net revenues before income taxes
discounted at 10% ($ in millions)(1)...................... 124.9 114.6 608.7
</TABLE>
- ---------------
(1) The present value of estimated future net reserves is based on weighted
average prices of $3.42 per Mcf of gas and $24.03 per Bbl of oil realized by
the Company at December 31, 1996. Subsequent to December 31, 1996, natural
gas prices have declined. Accordingly, the present value of estimated future
reserves would be lower if it were calculated using prices in effect at the
end of the second quarter of 1997.
ACREAGE
The following table sets forth the gross and net acres of developed and
undeveloped gas and oil leases held by the Company at June 30, 1997.
<TABLE>
<CAPTION>
DEVELOPED UNDEVELOPED TOTAL
----------------- --------------------- ---------------------
LOCATION GROSS NET GROSS NET GROSS NET
-------- ------- ------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Rocky Mountains:
Wind River Basin(1)........ 27,964 14,250 1,038,544 623,697 1,066,508 637,947
Green River Basin.......... 110,046 39,884 380,300 240,046 490,346 279,930
Piceance Basin............. 105,730 52,571 176,375 99,624 282,105 152,195
Paradox Basin.............. 1,684 1,673 127,130 124,406 128,814 126,079
Big Horn Basin............. 160 40 51,100 51,012 51,260 51,052
Powder River Basin......... 21,739 4,721 49,505 17,217 71,244 21,938
Other...................... 56,402 46,934 179,474 38,425 235,876 85,359
Texas:
Val Verde Basin............ 7,200 3,600 30,123 14,732 37,323 18,332
Permian Basin.............. 82,635 25,231 5,452 1,211 88,087 26,442
Cotton Valley Pinnacle Reef
Trend................... -- -- 92,600 39,070 92,600 39,070
Other...................... 18,560 4,947 4,241 2,039 22,801 6,986
Other........................ 114,372 15,456 280,919 143,832 395,291 159,288
------- ------- --------- --------- --------- ---------
Total.............. 546,492 209,307 2,415,763 1,395,311 2,962,255 1,604,618
======= ======= ========= ========= ========= =========
</TABLE>
- ---------------
(1) Includes 942,175 gross (536,343 net) acres in Wyoming under option
agreements between the Company and certain Indian tribes that give the
Company the right to acquire leasehold interests upon the payment of
specified consideration.
30
<PAGE> 32
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information with respect to the
executive officers and Directors of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
<S> <C> <C>
Donald L. Evans...................... 51 Chairman of the Board of Directors and Chief
Executive Officer
William R. Granberry................. 55 President, Chief Operating Officer and Director
Peter R. Scherer..................... 40 Executive Vice President
Thomas E. Klauss..................... 54 Vice President -- Exploration South
Christopher E. Mullen................ 37 Vice President -- Exploration North
Clifford C. Drescher................. 45 Vice President -- Production
Richard B. Porter.................... 42 Vice President -- Land
R. Kim Harris........................ 41 Controller
B. Jack Reed......................... 48 Treasurer
Bruce R. DeBoer...................... 44 Vice President, General Counsel and Secretary
Thomas C. Brown...................... 70 Director
David M. Carmichael(1)............... 58 Director
Henry Groppe(1)...................... 71 Director
Edward W. LeBaron, Jr.(2)............ 67 Director
Clyde E. McKenzie(2)................. 50 Director
James B. Wallace(2).................. 68 Director
Robert H. Whilden, Jr.(1)............ 62 Director
</TABLE>
- ---------------
(1) Member of Compensation Committee
(2) Member of Audit Committee
Directors of the Company serve until the next annual meeting of
stockholders and until their successors in office are elected and qualified.
Each officer is appointed annually by the Company's Board of Directors to serve
at the Board's discretion and until his successor in office is elected and
qualified.
Messrs. Evans, Scherer, Klauss, Drescher, Harris and Reed have each been
employed by the Company in their present positions for more than five years. Mr.
Evans is also a director of TMBR/Sharp Drilling, Inc.
Mr. Granberry has been a director of the Company since 1995 and President
and Chief Operating Officer of the Company since January 1996. He was Chairman
of the Board of Directors and Chief Executive Officer of Mineral Development,
Inc. ("MDI") from August 1994 until December 1995, and President of MDI from
October 1994 to December 1995.
Mr. Mullen has been employed by the Company since September 1994. He served
as Geologist -- Rocky Mountain Division from September 1994 to September 1995
and as Vice President -- Exploration North from September 1995 to the present.
Mr. Mullen was a Petroleum Geologist with Unocal Corporation from 1987 to
September 1994.
Mr. Porter has been employed by the Company since April 1994. He served as
Landman -- Rocky Mountain Division from April 1994 to September 1995 and as Vice
President -- Land from September 1995 to the present. Mr. Porter was Resource
Manager with Paragon Ranch Corporation from 1984 to January 1994.
31
<PAGE> 33
Mr. DeBoer has been employed by the Company since May 1997 as Vice
President, General Counsel and Secretary and from 1988 through 1996 was employed
by Presidio Oil Company in a similar capacity.
Mr. Brown has served as Chairman of the Board of Directors of TMBR/Sharp
Drilling, Inc. for the last five years and is also a director of Weatherford
International Incorporated.
Mr. Carmichael is a director of KN Energy, Inc. and was formerly Chairman
of the Board of Directors, Chief Executive Officer and President of American Oil
and Gas Corporation.
Mr. Groppe has been an oil and gas consultant with Groppe, Long & Littell
since 1955.
Mr. LeBaron is a retired partner in the law firm of Pillsbury, Madison and
Sutro in Sacramento, California, which he has been associated with since April
1989, and has served as Chairman of the Board of Directors of Pacific Casino
Management, Inc. since June 1994.
Mr. McKenzie has been employed by KN Energy, Inc. since 1996 as Vice
President and Chief Financial Officer and prior to joining the Company was Vice
President and Treasurer of Apache Corporation from 1988 to 1996.
Mr. Wallace has been a partner in Brownlie, Wallace, Armstrong and Bander
Exploration, a partnership engaged in oil and gas exploration and production,
since 1992. Mr. Wallace is a director of Grease Monkey International.
Mr. Whilden has been a partner in the law firm of Vinson & Elkins L.L.P. in
Houston, Texas, since 1970.
There are no family relationships between any of the Directors or executive
officers of the Company.
32
<PAGE> 34
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 2,500,000 shares of
preferred stock, $.10 par value per share, and 40,000,000 shares of Common
Stock, $.10 par value per share. As of August 31, 1997, 24,162,554 shares of
Common Stock were outstanding and 1,000,000 shares of preferred stock were
outstanding. All of the shares of Common Stock of the Company offered hereby
will be, when issued and sold, legally issued, fully paid and non-assessable.
COMMON STOCK
Subject to the prior rights of shares of preferred stock outstanding from
time to time, the shares of Common Stock of the Company: (1) are entitled to
such dividends as may be declared by the Board of Directors out of funds legally
available therefor (subject to limitations set forth in the Credit Facility);
(2) are entitled to one vote per share and have no cumulative voting rights; (3)
have no preemptive or conversion rights; (4) are not subject to, or entitled to
the benefits of, any redemption or sinking fund provisions; and (5) are entitled
upon liquidation to receive the assets of the Company remaining after the
payment of corporate debts and the satisfaction of any liquidation preferences
of preferred stock.
The Company has never paid any cash dividends and does not intend to pay
any cash dividends on the Common Stock in the foreseeable future. Under the
terms of its Credit Facility, the Company is prohibited from paying cash
dividends on the Common Stock without the written consent of its lenders. See
"Dividend Policy."
The Company's Rights Plan provides that a preferred stock purchase right is
associated with each share of Common Stock. See "-- Stockholder Rights Plan."
The Common Stock is quoted on The Nasdaq National Market under the symbol
"TMBR." The Transfer Agent and Registrar for the Common Stock is Boston
EquiServe, Boston, Massachusetts.
PREFERRED STOCK
The Company presently has outstanding 1,000,000 shares of Series A
Preferred Stock with an aggregate liquidation preference of $25,000,000.
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
quarterly. If full cumulative dividends on the Series A Preferred Stock have not
been paid, the Company may not declare or pay any dividends or make any other
distributions on, or purchase, redeem or retire the Common Stock, or any other
stock of the Company ranking junior to the Series A Preferred Stock (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 the rules of the
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
33
<PAGE> 35
nonassessable shares of Common Stock of the Company at the initial conversion
rate of 1.666 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 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 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 for four quarterly dividend periods, the holders of the
outstanding Series A Preferred Stock will have the right, voting separately as a
class without regard to series, to designate two additional 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 the 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 revesting in
the event of a subsequent dividend payment arrearage.
For so long as KNE owns 80% or more of the voting power of the securities
of the Company issued pursuant to the KNPC Acquisition, KNE has the right to
elect a special class of two Directors to the Board of Directors of the Company,
and for so long as KNE owns securities of the Company issued pursuant to the
KNPC Acquisition possessing less than 80% of the voting power of the securities
of the Company issued pursuant to the KNPC Acquisition, but more than 30% of
such voting power, KNE has the right to elect a special class of one Director to
the Board of Directors of the Company.
The holders of the Series A Preferred Stock are entitled to vote on all
matters upon which holders of the 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 Common Stock as if a part of that
class.
The Board of Directors is empowered, without approval of the stockholders,
to cause additional shares of preferred stock to be issued in one or more series
with the number of shares of each series and the rights, preferences and
limitations of each series to be determined by it. Among the specific matters
that may be determined by the Board of Directors are the rate of dividends,
redemption and conversion prices, terms and amounts payable in the event of
liquidation and voting rights. Issuance of shares of preferred stock could
involve dilution of the equity of the holders of Common Stock and further
restrict the rights of such stockholders to receive dividends. Although the
Company has no present intention to issue any additional shares of preferred
stock, the
34
<PAGE> 36
issuance of such shares in the future could be used to discourage an unsolicited
acquisition proposal.
STOCKHOLDER 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 and
authorized the issuance of Rights for all shares of Common Stock that are
subsequently issued. Each Right entitles the registered holder to purchase, in
lieu of preferred shares, 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. Until the Distribution Date occurs, the
certificates representing shares of Common Stock also evidence the Rights.
Following the Distribution Date, the Rights will be evidenced by separate
certificates.
The Rights may tend to deter potential unsolicited tender offers or other
efforts to obtain control of the Company that are not approved by the Board of
Directors. See Note 6 to Notes to Consolidated Financial Statements of the
Company included elsewhere in this Prospectus.
DELAWARE ANTI-TAKEOVER LAW
Under Section 203 of the Delaware General Corporation Law (the "Delaware
anti-takeover law"), certain "business combinations" between a Delaware
corporation whose stock generally is publicly traded or held of record by more
than 2,000 stockholders and an "interested stockholder" are prohibited for a
three-year period following the date such stockholder became an interested
stockholder, unless (1) the corporation has elected in its certificate of
incorporation not to be governed by the Delaware anti-takeover law (the Company
has not made such an election), (2) the business combination was approved by the
board of directors of the corporation before the other party to the business
combination became an interested stockholder, (3) upon consummation of the
transaction that made it an interested stockholder, the interested stockholder
owned at least 85% of the voting stock of the corporation outstanding at the
commencement of the transaction (excluding voting stock owned by directors who
are also officers or held in employee benefit plans in which the employees do
not have a confidential right to tender or vote stock held by the plan) or (4)
the business combination was approved by the board of directors of the
corporations and ratified by 66 2/3% of the voting stock which the interested
stockholder did not own. The three-year prohibition also does not apply to
certain business combinations proposed by an interested stockholder following
the announcement or notification of certain extraordinary transactions involving
the corporation and a person who had not been an interested stockholder with the
approval of a majority of the corporation's directors. The term "business
combination" is defined generally to include mergers or consolidations between a
Delaware corporation and an "interested stockholder," transactions with an
"interested stockholder" involving the assets or stock of the corporation or its
majority-owned subsidiaries and transactions which increase an interested
stockholder's percentage ownership of stock. The term "interested stockholder"
is defined generally as those stockholders who become beneficial owners of 15%
or more of a Delaware corporation's voting stock.
35
<PAGE> 37
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Vinson & Elkins L.L.P., 1001 Fannin, Houston, Texas 77002. Robert H.
Whilden, Jr., a partner in the firm of Vinson & Elkins L.L.P., is a Director of
the Company. See "Management -- Compensation of Directors" in the Company's 1997
Proxy Statement, which has been incorporated herein by reference, for a
description of stock options held by Mr. Whilden. Certain legal matters will be
passed upon for the Underwriters by Andrews & Kurth L.L.P., 4200 Texas Commerce
Tower, Houston, Texas 77002. Andrews & Kurth L.L.P. has provided legal services
for the Company from time to time on matters unrelated to the offering of the
Common Stock.
EXPERTS
The consolidated financial statements of Tom Brown, Inc. included or
incorporated by reference in this Prospectus or elsewhere in this Registration
Statement, to the extent and for the periods indicated in their report, have
been audited by Arthur Andersen LLP, independent public accountants, and are
included herein in reliance upon the authority of said firm as experts in giving
said report.
The consolidated financial statements of Presidio Oil Company incorporated
herein by reference from the Current Report on Form 8-K of Tom Brown, Inc. filed
on January 7, 1997 have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report which is incorporated herein by reference.
Such financial statements have been so incorporated in reliance upon the report
of such firm given upon their authority as experts in accounting and auditing.
The estimated reserve evaluations and related calculations of Williamson
Petroleum Consultants, Inc. and Ryder Scott Company incorporated by reference
into this Prospectus have been included herein in reliance upon the authority of
said firms as experts in petroleum engineering.
AVAILABLE INFORMATION
The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Commission. Such reports, proxy statements and other information can be
inspected and copied at the public reference facilities maintained by the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington D.C. 20549,
and at the following regional offices of the Commission: Seven World Trade
Center, Suite 1300, New York, New York 10048 and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such
materials can be obtained by mail from the Public Reference Section of the
Commission, at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
at prescribed rates. The Commission maintains a World Wide Web site on the
Internet at http://www.sec.gov that contains reports, proxy statements and other
information regarding registrants that file electronically with the Commission.
In addition, reports, proxy statements and other information concerning the
Company can be inspected at the Nasdaq National Market, 1735 K Street, N.W.,
Washington, D.C. 20006, on which exchange the Common Stock is quoted.
This Prospectus constitutes a part of a Registration Statement on Form S-3
(together with all amendments and exhibits thereto, the "Registration
Statement") filed by the Company with the Commission under the Securities Act of
1933, as amended (the "Securities Act"). This Prospectus omits certain of the
information contained in the Registration Statement, and reference is hereby
made to the Registration Statement for further information with respect to the
Company and the securities offered hereby, Any statements contained herein
concerning the provisions of any document filed as an exhibit to the
Registration Statement or otherwise filed with the Commission are not
necessarily complete, and in each instance reference is made to the copy of such
document so filed. Each such statement is qualified in its entirety by such
reference.
36
<PAGE> 38
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, filed with the Commission by the Company pursuant
to the Exchange Act, are incorporated herein by reference and made a part of
this Prospectus:
(i) the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996;
(ii) the Company's Quarterly Reports on Form 10-Q for the quarters
ended March 31, 1997 and June 30, 1997;
(iii) the Company's Proxy Statement for the Annual Meeting of
Stockholders held May 21, 1997; and
(iv) the Company's Current Report on Form 8-K filed on January 7,
1997.
Each document filed by the Company pursuant to Sections 13(a), 13(c), 14
and 15(d) of the Exchange Act subsequent to the date of this Prospectus and
prior to the termination of this offering shall be deemed to be incorporated by
reference in this Prospectus and to be a part hereof from the date of filing of
such document. Any statement contained in a document incorporated or deemed to
be incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained in this
Prospectus or in any other subsequently filed document which also is or is
deemed to be incorporated by reference herein modifies or supersedes such
statement. Any statement so modified or superseded shall not be deemed, except
as so modified or suspended, to constitute a part of this Prospectus.
The Company will provide without charge to each person to whom a copy of
this Prospectus is delivered, on the request of any such person, a copy of any
or all of the foregoing documents incorporated herein by reference, other than
exhibits to such documents (unless such exhibits are specifically incorporated
by reference in such documents). Written or telephone requests for such copies
should be directed to Bruce R. DeBoer, Secretary, Tom Brown, Inc., 500 Empire
Plaza Building, Midland, Texas 79701; telephone: (915) 682-9715.
CERTAIN DEFINITIONS
As used in this Prospectus, the following terms have the following specific
meanings: "Mcf" means thousand cubic feet, "Mmcf" means million cubic feet,
"Bcf" means billion cubic feet, "Bbl" means barrel, "MBbl" means thousand
barrels, "MmBbl" means million barrels, "Mcfe" means thousand cubic feet
equivalent, "Mmcfe" means million cubic feet equivalent, "Bcfe" means billion
cubic feet equivalent, "MBbls/d" means thousand barrels of oil per day, "Mmcf/d"
means million cubic feet per day, and "Mmcfe/d" means million cubic feet
equivalent per day. 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. "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.
37
<PAGE> 39
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Interim Financial Statements (unaudited):
Consolidated Balance Sheets, June 30, 1997 (Unaudited) and
December 31, 1996...................................... F-2
Consolidated Statements of Operations, Three and Six
Months ended June 30, 1997 and 1996 (Unaudited)........ F-3
Consolidated Statements of Cash Flows, Six Months ended
June 30, 1997 and 1996 (Unaudited)..................... F-4
Notes to Consolidated Financial Statements, Three and Six
Months ended June 30, 1997 and 1996 (Unaudited)........ F-5
Annual Financial Statements:
Report of Independent Public Accountants.................. F-8
Consolidated Balance Sheets, December 31, 1996 and 1995... F-9
Consolidated Statements of Operations, Years ended
December 31, 1996, 1995 and 1994....................... F-10
Consolidated Statements of Changes in Stockholders'
Equity, Years ended December 31, 1996, 1995 and 1994... F-11
Consolidated Statements of Cash Flows, Years ended
December 31, 1996, 1995 and 1994....................... F-12
Notes to Consolidated Financial Statements................ F-13
</TABLE>
F-1
<PAGE> 40
TOM BROWN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
----------- --------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 10,658 $ 20,504
Accounts receivable....................................... 24,366 33,080
Inventories............................................... 1,487 1,374
Other..................................................... 682 889
-------- --------
Total current assets.............................. 37,193 55,847
-------- --------
Property and equipment, at cost:
Oil and gas properties, based on the successful efforts
accounting method...................................... 440,910 436,879
Other equipment........................................... 38,035 35,216
-------- --------
478,945 472,095
Less: Accumulated depreciation and depletion.............. 141,633 124,834
-------- --------
Net property and equipment........................ 337,312 347,261
-------- --------
Deferred income taxes, net.................................. 69 2,865
-------- --------
Other assets, net........................................... 464 401
-------- --------
$375,038 $406,374
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 18,328 $ 25,033
Accrued expenses.......................................... 6,635 10,562
-------- --------
Total current liabilities......................... 24,963 35,595
-------- --------
Commitments and contingencies
Bank debt................................................... 90,000 119,000
-------- --------
Other non-current liabilities............................... 5,890 5,643
-------- --------
Stockholders' equity:
Common stock, at $.10 par value Authorized 40,000,000
shares; Outstanding 24,135,714 and 23,898,431 shares,
respectively........................................... 2,414 2,390
Convertible preferred stock, at $.10 par value. Authorized
2,500,000 shares; 1,000,000 shares outstanding......... 100 100
Additional paid-in capital................................ 309,389 307,631
Accumulated deficit....................................... (57,718) (63,985)
-------- --------
Total stockholders' equity........................ 254,185 246,136
-------- --------
$375,038 $406,374
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE> 41
TOM BROWN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
1997 1996 1997 1996
------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues:
Gas and oil sales............................ $19,281 $ 8,324 $47,827 $16,757
Marketing, gathering and processing.......... 7,186 5,635 14,504 10,289
Interest income and other.................... 421 112 907 230
------- ------- ------- -------
Total revenues....................... 26,888 14,071 63,238 27,276
------- ------- ------- -------
Costs and expenses:
Gas and oil production....................... 3,969 1,648 8,196 3,087
Taxes on gas and oil production.............. 1,599 477 3,689 1,174
Cost of gas sold............................. 5,688 3,835 11,884 7,486
Exploration costs............................ 1,527 515 2,648 926
Impairments of leasehold costs............... 180 2 360 67
General and administrative................... 2,664 1,403 5,061 2,757
Depreciation, depletion and amortization..... 8,655 3,980 17,351 7,697
Interest expense............................. 1,705 10 3,667 17
------- ------- ------- -------
Total costs and expenses............. 25,987 11,870 52,856 23,211
------- ------- ------- -------
Income before income taxes..................... 901 2,201 10,382 4,065
Income tax expense............................. (212) (752) (3,240) (1,386)
------- ------- ------- -------
Net income..................................... 689 1,449 7,142 2,679
------- ------- ------- -------
Preferred stock dividend....................... (437) (437) (875) (797)
------- ------- ------- -------
Net income available to common shareholders.... $ 252 $ 1,012 $ 6,267 $ 1,882
======= ======= ======= =======
Weighted average number of common shares
outstanding.................................. 25,169 21,121 25,110 21,117
======= ======= ======= =======
Net income per common share.................... $ .01 $ .05 $ .25 $ .09
======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 42
TOM BROWN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
1997 1996
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 6,267 $ 1,882
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation, depletion and amortization............... 17,351 7,697
Gain on sales of assets................................ (10) (11)
Option plan compensation............................... -- 20
Exploration costs...................................... 2,648 926
Impairments of leasehold costs......................... 360 67
Deferred income taxes.................................. 2,796 1,208
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable........... 8,714 (4,535)
Increase in inventories.............................. (113) (194)
Decrease (increase) in other current assets.......... 207 (46)
(Decrease) increase in accounts payable.............. (9,113) 4,801
Decrease (increase) in other non-current accounts.... 184 (551)
-------- -------
Net cash provided by operating activities................... 29,291 11,264
-------- -------
Cash flows from investing activities:
Proceeds from sales of assets............................. 12,613 109
Capital and exploration expenditures...................... (23,013) (9,658)
Changes in accounts payable and accrued expenses for oil
and gas expenditures................................... (972) --
-------- -------
Net cash used in investing activities....................... (11,372) (9,549)
-------- -------
Cash flows from financing activities:
Proceeds from exercise of stock options................... 1,235 140
Repayments of long-term debt.............................. (29,000) --
-------- -------
Net cash provided by financing activities................... (27,765) 140
-------- -------
Net increase (decrease) in cash and cash equivalents........ (9,846) 1,855
-------- -------
Cash and cash equivalents at beginning of period............ 20,504 4,982
-------- -------
Cash and cash equivalents at end of period.................. $ 10,658 $ 6,837
======== =======
Cash paid during the period for:
Interest.................................................. $ 2,941 $ --
Taxes..................................................... 397 85
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 43
TOM BROWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
During interim periods, Tom Brown, Inc. follows the accounting policies set
forth in its Annual Report to Stockholders and its Report on Form 10-K filed
with the Securities and Exchange Commission. Users of financial information
produced for interim periods are encouraged to refer to the footnotes contained
in the Annual Report to Stockholders when reviewing interim financial results.
In the opinion of management, the accompanying interim financial statements
contain all material adjustments, consisting only of normal recurring
adjustments necessary for a fair presentation.
(2) ACQUISITION
Acquisition of Presidio Oil Company
On December 23, 1996, the Company completed the acquisition of Presidio Oil
Company and its subsidiaries (collectively, "Presidio"), following the issuance
by the U.S. Bankruptcy Court, District of Delaware, on December 10, 1996, of an
Order confirming Presidio's reorganization under Chapter 11 of the U.S.
Bankruptcy Code. The purchase price was approximately $206.6 million consisting
of approximately $105 million in cash, 2.71 million shares of the Company's
Common Stock valued at $17.125 per share and the assumption of certain
liabilities. Such amount does not include 2.64 million shares of the Company's
Common Stock which were not issued due to the Company's ownership of $56.15
million principal amount of Presidio's Senior Gas Indexed Notes. The Presidio
acquisition has been accounted for using the purchase method. The cash portion
of the Presidio acquisition was funded by borrowings under the Company's loan
agreement with its bank lender. The assets acquired consisted primarily of
proved oil and gas properties and undeveloped acreage located in Wyoming, North
Dakota, Oklahoma and Louisiana. The Wyoming properties are concentrated in the
Green River and Powder River Basins of Wyoming.
Pro Forma Information
The following table presents the unaudited revenues, net income and net
income per share of the Company for the six months ended June 30, 1997 and 1996
assuming that the Presidio acquisition occurred on January 1, 1996.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------------
1997 1996
------------ -----------
(HISTORICAL) (PRO FORMA)
(IN THOUSANDS, EXCEPT FOR
PER SHARE AMOUNTS)
<S> <C> <C>
Revenues.................................................... $63,238 $44,955
======= =======
Net income.................................................. 7,142 3,956
======= =======
Net income available to common shareholders................. 6,267 3,159
======= =======
Net income per common share................................. $ .25 $ .13
======= =======
</TABLE>
(3) BANK DEBT
In September 1995, the Company entered into a bank credit agreement. The
credit agreement provided for a $65 million revolving credit facility (the
"credit facility") maturing in September 1998.
F-5
<PAGE> 44
TOM BROWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
In connection with the Presidio acquisition, on December 23, 1996, the
Company and its lenders entered into a credit agreement providing for a $125
million revolving credit facility, maturing December 1999. Pursuant to this
agreement, the Company repaid the existing indebtedness under the prior facility
with borrowings under the new credit agreement. The terms and conditions of the
new credit facility are substantially the same as the credit facility. At June
30, 1997 the outstanding balance was $90 million at an interest rate of
approximately 6.7%.
Financial covenants of the credit facility require the Company to maintain
a minimum consolidated tangible net worth of not less than $226 million as of
June 30, 1997. The Company is also required to maintain a ratio of (i) earnings
before interest expense, state and federal taxes and depreciation, depletion and
amortization to (ii) consolidated fixed charges, as defined in the credit
agreement, of not less than 2.5:1. Additionally, the Company is required to
maintain a ratio of consolidated debt to consolidated total capitalization of
less than 0.45:1 and a current ratio of not less than 1.1:1. The Company was in
compliance with all financial covenants at June 30, 1997.
(4) INCOME TAXES
The Company has not paid Federal income taxes since March 31, 1982, 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.
Temporary differences and carryforwards which gave rise to significant
portions of deferred tax assets (liabilities) are as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
-------- ------------
(IN THOUSANDS)
<S> <C> <C>
Net operating loss carryforwards........................... $ 15,715 $ 18,689
Gas and oil acquisition, exploration and development costs
deducted for tax purposes in excess of book.............. (14,414) (14,520)
Investment tax credit carryforwards........................ 2,463 2,463
Option plan compensation................................... 1,559 1,559
Other...................................................... 2,591 2,309
-------- --------
Net deferred tax asset................................... 7,914 10,500
Valuation allowance........................................ (7,845) (7,635)
-------- --------
Recognized net deferred tax asset........................ $ 69 $ 2,865
======== ========
</TABLE>
A valuation allowance of approximately $7.8 million and $7.6 million at
June 30, 1997 and December 31, 1996, respectively, has been provided against the
Company's net deferred tax assets based on management's estimate of the
recoverability of future tax benefits. The valuation allowance relates primarily
to the ability to use net operating loss and investment tax credit
carryforwards. The Company evaluated all appropriate factors to determine the
proper valuation
F-6
<PAGE> 45
TOM BROWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
allowance for these carryforwards, including any limitations concerning their
use, and the levels of taxable income necessary for utilization. In this regard,
full valuation allowances were provided for investment tax credit carryforwards.
Based on its recent operating results and its expected levels of future
earnings, the Company believes it will, more likely than not, generate
sufficient taxable income to realize the benefit attributable to the net
operating loss carryforwards for which valuation allowances were not provided.
The deferred tax assets and related valuation allowance will be adjusted as
future events so warrant.
At June 30, 1997, the Company had investment tax credit carryforwards of
approximately $2.5 million and net operating loss carryforwards of approximately
$44.9 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 1997 and
2004. Additionally, the Company has approximately $4.5 million of statutory
depletion carryforwards and $0.9 million of AMT credit carryforwards that may be
carried forward until utilized.
F-7
<PAGE> 46
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors
of Tom Brown, Inc.:
We have audited the accompanying consolidated balance sheets of Tom Brown,
Inc. (a Delaware corporation) and subsidiaries as of December 31, 1996 and 1995,
and the related consolidated statements of operations, changes in stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Tom Brown,
Inc. and subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
February 28, 1997
F-8
<PAGE> 47
TOM BROWN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 20,504 $ 4,982
Accounts receivable....................................... 33,080 7,470
Inventories............................................... 1,374 246
Other..................................................... 889 190
-------- --------
Total current assets.............................. 55,847 12,888
-------- --------
PROPERTY AND EQUIPMENT, AT COST:
Gas and oil properties, successful efforts method of
accounting............................................. 436,879 186,624
Other..................................................... 35,216 12,056
-------- --------
Total............................................. 472,095 198,680
Less: Accumulated depreciation, depletion and
amortization........................................... 124,834 112,695
-------- --------
Net property and equipment........................ 347,261 85,985
-------- --------
OTHER ASSETS:
Investment in securities.................................. -- 51,093
Deferred income taxes, net................................ 2,865 13,170
Other assets.............................................. 401 1,038
-------- --------
Total other assets................................ 3,266 65,301
-------- --------
$406,374 $164,174
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 25,033 $ 5,979
Accrued expenses.......................................... 10,562 1,536
-------- --------
Total current liabilities......................... 35,595 7,515
-------- --------
BANK DEBT................................................... 119,000 --
-------- --------
OTHER NON-CURRENT LIABILITIES............................... 5,643 --
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Convertible preferred stock, $.10 par value. Authorized
2,500,000 shares; Outstanding 1,000,000 shares with a
liquidation preference of $25,000,000.................. 100 --
Common Stock, $.10 par value. Authorized 40,000,000
shares; Outstanding 23,898,431 shares and 20,180,902
shares, respectively................................... 2,390 2,018
Additional paid-in capital................................ 307,631 224,889
Accumulated deficit....................................... (63,985) (70,248)
-------- --------
Total stockholders' equity........................ 246,136 156,659
-------- --------
$406,374 $164,174
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE> 48
TOM BROWN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
REVENUES:
Gas and oil sales......................................... $40,789 $20,385 $15,792
Marketing, gathering and processing....................... 25,122 15,572 11,876
Gain on sales of gas and oil properties................... 267 4,402 13
Interest income and other................................. 542 694 1,390
------- ------- -------
Total revenues.................................... 66,720 41,053 29,071
------- ------- -------
COSTS AND EXPENSES:
Gas and oil production.................................... 6,576 4,834 4,130
Taxes on gas and oil production........................... 3,258 2,043 1,869
Cost of gas sold.......................................... 20,496 13,146 10,022
Exploration costs......................................... 3,471 3,644 1,184
Impairments of leasehold costs............................ 331 582 910
General and administrative................................ 5,786 4,184 3,546
Depreciation, depletion and amortization.................. 15,140 9,994 7,288
Writedown of properties................................... -- 8,368 --
Interest expense.......................................... 389 1,369 20
------- ------- -------
Total costs and expenses.......................... 55,447 48,164 28,969
------- ------- -------
Income (loss) before income taxes................. 11,273 (7,111) 102
INCOME TAX BENEFIT (PROVISION):
Recognition of deferred tax asset......................... -- 13,170 --
Income tax expense........................................ (3,338) (274) (262)
------- ------- -------
Net income (loss)........................................... 7,935 5,785 (160)
Preferred stock dividends................................... (1,672) -- --
------- ------- -------
Net income (loss) attributable to common stock.............. $ 6,263 $ 5,785 $ (160)
======= ======= =======
Weighted average number of common shares outstanding........ 22,223 16,852 15,464
======= ======= =======
Net income (loss) per common share.......................... $ .28 $ .34 $ (.01)
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-10
<PAGE> 49
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
--------- ------ ---------- ----------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE AS OF DECEMBER 31, 1993........ $ -- $1,544 $176,705 $(75,873) $102,376
Stock options exercised................ -- 7 304 -- 311
Property acquisition................... -- 1 134 -- 135
Option plan compensation............... -- -- 207 -- 207
Net loss............................... -- -- -- (160) (160)
---- ------ -------- -------- --------
BALANCE AS OF DECEMBER 31, 1994........ -- 1,552 177,350 (76,033) 102,869
Stock options exercised................ -- 6 255 -- 261
Common stock issuance.................. -- 460 47,472 -- 47,932
Stock issuance costs................... -- -- (285) -- (285)
Option plan compensation............... -- -- 97 -- 97
Net income............................. -- -- -- 5,785 5,785
---- ------ -------- -------- --------
BALANCE AS OF DECEMBER 31, 1995........ -- 2,018 224,889 (70,248) 156,659
Stock issuance for KNPC Acquisition.... 100 92 36,058 -- 36,250
Stock options exercised................ -- 9 510 -- 519
Common stock issuance for Presidio
Acquisition.......................... -- 271 46,157 -- 46,428
Stock issuance costs................... -- -- (5) -- (5)
Option plan compensation............... -- -- 22 -- 22
Net income............................. -- -- -- 6,263 6,263
---- ------ -------- -------- --------
BALANCE AS OF DECEMBER 31, 1996........ $100 $2,390 $307,631 $(63,985) $246,136
==== ====== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-11
<PAGE> 50
TOM BROWN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
-------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)....................................... $ 6,263 $ 5,785 $ (160)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation, depletion and amortization............. 15,140 9,994 7,288
Gain on sales of assets.............................. (267) (4,402) (53)
Writedown of properties.............................. -- 8,368 --
Use (Recognition) of deferred tax asset.............. 2,701 (13,170) --
Option plan compensation............................. 22 97 207
Exploration costs.................................... 3,471 3,644 1,184
Impairments of leasehold costs....................... 331 582 910
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable......... (15,408) 990 (1,682)
Decrease (increase) in inventories................. 75 886 (410)
Decrease (increase) in other current assets........ 220 (12) 4
Increase (decrease) in accounts payable and
accrued expenses................................ 9,919 (3,050) 306
Decrease (increase) in other assets................ 2,406 (922) 2
-------- -------- -------
Net cash provided by operating activities................. 24,873 8,790 7,596
-------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of assets........................... 593 9,044 295
Investment in securities................................ -- (51,093) --
KNPC and Presidio Acquisitions.......................... (95,529) -- --
Capital and exploration expenditures.................... (33,929) (28,814) (17,558)
-------- -------- -------
Net cash used in investing activities..................... (128,865) (70,863) (17,263)
-------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock.................. -- 47,932 --
Borrowings of long-term bank debt....................... 119,000 51,000 --
Repayments of long-term bank debt....................... -- (51,000) --
Proceeds from exercise of stock options................. 519 261 311
Stock issuance costs.................................... (5) (285) --
-------- -------- -------
Net cash provided by financing activities................. 119,514 47,908 311
-------- -------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...... 15,522 (14,165) (9,356)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR............ 4,982 19,147 28,503
-------- -------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR.................. $ 20,504 $ 4,982 $19,147
======== ======== =======
Cash paid during the year for:
Interest................................................ $ 136 $ 1,369 $ 20
Income taxes............................................ 190 77 141
</TABLE>
See accompanying notes to consolidated financial statements
F-12
<PAGE> 51
TOM BROWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(1) NATURE OF OPERATIONS
Tom Brown, Inc and its wholly-owned subsidiaries ("the Company") is an
independent energy company engaged in the domestic exploration for, and the
acquisition, development, marketing, production and sale of, natural gas and
crude oil. The Company's industry segments are (i) the exploration for, and the
acquisition, development and production of, natural gas and crude oil, and (ii)
the marketing, gathering and processing of natural gas, primarily through
Wildhorse Energy Partners, L.L.C. ("Wildhorse"). All of the Company's operations
are conducted in the United States. The Company's operations are presently
focused in the Wind River and Green River Basins of Wyoming, the Piceance Basin
of Colorado, the Val Verde Basin of west Texas and the Permian Basin of west
Texas and southeastern New Mexico. The Company also, to a lesser extent,
conducts exploration and development activities in other areas of the
continental United States.
Substantially all of the Company's production is sold under
market-sensitive contracts. The Company's revenue, profitability and future rate
of growth are substantially dependent upon the price of, and demand for, oil,
natural gas and natural gas liquids. Prices for natural gas and oil are subject
to wide fluctuation in response to relatively minor changes in their supply and
demand as well as market uncertainty and a variety of additional factors that
are beyond the control of the Company. These factors include the level of
consumer product demand, weather conditions, domestic and foreign governmental
regulations, the price and availability of alternative fuels, political
conditions in foreign countries, the foreign supply of natural gas and oil and
the price of foreign imports and overall economic conditions. The Company is
affected more by fluctuations in natural gas prices than oil prices because a
majority of its production (84 percent in 1996 on a volumetric equivalent basis)
was natural gas.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation
The accompanying consolidated financial statements include the accounts of
the Company. The Company's proportionate share of assets, liabilities, revenues
and expenses associated with certain interests in gas and oil partnerships and
the Company's 45% ownership in Wildhorse are consolidated within the
accompanying financial statements. All significant intercompany accounts and
transactions have been eliminated. Certain reclassifications have been made to
amounts reported on previous years to conform to the 1996 presentation.
Inventories
Inventories consist of pipe and other production equipment. Inventories are
stated at the lower of cost (principally first-in, first-out) or estimated net
realizable value.
Property and Equipment
The Company accounts for its natural gas and crude oil exploration and
development activities under the successful efforts method of accounting. Under
such method, costs of productive exploratory wells, development dry holes and
productive wells and undeveloped leases are capitalized. Gas and oil lease
acquisition costs are also capitalized. Exploration costs, including geological
and geophysical expenses and delay rentals for gas and oil leases, are charged
to expense as incurred. Exploratory drilling costs are initially capitalized,
but charged to expense if and when the well is determined not to have found
reserves in commercial quantities.
F-13
<PAGE> 52
TOM BROWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Maintenance and repairs are charged to expense; renewals and betterments
are capitalized to the appropriate property and equipment accounts. Upon
retirement or disposition of assets, the costs and related accumulated
depreciation are removed from the accounts with the resulting gains or losses,
if any, reflected in results of operations.
Unproved properties with significant acquisition costs are assessed
quarterly on a property-by-property basis and any impairment in value is charged
to expense. Unproved properties whose acquisition costs are not individually
significant are aggregated, and the portion of such costs estimated to be
nonproductive, based on historical experience, is amortized over the average
holding period. If the unproved properties are determined to be productive, the
related costs are transferred to proved gas and oil properties.
During 1995, the Company adopted Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-lived Assets . . ."
("SFAS 121"). SFAS 121 generally requires a separate assessment for potential
impairment of each of the Company's producing property cost centers, in contrast
to the Company's prior policy of evaluating the producing property accounts for
impairment in total. As a result, the Company recorded an $8.4 million non-cash
charge during 1995 which reduced the carrying value of certain of the Company's
non-core properties to their estimated fair values.
The provision for depreciation, depletion and amortization of oil and gas
properties is calculated on a field-by-field basis using the unit-of-production
method. Included in such calculations are estimated future dismantlement,
restoration and abandonment costs, net of estimated salvage values.
Other property and equipment is recorded at cost and depreciated using the
straight-line method based on estimated useful lives.
Natural Gas Revenues
The Company utilizes the accrual method of accounting for natural gas
revenues whereby revenues are recognized as the Company's entitlement share of
gas is produced based on its working interests in the properties. The Company
records a receivable (payable) to the extent it receives less (more) than its
proportionate share of gas revenues. At December 31, 1996, the Company had net
gas balancing liabilities of approximately $3,427,000 associated with
approximately 2.1 billion cubic feet ("Bcf") of gas.
Income Taxes
The Company provides for income taxes using the asset and liability method
under which deferred income taxes are recognized for the tax consequences of
"temporary differences" by applying enacted statutory tax rates applicable to
future years to differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities. The effect on deferred taxes
of a change in tax laws or tax rates is recognized in income in the period such
changes are enacted.
Stock-Based Compensation
The Company accounts for employee stock-based compensation using the
intrinsic value method prescribed by Accounting Principles Board (APB) Opinion
No. 25, "Accounting for Stock Issued to Employees". Accordingly, adoption of
SFAS No. 123, "Accounting for Stock-Based Compensation" had no effect on the
Company's results of operations but pro forma disclosure is
F-14
<PAGE> 53
TOM BROWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
made of the effect on Net Income had the accounting recommended by SFAS No. 123
been implemented (See Note 7) in 1996.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements. Such estimates and assumptions also affect the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates. Significant estimates with regard to these financial
statements include the estimate of proved oil and gas reserve volumes and the
related present value of estimated future net revenues to be received therefrom
(see Note 13), as well as the valuation allowance for deferred taxes (see Note
5).
Net Income (Loss) Per Common Share
Net income per common share for the years 1996 and 1995 was calculated
based on the weighted average number of common shares and common equivalent
shares outstanding. For fiscal years prior to 1995, common stock equivalents
were antidilutive for purposes of calculating the net loss per common share.
Consolidated Statements of Cash Flows
The Company considers investments purchased with an original maturity of
three months or less to be cash equivalents. During the year ended December 31,
1996 the Company (i) issued 1.0 million shares of Preferred Stock and .9 million
shares of Common Stock in connection with the KNPC Acquisition (see Note 3), and
(ii) issued 2.71 million shares of the Company's Common Stock and converted its
$51 million investment in Presidio GINs, purchased in June 1995, into equity
ownership, both in connection with the Presidio Acquisition (see Note 3).
Insofar as such transactions are non-cash, they are not reflected in the
Consolidated Statements of Cash Flows.
(3) ACQUISITIONS AND DIVESTITURES
Acquisition of KN Production Company
Pursuant to a letter of intent entered into in December 1995, the Company
and KN Energy, Inc. ("KNE") closed certain transactions on January 31, 1996
which resulted in (i) the Company's acquisition of all of the issued and
outstanding stock of KN Production Company ("KNPC"), a wholly owned subsidiary
of KNE, and (ii) Wildhorse being formed by the Company and KNE for the purpose
of providing gas gathering, processing, marketing, field and storage services,
(collectively the "KNPC Acquisition"). The price paid to KNE in connection with
the KNPC Acquisition was determined to be $36.25 million, of which $25 million
was paid in the form of 1,000,000 shares of the Company's $1.75 Convertible
Preferred Stock, Series A (the "Preferred Stock") and the remaining $11,250,000
was paid in the form of 918,367 shares of the Company's Common Stock, based on a
price per share of $12.25. The KNPC Acquisition has been recorded under the
purchase method of accounting.
As a result of the KNPC Acquisition, the Company acquired interests in 624
gross producing wells in Colorado and Wyoming, of which the Company became
operator of 308. The properties acquired by the Company include approximately
243,000 net undeveloped acres in Colorado, Wyoming, Kansas and Nebraska and
approximately 64,000 net developed acres located in Colorado and Wyoming.
F-15
<PAGE> 54
TOM BROWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
An integral part of the KNPC Acquisition was the formation of Wildhorse,
which is owned fifty-five percent (55%) by KNE and forty-five percent (45%) by
the Company. The business and affairs of Wildhorse are managed by KNE under the
direction of an operating team consisting of two representatives appointed by
the Company and two representatives appointed by KNE. The Company dedicated a
significant amount of its Rocky Mountain gas reserves to Wildhorse and KNE
contributed gas marketing contracts. The Company also acquired a natural gas
storage facility in western Colorado which was simultaneously contributed to
Wildhorse.
The principal purpose of Wildhorse is to provide for the furnishing of
services related to natural gas, natural gas liquids and other natural gas
products, including gathering, processing and storage services, marketing
services and field services.
Acquisition of Presidio Oil Company
On December 23, 1996, the Company completed the acquisition of Presidio Oil
Company and its subsidiaries (collectively, "Presidio"), following the issuance
by the U.S. Bankruptcy Court, District of Delaware, on December 10, 1996, of an
Order confirming Presidio's reorganization under Chapter 11 of the U.S.
Bankruptcy Code. The purchase price was approximately $206.6 million consisting
of approximately $105 million in cash and 2.71 million shares of the Company's
Common Stock valued at $17.125 per share, including the assumption of certain
liabilities. Such amount does not include 2.64 million shares of the Company's
Common Stock which were not issued due to the Company's ownership of $56.15
million principal amount of Presidio's Senior Gas Indexed Notes (the "GINs").
The GINs were purchased in June 1995 for approximately $51 million as a
strategic part of the Company's efforts to acquire Presidio Oil Company. The
Presidio Acquisition has been accounted for using the purchase method. The cash
portion of the Presidio Acquisition was funded by borrowings under the Company's
loan agreement with its bank lender. The assets acquired consist primarily of
proved oil and gas properties and undeveloped acreage located in Wyoming, North
Dakota, Oklahoma and Louisiana. The Wyoming properties are concentrated in the
Green River and Powder River Basins of Wyoming.
Pro Forma Information
The following table presents the unaudited pro forma revenues, net income
and net income per share of the Company for the years ended December 31, 1996
and 1995 assuming that the KNPC Acquisition and the Presidio Acquisition both
occurred on January 1, 1995.
<TABLE>
<CAPTION>
YEARS ENDED
-------------------------
1996 1995
----------- ----------
(IN THOUSANDS, EXCEPT FOR
PER SHARE AMOUNTS)
<S> <C> <C>
Revenues.................................................... $106,009 $84,821
======== =======
Net income.................................................. 8,184 5,026
======== =======
Net income available to common shareholders................. 6,512 3,276
======== =======
Net income per common share................................. .26 .13
======== =======
</TABLE>
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.
F-16
<PAGE> 55
TOM BROWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Proceeds from the sale of these properties were used to repay a portion of the
Company's outstanding indebtedness under its Credit Facility.
(4) BANK DEBT
In September 1995, the Company entered into a bank credit agreement. The
credit agreement provided for a $65 million revolving credit facility (the
"Credit Facility") maturing in September 1998. Borrowings under the Credit
Facility are unsecured and bear interest, at the election of the Company, at a
rate equal to (i) the greater of the agent bank's prime rate or the federal
funds effective rate plus 1/2 of 1% or (ii) the agent bank's Eurodollar rate
plus a margin ranging from .75% to 1.00%. Interest on amounts outstanding under
the Credit Facility is due on the last day of each month in the case of loans
bearing interest at the prime rate or federal funds rate and, in the case of
loans bearing interest at the Eurodollar rate, interest payments are due on the
last day of each applicable interest period of one, two, three or six months, as
selected by the Company at the time of borrowing.
On November 13, 1995, the Company repaid the $51 million outstanding under
the Credit Facility primarily with funds generated from the Company's public
stock offering (see Note 6). At December 31, 1995, there was no outstanding
balance under the Credit Facility.
In connection with the Presidio Acquisition, on December 23, 1996, the
Company and its lenders entered into a Credit Agreement providing for a $125
million revolving credit facility, maturing December 1999. Pursuant to this
agreement, the Company repaid the existing indebtedness under the prior facility
with borrowings under the new Credit Agreement. The terms and conditions of the
new Credit Facility are substantially the same as the Credit Facility. At
December 31, 1996, the outstanding balance was $119 million at an interest rate
of 8.25%.
Financial covenants of the Credit Facility require the Company to maintain
a minimum consolidated tangible net worth of not less than $223 million as of
December 31, 1996. The Company is also required to maintain a ratio of (i)
earnings before interest expense, state and federal taxes and depreciation,
depletion and amortization to (ii) consolidated fixed charges, as defined in the
credit agreement, of not less than 2.5:1. Additionally, the Company is required
to maintain a ratio of consolidated debt to consolidated total capitalization of
less than 0.45:1 and a current ratio of not less than 1.1:1. The Company was in
compliance with all financial covenants at December 31, 1996.
(5) INCOME TAXES
The Company has not paid Federal income taxes due to its net operating loss
carryforward, but is required to pay alternative minimum tax ("AMT"). This tax
can be partially offset by an AMT net operating loss carryforward.
F-17
<PAGE> 56
TOM BROWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A U.S. Federal statutory rate applied to the Company's income (loss) before
income taxes of 35% in 1996 and 34% in 1995 and 1994 was used in the following
reconciliation of the Company's effective income tax expense:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1996 1995 1994
------ ------- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Federal income tax provision (benefit) at statutory
rate................................................. $3,946 $(2,418) $ 35
Utilization of net operating loss carryforward......... -- -- (105)
Adjustment to valuation allowance...................... (596) 2,357 --
Other.................................................. (583) 33 70
------ ------- -----
2,767 (28) --
AMT provision.......................................... 290 105 24
State income and franchise taxes....................... 281 197 238
------ ------- -----
Income tax expense..................................... $3,338 $ 274 $ 262
====== ======= =====
</TABLE>
The significant components which give rise to the Company's deferred tax
assets (liabilities) are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Net operating loss carryforwards............................ $ 18,689 $ 23,070
Gas and oil acquisition, exploration and development costs
deducted for tax purposes in excess of book............... (14,520) (8,074)
Investment tax credit carryforwards......................... 2,463 4,813
Option plan compensation.................................... 1,559 1,507
Other....................................................... 2,309 2,435
-------- --------
Net deferred tax asset.................................... 10,500 23,751
Valuation allowance......................................... (7,635) (10,581)
-------- --------
Recognized net deferred tax asset......................... $ 2,865 $ 13,170
======== ========
</TABLE>
A valuation allowance of approximately $7.6 million and $10.6 million at
December 31, 1996 and 1995, respectively, has been provided against the
Company's net deferred tax assets based on management's estimate of the
recoverability of future tax benefits. The valuation allowance relates primarily
to the ability to use net operating loss and investment tax credit
carryforwards. The Company evaluated all appropriate factors to determine the
proper valuation allowance for these carryforwards, including any limitations
concerning their use, the year the carryforwards expire and the levels of
taxable income necessary for utilization. In this regard, full valuation
allowances were provided for investment tax credit carryforwards. Based on its
recent operating results and its expected levels of future earnings, the Company
believes it will, more likely than not, generate sufficient taxable income to
realize the benefit attributable to the net operating loss carryforwards for
which valuation allowances were not provided.
At December 31, 1996, the Company had investment tax credit carryforwards
of approximately $2.5 million and net operating loss carryforwards of
approximately $53.4 million. The Company currently has no liability for deferred
Federal income taxes because of these net operating loss and investment tax
credit carryforwards. Realization of the benefits of these carryforwards is
dependent upon the Company's ability to generate taxable earnings in future
periods. In addition, the availability
F-18
<PAGE> 57
TOM BROWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of these carryforwards is subject to various limitations. The remainder of the
carryforwards will expire between 1997 and 2004. Additionally, the Company has
approximately $3.9 million of statutory depletion carryforwards and $0.4 million
of AMT credit carryforwards that may be carried forward until utilized.
(6) STOCKHOLDERS' EQUITY
Common Stock
The Company's Common Stock is $.10 par value per share. There are
40,000,000 authorized shares of Common Stock of which 23,898,431 shares and
20,180,902 shares were outstanding as of December 31, 1996 and 1995,
respectively.
In November 1995, the Company sold 4,600,000 of Common Stock in a public
offering. The net proceeds of such offering totaled approximately $47.7 million
and were used to repay indebtedness outstanding under the Credit Facility.
The Company issued 918,367 shares of Common Stock in January 1996 in
connection with the KNPC Acquisition and 2.71 million shares of Common Stock in
December 1996 in connection with the Presidio Acquisition (See Note 3).
Rights Plan
On March 1, 1991, the Board of Directors adopted a Rights Plan designed to
help assure that all stockholders receive fair and equal treatment in the event
of a hostile attempt to take over the Company, and to help guard against abusive
takeover tactics. The Board of Directors declared a dividend of one preferred
share purchase right (a "Right") for each outstanding share of Common Stock. The
dividend was distributed on March 15, 1991 to the shareholders of record on that
date. Each Right entitles the registered holder to purchase, for the $20 per
share exercise price, shares of Common Stock or other securities of the Company
(or, under certain circumstances, of the acquiring person) worth twice the per
share exercise price of the Right.
The Rights will be exercisable only if a person or group acquires 20% or
more of the Company's Common Stock or announces a tender offer which would
result in ownership by a person or group of 20% or more of the Common Stock. The
date on which the above occurs is to be known as the ("Distribution Date"). The
Rights will expire on March 15, 2001, unless extended or redeemed earlier by the
Company.
At the time the Rights dividend was declared, the Board of Directors
further authorized the issuance of one Right with respect to each share of the
Company's Common Stock that shall become outstanding between March 15, 1991 and
the earlier of the Distribution Date or the expiration or redemption of the
Rights. Until the Distribution Date occurs, the certificates representing shares
of the Company's Common Stock also evidence the Rights. Following the
Distribution Date, the Rights will be evidenced by separate certificates.
The provisions described above may tend to deter any potential unsolicited
tender offers or other efforts to obtain control of the Company that are not
approved by the Board of Directors and thereby deprive the stockholders of
opportunities to sell shares of the Company's Common Stock at prices higher than
the prevailing market price. On the other hand, these provisions will tend to
assure continuity of management and corporate policies and to induce any person
seeking control of the Company or a business combination with the Company to
negotiate on terms acceptable to the then elected Board of Directors.
F-19
<PAGE> 58
TOM BROWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Preferred Stock
In January 1996, in connection with the KNPC acquisition, (see Note 3) the
Company issued 1,000,000 shares of its $1.75 Convertible Preferred Stock, Series
A (the "Preferred Stock"). There are 2,500,000 shares of Preferred Stock
authorized.
As the holder of the Preferred Stock, KNE is entitled to receive cumulative
dividends at the annual rate of $1.75 per share, payable in cash quarterly on
the fifteenth day of March, June, September and December in each year. If full
cumulative dividends on the Preferred Stock have not been declared and paid or
set apart for payment, the Company may not declare or pay or set apart for
payment any dividends or make any other distributions on, or make any payment on
account of the purchase, redemption or retirement of, the Company's Common
Stock, or any other stock of the Company ranking junior to the Preferred Stock
as to payment of dividends or distribution of assets on liquidation, dissolution
or winding up of the Company (other than, in the case of dividends or
distributions, dividends or distributions paid in shares of Common Stock or such
other junior ranking stock).
The Company has the option, at any time beginning on or after March 15,
2001, to redeem all or any part of the outstanding shares of Preferred Stock at
the redemption price of $25.00 per share, plus an amount equal to all accrued
and unpaid dividends on such shares of Preferred Stock to the date of
redemption.
Upon the occurrence of a change of control of the Company, KNE, as the
holder of the Preferred Stock, has the right to cause the Preferred Stock to be
redeemed by the Company, in whole or in part, at the redemption price of $25.50
per share, plus all accrued and unpaid dividends. Generally, for purposes of the
Preferred Stock, a "change of control" is any situation in which a majority of
the Board of Directors of the Company changes within a period of twelve months
or a new person or group of persons becomes in "control" of the Company, within
the meaning of rules of the Securities and Exchange Commission.
Each share of the Preferred Stock is convertible at the option of the
holder thereof, at any time and from time to time prior to the redemption of
such share, into fully paid and nonassessable shares of Common Stock of the
Company at the initial conversion rate of 1.6660 shares of Common Stock for each
share of Preferred Stock, subject to customary adjustments.
The Preferred Stock is exchangeable, in whole or in part, at the option of
the Company on any dividend payment date at any time on or after March 15, 1999,
and prior to March 15, 2001, for shares of Common Stock at the exchange rate of
1.666 shares of Common Stock for each share of Preferred Stock; provided that
(i) on or prior to the date of exchange, the Company shall have declared and
paid or set apart for payment to the holders of Preferred Stock all accumulated
and unpaid dividends to the date of exchange, and (ii) the current market price
of the Common Stock is above $18.375 (the "Threshold Price"). The exchange rate
is subject to adjustment in the same manner and under the same circumstances as
the conversion rate is subject to adjustment, and the Threshold Price is also
subject to adjustment in the same manner and under the same circumstances.
Upon the dissolution, liquidation or winding up of the Company, whether
voluntary or involuntary, the holders of the Preferred Stock are entitled to
receive out of the assets of the Company available for distribution to
stockholders, the amount of $25.00 per share plus an amount equal to all
dividends on such shares (whether or not earned or declared) accrued and unpaid
thereon to the date of final distribution, before any payment or distribution
may be made on the Common Stock or on any class of stock ranking junior to the
Preferred Stock with respect to distributions upon dissolution, liquidation or
winding up.
F-20
<PAGE> 59
TOM BROWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
If at any time dividends payable on the Preferred Stock are in arrears and
unpaid in an amount equal to or exceeding the amount of dividends payable
thereon for four quarterly dividend periods, the total number of Directors on
the Company's Board of Directors will be limited to a maximum of nine and the
holders of the outstanding Preferred Stock will have the exclusive right, voting
separately as a class without regard to series, to designate a special class of
two Directors of the Company (the "Special Directors") at the next annual or
special meeting of stockholders of the Company irrespective of whether such
meeting otherwise would involve the election of directors, and the membership of
the Board of Directors of the Company shall be increased by the number of the
Special Directors so designated. Such right of the holders of Preferred Stock to
designate Special Directors continues until all dividends accumulated and
payable on the Preferred Stock have been paid in full, at which time such right
to designate Special Directors terminates, subject to re-vesting in the event of
a subsequent dividend payment arrearage.
In exercising the right to designate Special Directors or when otherwise
granted voting rights by operation of law, each share of Preferred Stock shall
be entitled to one vote, except as described below.
For so long as KNE owns 80% or more of the voting power of the securities
of the Company issued pursuant to the KNPC Acquisition, KNE has the right to
elect a special class of two Directors to the Board of Directors of the Company,
and for so long as KNE owns securities of the Company issued pursuant to the
KNPC Acquisition possessing less than 80% of the voting power of the securities
of the Company issued pursuant to the KNPC Acquisition, but more than 30% of
such voting power, KNE has the right to elect a special class of one Director to
the Board of Directors of the Company.
The holders of the Preferred Stock are entitled to vote on all matters upon
which holders of the Company's Common Stock have the right to vote. In such
voting, each share of Preferred Stock is entitled to a number of votes per share
equivalent to the number of shares of Common Stock issuable upon conversion of
the Preferred Stock and shall vote together with the holders of the outstanding
shares of the Company's Common Stock as if a part of that class.
(7) BENEFIT PLANS
1986 Grant
The Company granted nonqualified stock options to certain key officers and
employees for various terms and at prices not less than the market value of the
shares at the date of the grant. The exercise prices of the options granted,
which originally were set at prices ranging from $5.682 per share to $7.50 per
share, were reduced effective September 4, 1991 to $4.00 per share, the market
value at that date. The options expire ten years from the date of grant.
1989 Plan
On September 28, 1990, shareholders approved the Company's 1989 Stock
Option Plan (the "1989 Plan"). The aggregate number of shares of Common Stock
that may be issued under the 1989 Plan is 1,400,000 shares. The exercise price
of the options granted to employees and employee directors prior to 1991, which
was originally set at $5.25 per share, was reduced effective September 4, 1991
to $4.00 per share, the market value at that date. The options expire ten years
from the date of grant.
F-21
<PAGE> 60
TOM BROWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1993 Plan
In May 1990 and March 1992, the Board of Directors adopted the 1990 Phantom
Stock Option Plan and the 1992 Phantom Stock Option Plan for Non-employee
Directors (the "Phantom Plans").
In February 1993, the Board of Directors adopted the Company's 1993 Stock
Option Plan (the "1993 Plan"). The 1993 Plan provides for issuance of options to
certain employees and directors to purchase shares of Common Stock. In May 1996,
the Board of Directors increased the aggregate number of shares of Common Stock
that may be issued under the 1993 Plan is 800,000 shares. The exercise price,
vesting and duration of the options may vary and will be determined at the time
of issuance. Also, in connection with the 1993 Plan, employees and directors who
were granted units pursuant to the Phantom Plans surrendered those units for a
like number of options under the 1993 Plan at the surrendered units' exercise
prices.
A summary of the status of the plans described above, as of the dates
indicated, and the changes during the years then ended, is presented in the
table and narrative below:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------
1996 1995 1994
--------------- --------------- ---------------
WTD. WTD. WTD.
SHARES AVG. SHARES AVG. SHARES AVG.
UNDER EXER. UNDER EXER. UNDER EXER.
OPTION PRICE OPTION PRICE OPTION PRICE
------ ------ ------ ------ ------ ------
(SHARES IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year........ 1,525 $ 8.72 1,120 $ 6.51 1,099 $ 6.17
Granted............................... 673 15.70 470 12.96 88 11.75
Exercised............................. (88) 5.89 (60) 4.41 (67) 4.65
Forfeited............................. 0 (5) 3.86 0
----- ----- -----
Outstanding, end of year.............. 2,110 11.06 1,525 8.72 1,120 6.51
===== ===== =====
Exercisable, end of year.............. 1,457 8.99 1,309 8.28 893 5.71
===== ===== =====
Available for grant, end of year...... 31 429 495
===== ===== =====
</TABLE>
The weighted average fair value of options granted during the years ended
December 31, 1996 and 1995 was $9.19 and $6.71, respectively. The fair value of
each option is estimated as of the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions used for
grants in 1996 and 1995, respectively: (i) risk-free interest rates of 6.35 and
7.59 percent; (ii) expected lives of seven years, (iii) expected volatility of
45.4 and 46.9 percent, and (iv) no dividend yields.
The following table summarizes information about stock options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------- -----------------------
NO. OF SHS. WTD. AVG. NO. OF SHS.
RANGE OF UNDER REMAINING WTD. AVG. UNDER WTD. AVG.
EXERCISE OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
PRICES OPTIONS LIFE PRICE OPTIONS PRICE
-------- ----------- ----------- --------- ----------- ---------
(SHARES IN THOUSANDS)
<C> <C> <C> <C> <C> <C>
$ 3.810- 7.620 699 4.51 $ 4.26 694 $ 4.23
11.125-13.320 493 8.74 12.16 418 12.09
14.687-18.875 918 9.20 15.66 345 14.82
----- -----
2,110 7.54 11.06 1,457 8.99
===== =====
</TABLE>
F-22
<PAGE> 61
TOM BROWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company accounts for its stock-based compensation using the intrinsic
value method prescribed by APB Opinion No. 25 and related interpretations, under
which no compensation cost has been recognized for the stock option plans.
Alternatively, if compensation costs for these plans had been determined in
accordance with SFAS No. 123 ("SFAS 123"), the Company's net income and net
income per share would approximate the following pro forma amounts:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
----------------------
1996 1995
-------- --------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Net Income
As Reported............................................... $6,263 $5,785
Pro Forma................................................. 4,729 5,105
Net Income per Common Share:
As Reported............................................... $ 0.28 $ 0.34
Pro Forma................................................. 0.21 0.30
</TABLE>
The pro forma amounts shown above may not be representative of future
results because the SFAS 123 method of accounting has not been applied to
options granted prior to January 1, 1995.
Profit Sharing, ESOP and KSOP Plans
Effective April 1, 1985, the Company adopted a profit sharing plan (the
"Profit Sharing Plan") for the benefit of all employees. Under the Profit
Sharing Plan, the Company may contribute to a trust either stock or cash in such
amounts as it may, from time to time, deem advisable. The Company contributed
$30,000 for 1995 to the Profit Sharing Plan. The Company did not make a
contribution to the Profit Sharing Plan for year 1994.
Effective April 1, 1986, the Company adopted an employee stock ownership
plan (the "ESOP") for the benefit of all employees. Under the ESOP, the Company
may contribute cash or the Company's Common Stock to a trust in such amounts as
the Company deems advisable. The Company contributed $30,000 and $60,000 to the
trust for 1995 and 1994, respectively, for the purchase by the trust of 2,110
and 4,750 shares of Common Stock.
Effective April 1, 1990, the Profit Sharing Plan was amended to provide for
voluntary employee contributions under Section 401(k) of the Internal Revenue
Code of 1986, as amended. The Profit Sharing Plan was further amended to provide
employees with the ability to give direct investment instructions to the Profit
Sharing Trustee for amounts held for their benefit.
Effective January 1, 1996 the Company adopted the KSOP ("KSOP")which is a
merger of the ESOP and the Profit Sharing Plan which contains 401(k) profit
sharing plan and employer stock ownership plan provisions for the benefit of
those persons who qualify as participants. The Company contributed $100,000 to
the KSOP for 1996.
(8) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of financial instruments. The carrying values of trade receivables and trade
payables included in the accompanying Consolidated Balance Sheets approximated
market value at December 31, 1996 and 1995.
F-23
<PAGE> 62
TOM BROWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Cash and Cash Equivalents
The carrying amounts approximated fair value due to the short maturity of
these instruments.
Investments
At December 31, 1995, there was no quoted price for the Presidio GINs.
Consequently, the Company was unable to estimate the fair value of the GINs;
therefore, they remained valued at the Company's purchase price.
Bank Debt
The carrying value approximates fair value because the interest rate is
variable and is reflective of current market conditions.
(9) RELATED PARTIES AND SIGNIFICANT CUSTOMERS
Certain of the Company's officers and directors participate (either
individually or indirectly through various entities) with the Company and other
unrelated investors in the drilling, development and operation of gas and oil
properties. Related party transactions are non-interest bearing and are settled
in the normal course of business with terms which, in management's opinion, are
similar to those with other joint owners.
The Company has engaged from time to time two law firms, one of whose
partner serves as a director and one of whose partner serves as an officer. The
amounts paid to each of these firms for the years ended December 31, 1996, 1995
and 1994 were $56,000 and $268,000; $103,000 and $159,000; and $37,000 and
$70,000, respectively. The Company also paid $74,000, $35,000, and $35,000
during the years ended December 31, 1996, 1995 and 1994, respectively, to a
consulting firm which has a partner who serves as a director of the Company.
The Company participates in exploration activity with a partnership, one of
whose partner is a director of the Company. During the years ended December 31,
1996, 1995, and 1994 the Company billed $239,000, $153,000 and $6,000,
respectively to such partnership for their share of certain leasehold costs.
In addition, certain officers and directors of the Company are directors of
a former subsidiary. The Company and the former subsidiary make available to
each other certain personnel, office services and records with each party being
reimbursed for costs and expenses incurred in connection therewith. During the
years ended December 31, 1996, 1995 and 1994, the Company charged the former
subsidiary approximately $75,000, $70,000 and $64,000, respectively, for such
services. The former subsidiary performs drilling services on certain wells
operated by the Company and charged approximately $42,000, $934,000 and
$1,322,000 for such services during the years ended December 31, 1996, 1995 and
1994, respectively. In management's opinion, the above described transactions
and services were provided on the same terms as could be obtained from
non-related sources.
Gas and oil sales to three purchasers, Coastal Oil and Gas, Conoco, Inc.
and KN Gas Marketing, Inc., accounted for 15%, 14% and 13%, respectively, of gas
and oil sales and marketing, gathering and processing revenues for the year
ended December 31, 1996 and 14%, 25% and 12%, respectively, for the year ended
December 31, 1995. For the year ended December 31, 1994, Montana-Dakota
Utilities Co. and KN Gas Marketing, Inc. accounted for 13% and 12%,
respectively, of gas and oil sales and marketing, gathering and processing
revenues. Because there are
F-24
<PAGE> 63
TOM BROWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
numerous other parties available to purchase the Company's production, the
Company believes the loss of these purchasers would not materially affect its
ability to sell natural gas or crude oil.
Concentration of Credit Risk
The Company's revenues are derived principally from uncollateralized sales
to customers in the gas and oil industry. The concentration of credit risk in a
single industry affects the Company's overall exposure to credit risk because
customers may be similarly affected by changes in economic and other conditions.
The Company has not experienced significant credit losses on such receivables.
(10) SEGMENT INFORMATION
The Company operates in two reportable segments: (i) gas and oil
exploration and development and (ii) marketing, gathering and processing. The
segment results are presented in the following schedule:
<TABLE>
<CAPTION>
GAS & OIL MARKETING,
EXPLORATION GATHERING
& & INTERCOMPANY
DEVELOPMENT PROCESSING SALES & OTHER TOTAL
----------- ---------- ------------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Year ended December 31, 1996
Assets................................... $393,697 $14,923 $(2,246) $406,374
Revenues................................. 41,598 29,476 (4,354) 66,720
Income before taxes...................... 7,417 3,856 -- 11,273
Capital expenditures..................... 256,054 24,550 -- 280,604
Depreciation and amortization............ 13,762 1,378 -- 15,140
Year ended December 31, 1995
Assets................................... $157,928 $ 6,246 $ -- $164,174
Revenues................................. 25,385 19,696 (4,028) 41,053
Income (loss) before taxes............... (9,060) 1,949 -- (7,111)
Capital expenditures..................... 24,809 1,203 -- 26,012
Depreciation and amortization............ 9,785 209 -- 9,994
Year ended December 31, 1994
Assets................................... $106,144 $ 8,948 $ -- $115,092
Revenues................................. 15,792 16,554 (3,275) 29,071
Income (loss) before taxes............... (1,414) 1,516 -- 102
Capital expenditures..................... 22,359 651 -- 23,010
Depreciation and amortization............ 7,119 169 -- 7,288
</TABLE>
(11) COMMITMENTS AND CONTINGENCIES
The Company's operations are subject to numerous Federal and state
government regulations which may give rise to claims against the Company. In
addition, the Company is a defendant in various lawsuits generally incidental to
its business. The Company does not believe that the ultimate resolution of such
litigation will have a material adverse effect on the Company's financial
position or results of operations.
F-25
<PAGE> 64
TOM BROWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Lease Commitments
At December 31, 1996, the Company had long-term leases covering certain of
its facilities and equipment. The minimum rental commitments under
non-cancelable operating leases with lease terms in excess of one year are
approximately $562,000, $132,000 and $75,000 for 1997, 1998 and 1999,
respectively. Total rental expense incurred for the years ended December 31,
1996, 1995 and 1994 was approximately $394,000, $262,000 and $245,000,
respectively, all of which represented minimum rentals under non-cancelable
operating leases.
Firm Transportation Commitments
As of December 31, 1996, Wildhorse had entered into several contracts for
firm transportation on interstate pipelines. Based upon current rates and using
the Company's forty-five percent (45%) ownership in Wildhorse, the Company's
obligation for such firm transportation for the next five years and thereafter
is as follows:
<TABLE>
<CAPTION>
COMMITMENT
YEARS ENDING DECEMBER 31, AMOUNT
------------------------- --------------
(IN THOUSANDS)
<S> <C>
1997........................................... $ 2,812
1998........................................... 4,866
1999........................................... 4,851
2000........................................... 4,778
2001........................................... 4,531
Thereafter..................................... 7,490
-------
$29,328
=======
</TABLE>
Environmental Matters
A wholly-owned subsidiary of the Company is a party to an environmental
cleanup proceeding. The subsidiary's share of the estimated cleanup costs were
accrued in the consolidated financial statements at December 31, 1994. Based on
the amount of remediation costs estimated for this site and the Company's de
minimis contribution, if any, the Company believes that the outcome of this
proceeding will not have a material adverse effect on its financial position or
results of operations.
F-26
<PAGE> 65
TOM BROWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(12) QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996
Revenues............................... $13,205 $14,071 $14,773 $24,671 $66,720
Gross profit(1)........................ 7,300 7,999 6,407 13,875 $35,581
Net income............................. 870 1,012 122 4,259 $ 6,263
Net income per common share(3)......... .04 .05 .01 .19 $ .28
Year ended December 31, 1995
Revenues............................... $ 9,428 $ 9,162 $12,082 $10,381 $41,053
Gross profit(1)........................ 3,814 4,101 3,765 4,254 $15,934
Net income (loss)(2)................... 4,530 273 1,500 (518) $ 5,785
Net income (loss) per common
share(3)............................ .28 .02 .09 (.03) $ .34
</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.
(13) SUPPLEMENTAL INFORMATION RELATED TO GAS AND OIL ACTIVITIES (UNAUDITED)
The following tables set forth certain historical costs and operating
information related to the Company's gas and oil producing activities:
F-27
<PAGE> 66
TOM BROWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Capitalized Costs and Costs Incurred
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1996 1995 1994
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Capitalized costs
Proved gas and oil properties................ $ 392,192 $ 184,424 $ 212,218
Unproved gas and oil properties.............. 44,687 2,200 2,233
--------- --------- ---------
Total gas and oil properties......... 436,879 186,624 214,451
Less: Accumulated depreciation, depletion and
amortization.............................. (118,635) (105,442) (132,512)
--------- --------- ---------
Net capitalized costs................ $ 318,244 $ 81,182 $ 81,939
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
-------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Costs incurred
Proved property acquisition costs............ $194,869 $ 44 $ 256
Unproved property acquisition costs.......... 42,877 657 1,498
Exploration costs............................ 3,471 3,144 3,177
Development costs............................ 13,177 21,747 17,797
-------- ------- -------
Total................................ $254,394 $25,592 $22,728
======== ======= =======
</TABLE>
Gas and Oil Reserve Information (Unaudited)
The following summarizes the policies used by the Company in preparing the
accompanying gas and oil reserve disclosures, Standardized Measure of Discounted
Future Net Cash Flows Relating to Proved Gas and Oil Reserves and reconciliation
of such standardized measure between years.
Estimates of proved and proved developed reserves at December 31, 1996,
1995 and 1994 were principally prepared by independent petroleum consultants.
Proved reserves are estimated quantities of natural gas and crude oil which
geological and engineering data demonstrate with reasonable certainty to be
recoverable in future years from known reservoirs under existing economic and
operating conditions. Proved developed reserves are proved reserves that can be
recovered through existing wells with existing equipment and operating methods.
All of the Company's gas and oil reserves are located in the United States.
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
F-28
<PAGE> 67
TOM BROWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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
(MMCF) (MBBLS)
------- -------
<S> <C> <C>
Proved reserves:
Estimated reserves at December 31, 1993................... 130,995 3,300
Revisions of previous estimates........................ (4,582) (288)
Purchase of minerals in place.......................... 659 19
Extensions and discoveries............................. 60,593 1,775
Sales of minerals in place............................. (128) (8)
Production............................................. (7,231) (276)
------- -------
Estimated reserves at December 31, 1994................... 180,306 4,522
Revisions of previous estimates........................ (11,071) (476)
Purchase of minerals in place.......................... -- --
Extensions and discoveries............................. 12,065 455
Sales of minerals in place............................. (7,412) (46)
Production............................................. (10,585) (387)
------- -------
Estimated reserves at December 31, 1995................... 163,303 4,068
Revisions of previous estimates........................ 10,249 (471)
Purchase of minerals in place.......................... 174,185 6,278
Extensions and discoveries............................. 28,192 2,976
Production............................................. (16,762) (545)
------- -------
Estimated reserves at December 31, 1996................... 359,167 12,306
======= =======
Proved developed reserves:
December 31, 1993...................................... 86,153 2,357
December 31, 1994...................................... 114,061 2,877
December 31, 1995...................................... 109,267 2,862
December 31, 1996...................................... 257,241 8,994
</TABLE>
F-29
<PAGE> 68
TOM BROWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved
Gas and Oil Reserves
(Unaudited)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1996 1995 1994
---------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Future cash flows.............................. $1,523,845 $308,965 $348,652
Future production costs........................ (380,453) (86,735) (90,228)
Future development costs....................... (62,124) (13,344) (17,596)
---------- -------- --------
Future net cash flows before tax............... 1,081,268 208,886 240,828
Future income taxes............................ (265,260) (31,016) (38,950)
---------- -------- --------
Future net cash flows after tax................ 816,008 177,870 201,878
Annual discount at 10%......................... (349,795) (74,523) (90,048)
---------- -------- --------
Standardized measure at discounted future net
cash flows................................... $ 466,213 $103,347 $111,830
========== ======== ========
Discounted future net cash flows before income
taxes........................................ $ 608,746 $114,586 $124,942
========== ======== ========
</TABLE>
Natural gas prices increased significantly during the fourth quarter of
1996 and subsequent to December 31, 1996 have declined significantly.
Accordingly, the discounted future net cash flows shown above would be
substantially lower if the standardized measure were calculated using prices in
effect at the end of the first quarter of 1997.
Changes in Standardized Measure of Discounted Future Net Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
--------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Gas and oil sales, net of production costs..... $ (30,955) $(13,509) $ (9,793)
Net changes in anticipated prices and
production cost.............................. 129,492 (10,077) (29,733)
Extensions and discoveries, less related
costs........................................ 81,675 10,803 51,231
Changes in estimated future development
costs........................................ (1,985) 2,254 1,237
Previously estimated development costs
incurred..................................... 428 4,152 667
Net change in income taxes..................... (131,293) 1,872 (3,706)
Purchase of minerals in place.................. 288,643 -- 485
Sales of minerals in place..................... (37) (6,133) (157)
Accretion of discount.......................... 11,458 12,494 10,575
Revision of quantity estimates................. 16,993 (8,337) (3,515)
Changes in production rates and other.......... (1,553) (2,002) (1,808)
--------- -------- --------
Change in Standardized Measure............... $ 362,866 $ (8,483) $ 15,483
========= ======== ========
</TABLE>
F-30
<PAGE> 69
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement, the Company has agreed to sell to each of the Underwriters named
below, and each of such Underwriters, for whom Goldman, Sachs & Co., Howard,
Weil, Labouisse, Friedrichs Incorporated, Petrie Parkman & Co., Inc. and Salomon
Brothers Inc are acting as representatives (the "Representatives"), has
severally agreed to purchase from the Company, the respective number of shares
of Common Stock set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
COMMON
UNDERWRITER STOCK
----------- ---------
<S> <C>
Goldman, Sachs & Co.........................................
Howard, Weil, Labouisse, Friedrichs Incorporated............
Petrie Parkman & Co., Inc...................................
Salomon Brothers Inc........................................
---------
Total............................................. 4,000,000
=========
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all of the shares offered hereby,
if any are taken.
The Underwriters propose to offer the shares of Common Stock in part
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus, and in part to certain securities dealers at such
price less a concession of $ per share. The Underwriters may allow, and
such dealers may reallow, a concession not in excess of $ per share to
certain brokers and dealers. After the shares of Common Stock are released for
sale to the public, the offering price and other selling terms may from time to
time be varied by the Representatives.
In connection with the Offering, the Underwriters may purchase and sell the
Common Stock in the open market. These transactions may include overallotment
and stabilizing transactions, "passive" market making and purchases to cover
syndicate short positions created in connection with the offering. Stabilizing
transactions consist of certain bids or purchases for the purpose of preventing
or retarding a decline in the market price of the Common Stock and syndicate
short positions involve the sale by the Underwriters of a greater number of
shares of Common Stock than they are required to purchase from the Company in
the offering. The Underwriters also may impose a penalty bid, whereby selling
concessions allowed to syndicate members or other broker-dealers in respect of
the shares of Common Stock sold in the offering for their account may be
reclaimed by the syndicate if such shares of Common Stock are repurchased by the
syndicate in stabilizing or covering transactions. These activities may
stabilize, maintain or otherwise affect the market price of the Common Stock,
which may be higher than the price that might otherwise prevail in the open
market; and these activities, if commenced, may be discontinued at any time.
These transactions may be effected on the Nasdaq National Market, in the
over-the-counter market or otherwise.
As permitted by Rule 103 under the Exchange Act, certain Underwriters (and
selling group members, if any) that are market makers ("passive market makers")
in the Common Stock may make bids for or purchases of the Common Stock in the
Nasdaq National Market until such time, if
U-1
<PAGE> 70
any, when a stabilizing bid for such securities has been made. Rule 103
generally provides that (1) a passive market maker's net daily purchases of the
Common Stock may not exceed 30% of its average daily trading volume in such
securities for the two full consecutive calendar months (or any 60 consecutive
days ending within the 10 days) immediately preceding the filing date of the
registration statement of which this Prospectus forms a part, (2) a passive
market maker may not effect transactions or display bids for the Common Stock at
a price that exceeds the highest independent bid for the Common Stock by persons
who are not passive market makers and (3) bids made by passive market makers
must be identified as such.
The Company has granted to the Underwriters an option exercisable for 30
days after the date of this Prospectus to purchase up to an aggregate of 600,000
additional shares of Common stock solely to cover over-allotments, if any. If
the Underwriters exercise their over-allotment option, the Underwriters have
severally agreed, subject to certain conditions, to purchase approximately the
same percentage thereof that the number of shares to be purchased by each of
them, as shown in the foregoing table, bears to the 4,000,000 shares of Common
Stock offered.
The Company and its executive officers and directors have agreed not to
offer to sell, sell, grant any option to purchase or otherwise dispose of any
shares of any capital stock of the Company (or securities convertible into, or
exchangeable for capital stock of the Company), directly or indirectly, for a
period of 90 days after the date of this Prospectus, without the prior written
consent of Goldman, Sachs & Co., except for grants of stock options by the
Company to its officers, directors and employees and issuance of stock upon
exercise of options held by such persons, and except for shares of capital stock
issued by the Company in connection with the acquisition of assets or capital
stock of any company engaged in the oil and gas business.
Certain of the Underwriters have previously performed various investment
banking services for the Company from time to time.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.
U-2
<PAGE> 71
================================================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH
SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary...................... 3
Risk Factors............................ 9
The Company............................. 11
Use of Proceeds......................... 12
Capitalization.......................... 13
Price Range of Common Stock............. 14
Dividend Policy......................... 14
Selected Consolidated Financial Data.... 15
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 17
Business and Properties................. 23
Management.............................. 31
Description of Capital Stock............ 33
Legal Matters........................... 36
Experts................................. 36
Available Information................... 36
Incorporation of Certain Documents by
Reference............................. 37
Certain Definitions..................... 37
Index to Financial Statements........... F-1
Underwriting............................ U-1
</TABLE>
================================================================================
================================================================================
4,000,000 SHARES
TOM BROWN, INC.
COMMON STOCK
(PAR VALUE $.10 PER SHARE)
------------------
[TOM BROWN, INC. LOGO]
------------------
GOLDMAN, SACHS & CO.
HOWARD, WEIL, LABOUISSE, FRIEDRICHS
INCORPORATED
PETRIE PARKMAN & CO.
SALOMON BROTHERS INC
REPRESENTATIVES OF THE UNDERWRITERS
================================================================================
<PAGE> 72
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses of the offering are estimated to be as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee......... $ 34,653
National Association of Securities Dealers, Inc. Filing
Fee....................................................... 11,935
Legal Fees and Expenses..................................... 100,000
Accounting Fees and Expenses................................ 50,000
Blue Sky Fees and Expenses.................................. 5,000
Printing Costs.............................................. 150,000
Miscellaneous............................................... 23,412
--------
Total............................................. $375,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Registrant has authority under Section 145 of the General Corporation
Law of the State of Delaware to indemnify its officers, directors, employees and
agents to the extent provided in such statute. Article Tenth of the Registrant's
Certificate of Incorporation, referenced as Exhibit 3.1 hereto, provides for
indemnification of the Registrant's officers and directors to the full extent
provided in Section 145. Article 4 of the Registrant's Bylaws referenced as
Exhibit 3.2 hereto, provides for indemnification of the Registrant's officers,
directors, employees and agents.
Section 102 of the General Corporation Law of the State of Delaware
("Section 102") permits the limitation of a director's personal liability to the
corporation or its stockholders for monetary damages for breach of fiduciary
duties as a director except in certain situations including the breach of a
director's duty of loyalty or acts or omissions not made in good faith. Article
Ninth of the Registrant's Certificate of Incorporation limits directors'
personal liability to the extent permitted by Section 102.
Article Tenth of the Registrant's Certificate of Incorporation provides
that the Registrant may maintain insurance, at its expense, to protect itself
and any of its directors, officers, employees or agents or any person serving at
the request of the Registrant as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against any expense, liability or loss, whether or not the Registrant would have
the power to indemnify such person against such expense, liability or loss under
the Delaware General Corporation Law. Even though the Registrant has directors
and officers liability insurance, the liability and indemnification provisions
contained in the Registrant's Certificate of Incorporation would remain in place
and such provision will affect not only the Registrant, but its stockholders as
well.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers, or persons controlling the Registrant
pursuant to the foregoing provisions, the Registrant has been informed that in
the opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
II-1
<PAGE> 73
ITEM 16. EXHIBITS AND FINANCIAL SCHEDULES.
(A) EXHIBITS
<TABLE>
<CAPTION>
<C> <S>
*1.1 -- Form of Underwriting Agreement.
3.1 -- Certificate of Incorporation, as amended, of the
Registrant. (Incorporated by reference to Exhibit No. 4.1
in the Registrant's Form 10-Q Report for the quarterly
period ended June 30, 1996 and filed with the Securities
and Exchange Commission on August 14, 1996.)
3.2 -- Bylaws of the Registrant. (Incorporated by reference to
Exhibit No. 3.2 in the Registrant's Form 8-B Registration
Statement dated July 15, 1987 and filed with the
Securities and Exchange Commission on July 17, 1987.)
4.1 -- Specimen Common Stock Certificate. (Incorporated by
reference to Exhibit No. 4.2 in the Registrant's Form 8-B
Registration Statement dated July 15, 1987 and filed with
the Securities and Exchange Commission on July 17, 1987).
4.2 -- Rights Agreement dated as of March 5, 1991 between 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 with the Securities and Exchange Commission on
March 15, 1991.)
*5.1 -- Opinion and Consent of Vinson & Elkins L.L.P.
*23.1 -- Consent of Arthur Andersen LLP.
*23.2 -- Consent of Williamson Petroleum Consultants, Inc.
*23.3 -- Consent of Ryder Scott Company.
*23.4 -- Consent of Deloitte & Touche LLP.
23.5 -- Consent of Vinson & Elkins L.L.P. included as part of
Exhibit 5.1.
*24.1 -- Power of Attorney contained on the signature page hereto.
</TABLE>
- ---------------
* Filed herewith
ITEM 17. UNDERTAKINGS.
The Company hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, each filing of the registrants's annual report pursuant to Section
13(a) or Section 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan's annual report
pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in the registration statement shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(2) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions,
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its
II-2
<PAGE> 74
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification
by it is against public policy as expressed in the Act and will be governed
by the final adjudication of such issue.
(3) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Company pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(4) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 75
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL
OF THE REQUIREMENTS FOR FILING ON FORM S-3 AND HAS DULY CAUSED THIS REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN THE CITY OF MIDLAND, STATE OF TEXAS, ON SEPTEMBER 12, 1997.
TOM BROWN, INC.
By: /s/ DONALD L. EVANS
----------------------------------
Donald L. Evans,
Chairman of the Board and Chief
Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Donald L. Evans and R. Kim Harris, and each of
them either of whom may act without joinder of the other, his true and lawful
attorneys-in-fact and agents, with full power of substitution and, for him and
in his name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration Statement
and any additional registration statement pursuant to Rule 462(b), and to file
the same, with all exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, and each of them, or the substitutes of any or all
of them, may lawfully do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
THIS REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN
THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ DONALD L. EVANS Chairman of the Board of September 12, 1997
- ----------------------------------------------------- Directors and Chief
Donald L. Evans Executive Officer
(Principal Executive
Officer)
/s/ WILLIAM R. GRANBERRY President and Chief September 12, 1997
- ----------------------------------------------------- Operating Officer and
William R. Granberry Director
/s/ R. KIM HARRIS Controller (Principal September 12, 1997
- ----------------------------------------------------- Financial and Accounting
R. Kim Harris Officer)
/s/ THOMAS C. BROWN Director September 12, 1997
- -----------------------------------------------------
Thomas C. Brown
</TABLE>
II-4
<PAGE> 76
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ DAVID M. CARMICHAEL Director September 12, 1997
- -----------------------------------------------------
David M. Carmichael
/s/ HENRY GROPPE Director September 12, 1997
- -----------------------------------------------------
Henry Groppe
/s/ EDWARD W. LEBARON, JR. Director September 12, 1997
- -----------------------------------------------------
Edward W. LeBaron, Jr.
/s/ CLYDE E. MCKENZIE Director September 12, 1997
- -----------------------------------------------------
Clyde E. McKenzie
/s/ JAMES B. WALLACE Director September 12, 1997
- -----------------------------------------------------
James B. Wallace
/s/ ROBERT H. WHILDEN, JR. Director September 12, 1997
- -----------------------------------------------------
Robert H. Whilden, Jr.
</TABLE>
II-5
<PAGE> 77
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
<C> <S>
*1.1 -- Form of Underwriting Agreement.
3.1 -- Certificate of Incorporation, as amended, of the
Registrant. (Incorporated by reference to Exhibit No. 4.1
in the Registrant's Form 10-Q Report for the quarterly
period ended June 30, 1996 and filed with the Securities
and Exchange Commission on August 14, 1996.)
3.2 -- Bylaws of the Registrant. (Incorporated by reference to
Exhibit No. 3.2 in the Registrant's Form 8-B Registration
Statement dated July 15, 1987 and filed with the
Securities and Exchange Commission on July 17, 1987.)
4.1 -- Specimen Common Stock Certificate. (Incorporated by
reference to Exhibit No. 4.2 in the Registrant's Form 8-B
Registration Statement dated July 15, 1987 and filed with
the Securities and Exchange Commission on July 17, 1987).
4.2 -- Rights Agreement dated as of March 5, 1991 between 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 with the Securities and Exchange Commission on
March 15, 1991.)
*5.1 -- Opinion and Consent of Vinson & Elkins L.L.P.
*23.1 -- Consent of Arthur Andersen LLP.
*23.2 -- Consent of Williamson Petroleum Consultants, Inc.
*23.3 -- Consent of Ryder Scott Company.
*23.4 -- Consent of Deloitte & Touche LLP.
23.5 -- Consent of Vinson & Elkins L.L.P. included as part of
Exhibit 5.1.
*24.1 -- Power of Attorney contained on the signature page hereto.
</TABLE>
- ---------------
* Filed herewith
<PAGE> 1
TOM BROWN, INC.
COMMON STOCK, $.10 PAR VALUE
UNDERWRITING AGREEMENT
October . . . . , 1997
Goldman, Sachs & Co.,
Howard, Weil, Labouisse, Friedrichs Incorporated,
Petrie Parkman & Co.,
Salomon Brothers Inc.,
As representatives of the several Underwriters
named in Schedule I hereto,
c/o Goldman, Sachs & Co.,
85 Broad Street
New York, New York 10004
Ladies and Gentlemen:
Tom Brown, Inc., a Delaware corporation (the "Company"), proposes,
subject to the terms and conditions stated herein, to issue and sell to the
Underwriters named in Schedule I hereto (the "Underwriters") an aggregate of
4,000,000 shares (the "Firm Shares") and, at the election of the Underwriters,
up to 600,000 additional shares (the "Optional Shares") of Common Stock, $.10
par value ("Stock"), of the Company (the Firm Shares and the Optional Shares
that the Underwriters elect to purchase pursuant to Section 2 hereof being
collectively called the "Shares").
1. The Company represents and warrants to, and agrees with, each
of the Underwriters that:
(a) A registration statement on Form S-3 (File No. 333- . . . .)
(the "Initial Registration Statement") in respect of the Shares has been filed
with the Securities and Exchange Commission (the "Commission"); the Initial
Registration Statement and any post-effective amendment thereto, each in the
form heretofore delivered to you, and, excluding exhibits thereto but including
all documents incorporated by reference in the prospectus contained therein, to
you for each of the other Underwriters, have been declared effective by the
Commission in such form; other than a registration statement, if any,
increasing the size of the offering (a "Rule 462(b) Registration Statement"),
filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended (the
"Act"), which became effective upon filing, no other document with respect to
the Initial Registration Statement or document incorporated by reference
therein has heretofore been filed with the Commission; and no stop order
suspending the effectiveness of the Initial Registration Statement, any
post-effective amendment thereto or the Rule 462(b) Registration Statement, if
any, has been issued and no proceeding for that purpose has been initiated or
threatened by the Commission (any preliminary prospectus included in the
Initial Registration Statement or filed with the Commission pursuant to Rule
424(a) of the rules and regulations of the Commission under the Act is
hereinafter called a "Preliminary Prospectus"; the various parts of the Initial
Registration Statement and the Rule 462(b) Registration Statement, if any,
including all exhibits thereto and including (i) the information contained in
the form of final prospectus filed with the Commission pursuant to Rule
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<PAGE> 2
424(b) under the Act in accordance with Section 5(a) hereof and deemed by
virtue of Rule 430A under the Act to be part of the Initial Registration
Statement at the time it was declared effective or such part of the Rule 462(b)
Registration Statement, if any, became or hereafter becomes effective and (ii)
the documents incorporated by reference in the prospectus contained in the
registration statement at the time such part of the registration statement
became effective, each as amended at the time such part of the registration
statement became effective, is hereinafter collectively called the
"Registration Statement"; such final prospectus, in the form first filed
pursuant to Rule 424(b) under the Act, is hereinafter called the "Prospectus";
and any reference herein to any Preliminary Prospectus or the Prospectus shall
be deemed to refer to and include the documents incorporated by reference
therein pursuant to Item 12 of Form S-3 under the Act, as of the date of such
Preliminary Prospectus or Prospectus, as the case may be; and any reference to
any amendment or supplement to any Preliminary Prospectus or the Prospectus
shall be deemed to refer to and include any documents filed after the date of
such Preliminary Prospectus or Prospectus, as the case may be, under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and
incorporated by reference in such Preliminary Prospectus or Prospectus, as the
case may be; and any reference to any amendment to the Registration Statement
shall be deemed to refer to and include any annual report of the Company filed
pursuant to Section 13(a) or 15(d) of the Exchange Act after the effective date
of the Initial Registration Statement that is incorporated by reference in the
Registration Statement);
(b) No order preventing or suspending the use of any Preliminary
Prospectus has been issued by the Commission, and each Preliminary Prospectus,
at the time of filing thereof, conformed in all material respects to the
requirements of the Act and the rules and regulations of the Commission
thereunder, and did not contain an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; provided, however, that this representation and warranty
shall not apply to any statements or omissions made in reliance upon and in
conformity with information furnished in writing to the Company by an
Underwriter through Goldman, Sachs & Co. expressly for use therein;
(c) The documents incorporated by reference in the Prospectus,
when they became effective or were filed with the Commission, as the case may
be, conformed in all material respects to the requirements of the Act or the
Exchange Act, as applicable, and the rules and regulations of the Commission
thereunder, and none of such documents contained an untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary to make the statements therein not misleading; and any further
documents so filed and incorporated by reference in the Prospectus or any
further amendment or supplement thereto, when such documents become effective
or are filed with the Commission, as the case may be, will conform in all
material respects to the requirements of the Act or the Exchange Act, as
applicable, and the rules and regulations of the Commission thereunder and will
not contain an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading; provided, however, that this representation and warranty shall
not apply to any statements or omissions made in reliance upon and in
conformity with information furnished in writing to the Company by an
Underwriter through Goldman, Sachs & Co. expressly for use therein;
(d) The Registration Statement conforms, and the Prospectus and
any further amendments or supplements to the Registration Statement or the
Prospectus will conform, in all material respects to the requirements of the
Act and the rules and regulations of the Commission thereunder and do not and
will not, as of the applicable effective date as to the Registration Statement
and any amendment thereto, and as of the applicable filing date as to the
Prospectus
2
<PAGE> 3
and any amendment or supplement thereto, contain an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading; provided, however,
that this representation and warranty shall not apply to any statements or
omissions made in reliance upon and in conformity with information furnished in
writing to the Company by an Underwriter through Goldman, Sachs & Co. expressly
for use therein;
(e) The consolidated financial statements and schedules of the
Company and its subsidiaries included in or incorporated by reference into the
Registration Statement and the Prospectus present fairly the financial
condition, the results of operations and the cash flows of the Company and its
subsidiaries as of the dates and for the periods therein specified in
conformity with generally accepted accounting principles consistently applied
throughout the periods involved, except as otherwise stated therein; the pro
forma financial information and notes thereto included in the Registration
Statement and the Prospectus were prepared in accordance with the applicable
requirements of the Act and the rules and regulations of the Commission
thereunder, include all adjustments necessary to present fairly the pro forma
financial condition and results of operations of the Company and its
subsidiaries at the respective dates and for the periods indicated, and all
assumptions used in preparing such pro forma financial information were
reasonable; and the other financial and statistical information and data set
forth in the Registration Statement and the Prospectus is accurately presented
and, to the extent such information and data is derived from the financial
statements and books and records of the Company and its subsidiaries, is
prepared on a basis consistent with such financial statements and the books and
records of the Company and its subsidiaries; no other financial statements or
schedules are required to be included in the Registration Statement and the
Prospectus;
(f) Neither the Company nor any of its subsidiaries has sustained
since the date of the latest audited financial statements included or
incorporated by reference in the Prospectus any material loss or interference
with its business from fire, explosion, flood or other calamity, whether or not
covered by insurance, or from any labor dispute or court or governmental
action, order or decree, otherwise than as set forth or contemplated in the
Prospectus; and, since the respective dates as of which information is given in
the Registration Statement and the Prospectus, there has not been any change in
the capital stock or long-term debt of the Company or any of its subsidiaries
or any material adverse change, or any development involving a prospective
material adverse change, in or affecting the general affairs, management,
financial position, stockholders' equity or results of operations of the
Company and its subsidiaries, otherwise than as set forth or contemplated in
the Prospectus;
(g) The Company and its subsidiaries have (i) good and
indefeasible title to all their interests in their oil and gas properties, (ii)
good and marketable title in fee simple to all real property owned by them and,
(iii) good and marketable title to all personal property owned by them, in each
case free and clear of all liens, encumbrances and defects except such as are
described or contemplated by the Prospectus, or would not result in a material
adverse effect on the condition (financial or other), earnings, business or
properties of the Company or the Company and its subsidiaries, taken as a
whole, and do not interfere with the use made and proposed to be made of such
property by the Company and its subsidiaries, and any real property and
buildings held under lease by the Company and its subsidiaries are held by them
under valid, subsisting and enforceable leases with such exceptions as are not
material and do not interfere with the use made and proposed to be made of such
real property and buildings by the Company and its subsidiaries;
(h) The estimates of present values of reserves included in or
incorporated by reference into the Prospectus were prepared in accordance with
the methodology specified in the rules and regulations under the Act with
respect to prices for production, taxes and discount factor; to the knowledge
of the Company, each of Williamson Petroleum Consultants, Inc. and Ryder Scott
3
<PAGE> 4
Company were, as of the date of their respective reserve reports incorporated
by reference into the Registration Statement (the "Reserve Report"), and are,
as of the date hereof, independent petroleum engineers with respect to the
Company;
(i) The Company has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the State of Delaware, with
power and authority (corporate and other) to own its properties and conduct its
business as described in the Prospectus, and has been duly qualified as a
foreign corporation for the transaction of business and is in good standing
under the laws of each other jurisdiction in which it owns or leases properties
or conducts any business so as to require such qualification, or is subject to
no material liability or disability by reason of the failure to be so qualified
in any such jurisdiction; and each subsidiary of the Company has been duly
incorporated and is validly existing as a corporation in good standing under the
laws of its jurisdiction of incorporation;
(j) The Company has an authorized capitalization as set forth in
the Prospectus, and all of the issued shares of capital stock of the Company
have been duly and validly authorized and issued, are fully paid and
non-assessable, are free of any preemptive rights, rights of first refusal or
similar rights (except for the preferred share purchase rights issued pursuant
to the Company's Rights Plan (the "Rights") as described in the Prospectus),
and conform to the description of the Stock contained in the Prospectus; except
as described in the Prospectus, there are no outstanding options, warrants or
other rights calling for the issuance of, and there are no commitments, plans
or arrangements to issue, any shares of capital stock of the Company or any
security convertible or exchangeable or exercisable for capital stock of the
Company; there are no holders of securities of the Company who, by reason of
the filing of the Registration Statement, have the right (and have not waived
such right) to request the Company to include in the Registration Statement
securities owned by them;
(k) all of the issued shares of capital stock of each corporate
subsidiary of the Company have been duly and validly authorized and issued, are
fully paid and non-assessable and (except for directors' qualifying shares and
except as set forth in the Prospectus) are owned directly or indirectly by the
Company, free and clear of all liens, encumbrances, equities or claims; the
Company owns, directly or indirectly through a corporate subsidiary, (i) a
40.5% net interest in Wind River Gathering Company, a joint venture, (ii) a 20%
partnership interest (75% after "Pay-Out", as defined in the partnership
agreement applicable thereto) in Wind River-Pavillion, Ltd., a Texas limited
partnership, and (iii) a 45% ownership interest in Wildhorse Energy Partners,
L.L.C. a [Texas] limited liability company (collectively, the "Non-Corporate
Interests"), free and clear of all liens, encumbrances, equities, security
interests, or claims, except as provided in the partnership or joint venture
agreement relating thereto, and the Non-Corporate Interests have been duly and
validly authorized and issued and are fully paid and non-assessable, except as
provided in the partnership or joint venture agreement related thereto with
respect to future obligations of the parties thereof, and there are no
outstanding options, warrants or other rights calling for the issuance of, and
there are no commitments, plans or arrangements to issue, any shares of capital
stock or other equity interest of any subsidiary or any security convertible or
exchangeable or exercisable for capital stock or other equity interest of any
subsidiary; except for the shares of stock of each corporate subsidiary owned
by the Company and except for the Non-Corporate Interests, neither the Company
nor any subsidiary owns, directly or indirectly, any shares of capital stock of
any corporation or have any equity interest in any firm, partnership, joint
venture, association or other entity;
(l) The unissued Shares to be issued and sold by the Company to
the Underwriters hereunder have been duly and validly authorized and, when
issued and delivered against payment
4
<PAGE> 5
therefor as provided herein, will be duly and validly issued and fully paid and
non-assessable and will conform to the description of the Stock contained in
the Prospectus;
(m) The Company has all requisite power and authority to execute,
deliver and perform its obligations under this Agreement; the execution,
delivery and performance by the Company of its obligations under this Agreement
have been duly and validly authorized by all requisite corporate action of the
Company; and this Agreement constitutes the legal, valid and binding obligation
of the Company;
(n) The issue and sale of the Shares by the Company and the
compliance by the Company with all of the provisions of this Agreement and the
consummation of the transactions herein contemplated will not conflict with or
result in a breach or violation of any of the terms or provisions of, or
constitute a default under, any indenture, mortgage, deed of trust, loan
agreement or other agreement or instrument to which the Company or any of its
subsidiaries is a party or by which the Company or any of its subsidiaries is
bound or to which any of the property or assets of the Company or any of its
subsidiaries is subject, nor will such action result in any violation of the
provisions of the Certificate of Incorporation or By-laws of the Company or any
statute or any order, rule or regulation of any court or governmental agency or
body having jurisdiction over the Company or any of its subsidiaries or any of
their properties; and no consent, approval, authorization, order, registration
or qualification of or with any such court or governmental agency or body is
required for the issue and sale of the Shares or the consummation by the
Company of the transactions contemplated by this Agreement, except the
registration under the Act of the Shares and such consents, approvals,
authorizations, registrations or qualifications as may be required under state
securities or Blue Sky laws in connection with the purchase and distribution of
the Shares by the Underwriters;
(o) Neither the Company nor any of its subsidiaries is in
violation of its Certificate of Incorporation or By-laws or in default in the
performance or observance of any material obligation, agreement, covenant or
condition contained in any indenture, mortgage, deed of trust, loan agreement,
lease or other agreement or instrument to which it is a party or by which it or
any of its properties may be bound;
(p) The Company and its subsidiaries have such licenses, permits
and other approvals or authorizations of and from governmental or regulatory
authorities ("Permits") as are necessary under applicable law to own their
respective properties and to conduct their respective businesses in the manner
now being conducted and as described in the Prospectus; and the Company and its
subsidiaries have fulfilled and performed in all material respects their
respective obligations with respect to such Permits, and no event has occurred
which allows, or after notice or lapse of time or both would allow, revocation
or termination thereof or result in any other material impairment of the rights
of the holder of any such permits;
(q) The statements set forth in the Prospectus under the caption
"Description of Capital Stock," insofar as they purport to constitute a summary
of the terms of the Stock and under the caption "Underwriting," insofar as they
purport to describe the provisions of the laws and documents referred to
therein, are accurate, complete and fair;
(r) There are no statutes or governmental regulations, or any
contracts or other documents that are required to be described in or filed as
exhibits to the Registration Statement which are not described therein or filed
or incorporated by reference as exhibits thereto;
(s) Other than as set forth in the Prospectus, there are no legal
or governmental proceedings pending to which the Company or any of its
subsidiaries is a party or of which any property of the Company or any of its
subsidiaries is the subject which, if determined adversely to
5
<PAGE> 6
the Company or any of its subsidiaries, would individually or in the aggregate
have a material adverse effect on the current or future consolidated financial
position, stockholders' equity or results of operations of the Company and its
subsidiaries; and, to the best of the Company's knowledge, no such proceedings
are threatened or contemplated by governmental authorities or threatened by
others;
(t) The Company and its subsidiaries have timely filed all
necessary tax returns and notices and have paid all federal, state, county,
local and foreign taxes of any nature whatsoever for all tax years through
December 31, 1996, to the extent such taxes have become due. The Company has
no knowledge, or any reasonable grounds to know, of any tax deficiencies which
would have a material adverse effect on the Company or any of its subsidiaries;
the Company and its subsidiaries have paid all taxes which have become due,
whether pursuant to any assessments, or otherwise, and there is no further
liability (whether or not disclosed on such returns) or assessments for any
such taxes, and no interest or penalties accrued or accruing with respect
thereto, except as may be set forth or adequately reserved for in the financial
statements included in or incorporated by reference into the Registration
Statement; the amounts currently set up as provisions for taxes or otherwise by
the Company and its subsidiaries on their books and records are sufficient for
the payment of all their unpaid federal, foreign, state, county and local taxes
accrued through the dates as of which they speak, and for which the Company and
its subsidiaries may be liable in their own right, or as a transferee of the
assets of, or as successor to any other corporation, association, partnership,
joint venture or other entity;
(u) The Company and each of its subsidiaries carry, or are covered
by, insurance in such amounts and covering such risks as they believe is
reasonably necessary for the conduct of their respective business and the value
of their respective properties;
(v) The Company and its subsidiaries maintain a system of internal
accounting controls sufficient to provide reasonable assurances that (i)
transactions are executed in accordance with management's general or specific
authorization; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain accountability for assets; (iii) access
to assets is permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is compared with
existing assets at reasonable intervals and appropriate action is taken with
respect to any differences;
(w) Neither the Company nor any of its subsidiaries is in
violation of any foreign, federal, state or local law or regulation relating to
the protection of human health and safety, the environment or hazardous or
toxic substances or wastes, pollutants or contaminants, nor any federal or
state law relating to discrimination in the hiring, promotion or paying of
employees nor any applicable federal or state wages and hours laws, nor any
provisions of the Employee Retirement Income Security Act of 1974, as amended,
or the rules and regulations promulgated thereunder, where such violation would
have a material adverse effect on the Company and its subsidiaries, taken as a
whole;
(x) The Company is not and, after giving effect to the offering
and sale of the Shares, will not be an "investment company" or an entity
"controlled" by an "investment company," as such terms are defined in the
Investment Company Act of 1940, as amended (the "Investment Company Act");
(y) Neither the Company nor any of its affiliates does business
with the government of Cuba or with any person or affiliate located in Cuba
within the meaning of Section 517.075, Florida Statutes; and
6
<PAGE> 7
(z) Arthur Andersen L.L.P. and Deloitte & Touche LLP, who have
certified certain financial statements of the Company and its subsidiaries
included or incorporated by reference in the Registration Statement, are
independent public accountants as required by the Act and the rules and
regulations of the Commission thereunder.
2. Subject to the terms and conditions herein set forth, (a) the
Company agrees to issue and sell to each of the Underwriters, and each of the
Underwriters agrees, severally and not jointly, to purchase from the Company,
at a purchase price per share of $................, the number of Firm Shares
set forth opposite the name of such Underwriter in Schedule I hereto and (b) in
the event and to the extent that the Underwriters shall exercise the election
to purchase Optional Shares as provided below, the Company agrees to issue and
sell to each of the Underwriters, and each of the Underwriters agrees,
severally and not jointly, to purchase from the Company, at the purchase price
per share set forth in clause (a) of this Section 2, that portion of the number
of Optional Shares as to which such election shall have been exercised (to be
adjusted by you so as to eliminate fractional shares) determined by multiplying
such number of Optional Shares by a fraction, the numerator of which is the
maximum number of Optional Shares which such Underwriter is entitled to
purchase as set forth opposite the name of such Underwriter in Schedule I
hereto and the denominator of which is the maximum number of Optional Shares
that all of the Underwriters are entitled to purchase hereunder.
The Company hereby grants to the Underwriters the right to purchase at
their election up to 600,000 Optional Shares, at the purchase price per share
set forth in the paragraph above, for the sole purpose of covering
overallotments in the sale of the Firm Shares. Any such election to purchase
Optional Shares may be exercised only by written notice from you to the
Company, given within a period of 30 calendar days after the date of this
Agreement, setting forth the aggregate number of Optional Shares to be
purchased and the date on which such Optional Shares are to be delivered, as
determined by you but in no event earlier than the First Time of Delivery (as
defined in Section 4 hereof) or, unless you and the Company otherwise agree in
writing, earlier than two or later than ten business days after the date of
such notice.
3. Upon the authorization by you of the release of the Firm
Shares, the several Underwriters propose to offer the Firm Shares for sale upon
the terms and conditions set forth in the Prospectus.
4. (a) The Shares to be purchased by each Underwriter hereunder,
in definitive form, and in such authorized denominations and registered in such
names as Goldman, Sachs & Co. may request upon at least forty-eight hours'
prior notice to the Company shall be delivered by or on behalf of the Company
to Goldman, Sachs & Co., through the facilities of the Depository Trust Company
("DTC") for the account of such Underwriter, against payment by or on behalf of
such Underwriter of the purchase price therefor by wire transfer to the Company
in Federal (same day) funds. The Company will cause the certificates
representing the Shares to be made available for checking and packaging at
least twenty-four hours prior to the Time of Delivery (as defined below) with
respect thereto at the office of DTC or its designated custodian (the
"Designated Office"). The time and date of such delivery and payment shall be
9:30 a.m., New York City time, on October . . . . , 1997 or such other time and
date as Goldman, Sachs & Co. and the Company may agree upon in writing. Such
time and date are herein called the "Time of Delivery". The time and date of
such delivery and payment shall be, with respect to the Firm Shares, 9:30 a.m.,
New York City time, on October . . . . , 1997 or such other time and date as
Goldman, Sachs & Co. and the Company may agree upon in writing, and, with
respect to the Optional Shares, 9:30 a.m., New York time, on the date specified
by Goldman, Sachs & Co. in the written notice given by Goldman, Sachs & Co. of
the Underwriters' election to purchase such Optional Shares, or such other time
and date as Goldman, Sachs & Co. and the Company may agree upon in writing.
Such time and date for
7
<PAGE> 8
delivery of the Firm Shares is herein called the "First Time of Delivery," such
time and date for delivery of the Optional Shares, if not the First Time of
Delivery, is herein called the "Second Time of Delivery," and each such time
and date for delivery is herein called a "Time of Delivery".
(b) The documents to be delivered at each Time of Delivery by or
on behalf of the parties hereto pursuant to Section 7 hereof, including the
cross receipt for the Shares and any additional documents requested by the
Underwriters pursuant to Section 7 hereof, will be delivered at the offices of
Andrews & Kurth L.L.P., 4200 Texas Commerce Tower, Houston, Texas 77002 (the
"Closing Location"), and the Shares will be delivered at the Designated Office,
all at such Time of Delivery. A meeting will be held at the Closing Location
at .......p.m., New York City time, on the New York Business Day next preceding
such Time of Delivery, at which meeting the final drafts of the documents to be
delivered pursuant to the preceding sentence will be available for review by
the parties hereto. For the purposes of this Section 4, "New York Business
Day" shall mean each Monday, Tuesday, Wednesday, Thursday and Friday which is
not a day on which banking institutions in New York are generally authorized or
obligated by law or executive order to close.
5. The Company agrees with each of the Underwriters:
(a) To prepare the Prospectus in a form approved by you and to
file such Prospectus pursuant to Rule 424(b) under the Act not later than the
Commission's close of business on the second business day following the
execution and delivery of this Agreement, or, if applicable, such earlier time
as may be required by Rule 430A(a)(3) under the Act; to make no further
amendment or any supplement to the Registration Statement or Prospectus prior
to the last Time of Delivery which shall be disapproved by you promptly after
reasonable notice thereof; to advise you, promptly after it receives notice
thereof, of the time when any amendment to the Registration Statement has been
filed or becomes effective or any supplement to the Prospectus or any amended
Prospectus has been filed and to furnish you with copies thereof; to file
promptly all reports and any definitive proxy or information statements
required to be filed by the Company with the Commission pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of the
Prospectus and for so long as the delivery of a prospectus is required in
connection with the offering or sale of the Shares; to advise you, promptly
after it receives notice thereof, of the issuance by the Commission of any stop
order or of any order preventing or suspending the use of any Preliminary
Prospectus or prospectus, of the suspension of the qualification of the Shares
for offering or sale in any jurisdiction, of the initiation or threatening of
any proceeding for any such purpose, or of any request by the Commission for
the amending or supplementing of the Registration Statement or Prospectus or
for additional information; and, in the event of the issuance of any stop order
or of any order preventing or suspending the use of any Preliminary Prospectus
or prospectus or suspending any such qualification, promptly to use its best
efforts to obtain the withdrawal of such order;
(b) Promptly from time to time to take such action as you may
reasonably request to qualify the Shares for offering and sale under the
securities laws of such jurisdictions as you may request and to comply with
such laws so as to permit the continuance of sales and dealings therein in such
jurisdictions for as long as may be necessary to complete the distribution of
the Shares, provided that in connection therewith the Company shall not be
required to qualify as a foreign corporation or to file a general consent to
service of process in any jurisdiction;
(c) Prior to 10:00 a.m., New York City time, on the New York
Business Day next succeeding the date of this Agreement, and from time to time,
to furnish the Underwriters with copies of the Prospectus in New York City in
such quantities as you may reasonably request, and, if the delivery of a
prospectus is required at any time prior to the expiration of nine months after
the time of issue of the Prospectus in connection with the offering or sale of
the Shares and if at such
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time any event shall have occurred as a result of which the Prospectus as then
amended or supplemented would include an untrue statement of a material fact or
omit to state any material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made when such
Prospectus is delivered, not misleading, or, if for any other reason it shall
be necessary during such period to amend or supplement the Prospectus or to
file under the Exchange Act any document incorporated by reference in the
Prospectus in order to comply with the Act or the Exchange Act, to notify you
and upon your request to file such document and to prepare and furnish without
charge to each Underwriter and to any dealer in securities as many copies as
you may from time to time reasonably request of an amended Prospectus or a
supplement to the Prospectus which will correct such statement or omission or
effect such compliance, and in case any Underwriter is required to deliver a
prospectus in connection with sales of any of the Shares at any time nine
months or more after the time of issue of the Prospectus, upon your request but
at the expense of such Underwriter, to prepare and deliver to such Underwriter
as many copies as you may request of an amended or supplemented Prospectus
complying with Section 10(a)(3) of the Act;
(d) To make generally available to its securityholders as soon as
practicable, but in any event not later than eighteen months after the
effective date of the Registration Statement (as defined in Rule 158(c) under
the Act), an earnings statement of the Company and its subsidiaries (which need
not be audited) complying with Section 11(a) of the Act and the rules and
regulations thereunder (including, at the option of the Company, Rule 158);
(e) During the period beginning from the date hereof and
continuing to and including the date ninety days (90) after the date of the
Prospectus, not to offer, sell, contract to sell or otherwise dispose of,
except as provided hereunder any securities of the Company that are
substantially similar to the Shares, including but not limited to any
securities that are convertible into or exchangeable for, or that represent the
right to receive, Stock or any such substantially similar securities (other
than pursuant to employee stock option plans existing on, or upon the
conversion or exchange of convertible or exchangeable securities outstanding as
of, the date of this Agreement), without your prior written consent;
(f) To furnish to its stockholders as soon as practicable after
the end of each fiscal year an annual report (including a balance sheet and
statements of income, stockholders' equity and cash flows of the Company and
its consolidated subsidiaries certified by independent public accountants) and,
as soon as practicable after the end of each of the first three quarters of
each fiscal year (beginning with the fiscal quarter ending after the effective
date of the Registration Statement), consolidated summary financial information
of the Company and its subsidiaries for such quarter in reasonable detail;
(g) During a period of five years from the effective date of the
Registration Statement, to furnish to you copies of all reports or other
communications (financial or other) furnished to stockholders, and to deliver
to you (i) as soon as they are available, copies of any reports and financial
statements furnished to or filed with the Commission or any national securities
exchange on which any class of securities of the Company is listed; and (ii)
such additional information concerning the business and financial condition of
the Company as you may from time to time reasonably request (such financial
statements to be on a consolidated basis to the extent the accounts of the
Company and its subsidiaries are consolidated in reports furnished to its
stockholders generally or to the Commission);
(h) To use the net proceeds received by it from the sale of the
Shares pursuant to this Agreement in the manner specified in the Prospectus
under the caption "Use of Proceeds";
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(i) To use its best efforts to list for quotation the Shares on
the National Association of Securities Dealers Automated Quotations National
Market System ("NASDAQ");
(j) If the Company elects to rely upon Rule 462(b), the Company
shall file a Rule 462(b) Registration Statement with the Commission in
compliance with Rule 462(b) by 10:00 p.m., Washington, D.C. time, on the date
of this Agreement, and the Company shall at the time of filing either pay to
the Commission the filing fee for the Rule 462(b) Registration Statement or
give irrevocable instructions for the payment of such fee pursuant to Rule
111(b) under the Act.
6. The Company covenants and agrees with the several Underwriters
that the Company will pay or cause to be paid the following: (i) the fees,
disbursements and expenses of the Company's counsel and accountants in
connection with the registration of the Shares under the Act and all other
expenses in connection with the preparation, printing and filing of the
Registration Statement, any Preliminary Prospectus and the Prospectus and
amendments and supplements thereto and the mailing and delivering of copies
thereof to the Underwriters and dealers; (ii) the cost of printing or producing
any Agreement among Underwriters, this Agreement, the Blue Sky Memorandum,
closing documents (including any compilations thereof) and any other documents
in connection with the offering, purchase, sale and delivery of the Shares;
(iii) all expenses in connection with the qualification of the Shares for
offering and sale under state securities laws as provided in Section 5(b)
hereof, including the fees and disbursements of counsel for the Underwriters in
connection with such qualification and in connection with the Blue Sky survey
(iv) all fees and expenses in connection with listing the Shares on the NASDAQ;
(iv) the filing fees incident to, and the fees and disbursements of counsel for
the Underwriters in connection with, securing any required review by the
National Association of Securities Dealers, Inc. of the terms of the sale of
the Shares; (v) the cost of preparing stock certificates; (vi) the cost and
charges of any transfer agent or registrar; and (vii) all other costs and
expenses incident to the performance of its obligations hereunder which are not
otherwise specifically provided for in this Section. It is understood,
however, that, except as provided in this Section, and Sections 8 and 11
hereof, the Underwriters will pay all of their own costs and expenses,
including the fees of their counsel, stock transfer taxes on resale of any of
the Shares by them, and any advertising expenses connected with any offers they
may make.
7. The obligations of the Underwriters hereunder, as to the
Shares to be delivered at each Time of Delivery, shall be subject, in their
discretion, to the condition that all representations and warranties and other
statements of the Company herein are, at and as of such Time of Delivery, true
and correct, the condition that the Company shall have performed all of its
obligations hereunder theretofore to be performed, and the following additional
conditions:
(a) The Prospectus shall have been filed with the Commission
pursuant to Rule 424(b) within the applicable time period prescribed for such
filing by the rules and regulations under the Act and in accordance with
Section 5(a) hereof; if the Company has elected to rely upon Rule 462(b), the
Rule 462(b) Registration Statement shall have become effective by 10:00 p.m.,
Washington, D.C. time, on the date of this Agreement; no stop order suspending
the effectiveness of the Registration Statement or any part thereof shall have
been issued and no proceeding for that purpose shall have been initiated or
threatened by the Commission; and all requests for additional information on
the part of the Commission shall have been complied with to your reasonable
satisfaction;
(b) Andrews & Kurth L.L.P., counsel for the Underwriters, shall
have furnished to you such opinion or opinions (a draft of each such opinion is
attached as Annex III(a) hereto), dated such Time of Delivery, with respect to
the matters covered in paragraphs (i), (ii), (vii), (xi) (xvii) and (xviii) of
subsection (c) below (except that such counsel, for purposes of paragraph (ii)
of subsection
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(c) below, need express an opinion only with respect to the due authorization,
issuance and non-assessability of the Shares) as well as such other related
matters as you may reasonably request, and such counsel shall have received
such papers and information as they may reasonably request to enable them to
pass upon such matters;
(c) Vinson & Elkins L.L.P., counsel for the Company, shall have
furnished to you their written opinion (a draft of such opinion is attached as
Annex III(b) hereto), dated such Time of Delivery, in form and substance
satisfactory to you, to the effect that:
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of Delaware,
with power and authority (corporate and other) to own its properties
and conduct its business as described in the Prospectus;
(ii) The Company has an authorized capitalization as set
forth in the Prospectus, and all of the issued shares of capital stock
of the Company (including the Shares being delivered at such Time of
Delivery) have been duly and validly authorized and issued and are
fully paid and non-assessable; and the Shares conform to the
description of the Stock contained in the Prospectus;
(iii) The Company has been duly qualified as a foreign
corporation for the transaction of business and is in good standing
under the laws of each other jurisdiction in which it owns or leases
properties or conducts any business so as to require such
qualification or is subject to no material liability or disability by
reason of failure to be so qualified in any such jurisdiction (such
counsel being entitled to rely in respect of the opinion in this
clause upon opinions of local counsel and in respect of matters of
fact upon certificates of officers of the Company, provided that such
counsel shall state that they believe that both you and they are
justified in relying upon such opinions and certificates);
(iv) Each subsidiary of the Company has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of its jurisdiction of incorporation; and all of the
issued shares of capital stock of each such subsidiary have been duly
and validly authorized and issued, are fully paid and non-assessable,
and (except for directors' qualifying shares and except as otherwise
set forth in the Prospectus) are owned directly or indirectly by the
Company, free and clear of all liens, encumbrances, equities or claims
(such counsel being entitled to rely in respect of the opinion in this
clause upon opinions of local counsel and in respect to matters of
fact upon certificates of officers of the Company or its subsidiaries,
provided that such counsel shall state that they believe that both you
and they are justified in relying upon such opinions and
certificates);
(v) The Company and its subsidiaries have good and
marketable title in fee simple to all real property owned by them, in
each case free and clear of all liens, encumbrances and defects except
such as are described in the Prospectus or such as do not materially
affect the value of such property and do not interfere with the use
made and proposed to be made of such property by the Company and its
subsidiaries; and any real property and buildings held under lease by
the Company and its subsidiaries are held by them under valid,
subsisting and enforceable leases with such exceptions as are not
material and do not interfere with the use made and proposed to be
made of such property and buildings by the Company and its
subsidiaries (in giving the opinion in this clause, such counsel may
state that no examination of record titles for the purpose of such
opinion has been made, and that they are relying upon a general review
of the titles of the Company and its subsidiaries, upon opinions of
local counsel and abstracts, reports and policies of title companies
rendered or issued at or subsequent to the time of acquisition of such
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<PAGE> 12
property by the Company or its subsidiaries, upon opinions of counsel
to the lessors of such property and, in respect to matters of fact,
upon certificates of officers of the Company or its subsidiaries,
provided that such counsel shall state that they believe that both you
and they are justified in relying upon such opinions, abstracts,
reports, policies and certificates);
(vi) To the best of such counsel's knowledge and other
than as set forth in the Prospectus, there are no legal or
governmental proceedings pending to which the Company or any of its
subsidiaries is a party or of which any property of the Company or any
of its subsidiaries is the subject which, if determined adversely to
the Company or any of its subsidiaries, would individually or in the
aggregate have a material adverse effect on the current or future
consolidated financial position, stockholders' equity or results of
operations of the Company and its subsidiaries; and, to the best of
such counsel's knowledge, no such proceedings are threatened or
contemplated by governmental authorities or threatened by others;
(vii) This Agreement has been duly authorized, executed and
delivered by the Company;
(viii) The issue and sale of the Shares being delivered at
such Time of Delivery by the Company and the compliance by the Company
with all of the provisions of this Agreement and the consummation of
the transactions herein contemplated will not conflict with or result
in a breach or violation of any of the terms or provisions of, or
constitute a default under, any indenture, mortgage, deed of trust,
loan agreement or other agreement or instrument known to such counsel
to which the Company or any of its subsidiaries is a party or by which
the Company or any of its subsidiaries is bound or to which any of the
property or assets of the Company or any of its subsidiaries is
subject, nor will such action result in any violation of the
provisions of the Certificate of Incorporation or By-laws of the
Company or any statute or any order, rule or regulation known to such
counsel of any court or governmental agency or body having
jurisdiction over the Company or any of its subsidiaries or any of
their properties;
(ix) No consent, approval, authorization, order,
registration or qualification of or with any such court or
governmental agency or body is required for the issue and sale of the
Shares or the consummation by the Company of the transactions
contemplated by this Agreement, except the registration under the Act
of the Shares, and such consents, approvals, authorizations,
registrations or qualifications as may be required under state
securities or Blue Sky laws in connection with the purchase and
distribution of the Shares by the Underwriters;
(x) Neither the Company nor any of its subsidiaries is in
violation of its Certificate of Incorporation or By-laws or in default
in the performance or observance of any material obligation,
agreement, covenant or condition contained in any indenture, mortgage,
deed of trust, loan agreement, lease or other agreement or instrument
to which it is a party or by which it or any of its properties may be
bound;
(xi) The statements set forth in the Prospectus under the
caption "Description of Capital Stock," insofar as they purport to
constitute a summary of the terms of the Stock and under the caption
"Underwriting," insofar as they purport to describe the provisions of
the laws and documents referred to therein, are accurate, complete and
fair;
(xii) Except for the Rights, there are no preemptive or
other rights to subscribe for or to purchase, nor any restriction upon
the voting or transfer of, any Stock pursuant to any applicable
statute, the Company's Certificate of Incorporation or By-Laws, in
each case
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as amended to the date hereof, or any agreement or other instrument
known to such counsel; and no holders of securities of the Company
have rights to the registration thereof under the Registration
Statement or, if any such holders have such rights, such holders have
waived such rights;
(xiii) To the extent summarized therein, (a) all contracts
and agreements summarized in the Registration Statement and the
Prospectus are fairly summarized therein, conform in all material
respects to the descriptions thereof contained therein, and, (b) to
the extent such contracts or agreements or any other material
agreements are required under the Act or the rules and regulations
thereunder to be filed or incorporated by reference therein, as
exhibits to the Registration Statement, they are so filed or
incorporated by reference; and such counsel does not know of any
contracts or other documents required to be summarized or disclosed in
the Prospectus or to be so filed or incorporated by reference as an
exhibit to the Registration Statement, which have not been so
summarized or disclosed, or so filed or incorporated by reference;
(xiv) All descriptions in the Prospectus of statutes,
regulations or legal or governmental proceedings are fair summaries
thereof and fairly present the information required to be shown with
respect to such matters;
(xv) The Company is not an "investment company" or an
entity "controlled" by an "investment company," as such terms are
defined in the Investment Company Act;
(xvi) The Registration Statement has become effective under
the Act, the Prospectus has been filed in accordance with Rule 424(b)
of the rules and regulations of the Commission under the Act,
including the applicable time periods set forth therein, and, to the
best knowledge of such counsel, no stop order suspending the
effectiveness of the Registration Statement has been issued and no
proceedings for that purpose have been instituted or are pending or
threatened under the Act;
(xvii) The documents incorporated by reference in the
Prospectus or any further amendment or supplement thereto made by the
Company prior to such Time of Delivery (other than the financial
statements and related schedules therein, as to which such counsel
need express no opinion), when they became effective or were filed
with the Commission, as the case may be, complied as to form in all
material respects with the requirements of the Act or the Exchange
Act, as applicable, and the rules and regulations of the Commission
thereunder; and they have no reason to believe that any of such
documents, when such documents became effective or were so filed, as
the case may be, contained, in the case of a registration statement
which became effective under the Act, an untrue statement of a
material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading, or, in the case of other documents which were filed under
the Exchange Act with the Commission, an untrue statement of a
material fact or omitted to state a material fact necessary in order
to make the statements therein, in the light of the circumstances
under which they were made when such documents were so filed, not
misleading; and
(xviii) The Registration Statement and the Prospectus and any
further amendments and supplements thereto made by the Company prior
to such Time of Delivery (other than the financial statements and
related schedules therein, as to which such counsel need express no
opinion) comply as to form in all material respects with the
requirements of the Act and the rules and regulations thereunder;
although they do not assume any responsibility for the accuracy,
completeness or fairness of the statements contained in the
Registration Statement or the Prospectus, except for those referred to
in the opinion in
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<PAGE> 14
subsection (xi) of this section 7(c), they have no reason to believe
that, as of its effective date, the Registration Statement or any
further amendment thereto made by the Company prior to such Time of
Delivery (other than the financial statements and related schedules
therein, as to which such counsel need express no opinion) contained
an untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements
therein not misleading or that, as of its date, the Prospectus or any
further amendment or supplement thereto made by the Company prior to
such Time of Delivery (other than the financial statements and related
schedules therein, as to which such counsel need express no opinion)
contained an untrue statement of a material fact or omitted to state a
material fact necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading or
that, as of such Time of Delivery, either the Registration Statement
or the Prospectus or any further amendment or supplement thereto made
by the Company prior to such Time of Delivery (other than the
financial statements and related schedules therein, as to which such
counsel need express no opinion) contains an untrue statement of a
material fact or omits to state a material fact necessary to make the
statements therein, in the light of the circumstances under which they
were made, not misleading; and they do not know of any amendment to
the Registration Statement required to be filed or of any contracts or
other documents of a character required to be filed as an exhibit to
the Registration Statement or required to be incorporated by reference
into the Prospectus or required to be described in the Registration
Statement or the Prospectus which are not filed or incorporated by
reference or described as required;
(d)(i) On the date of the Prospectus at a time prior to the execution
of this Agreement, at 9:30 a.m., New York City time, on the effective date of
any post-effective amendment to the Registration Statement filed subsequent to
the date of this Agreement and also at each Time of Delivery, Arthur Andersen
LLP shall have furnished to you a letter or letters, dated the respective dates
of delivery thereof, in form and substance satisfactory to you, to the effect
set forth in Annex I hereto (the executed copy of the letter delivered prior to
the execution of this Agreement is attached as Annex I(a) hereto and a draft of
the form of letter to be delivered on the effective date of any post-effective
amendment to the Registration Statement and as of each Time of Delivery is
attached as Annex I(b) hereto);
(ii) On the date of the Prospectus at a time prior to the execution
of this Agreement, at 9:30 a.m., New York City time, on the effective date of
any post-effective amendment to the Registration Statement filed subsequent to
the date of this Agreement and also at each Time of Delivery, Deloitte & Touche
LLP shall have furnished to you a letter or letters, dated the respective dates
of delivery thereof, in form and substance satisfactory to you, to the effect
set forth in Annex II hereto (the executed copy of the letter delivered prior
to the execution of this Agreement is attached as Annex II(a) hereto and a
draft of the form of letter to be delivered on the effective date of any
post-effective amendment to the Registration Statement and as of each Time of
Delivery is attached as Annex II(b) hereto);
(e)(i) Neither the Company nor any of its subsidiaries shall have
sustained since the date of the latest audited financial statements included or
incorporated by reference in the Prospectus any loss or interference with its
business from fire, explosion, flood or other calamity, whether or not covered
by insurance, or from any labor dispute or court or governmental action, order
or decree, otherwise than as set forth or contemplated in the Prospectus, and
(ii) since the respective dates as of which information is given in the
Prospectus there shall not have been any change in the capital stock or
long-term debt of the Company or any of its subsidiaries or any change, or any
development involving a prospective change, in or affecting the general
affairs, management,
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<PAGE> 15
financial position, stockholders' equity or results of operations of the
Company and its subsidiaries, otherwise than as set forth or contemplated in
the Prospectus, the effect of which, in any such case described in Clause (i)
or (ii), is in the judgment of the Representatives so material and adverse as
to make it impracticable or inadvisable to proceed with the public offering or
the delivery of the Shares being delivered at such Time of Delivery on the
terms and in the manner contemplated in the Prospectus;
(f) On or after the date hereof (i) no downgrading shall have
occurred in the rating accorded the Company's debt securities by any
"nationally recognized statistical rating organization", as that term is
defined by the Commission for purposes of Rule 436(g)(2) under the Act, and
(ii) no such organization shall have publicly announced that it has under
surveillance or review, with possible negative implications, its rating of any
of the Company's debt securities;
(g) On or after the date hereof there shall not have occurred any
of the following: (i) a suspension or material limitation in trading in
securities generally on the New York Stock Exchange or on the NASDAQ; (ii) a
suspension or material limitation in trading in the Company's securities on the
NASDAQ; (iii) a general moratorium on commercial banking activities declared by
either Federal or New York or Texas State authorities; or (iv) the outbreak or
escalation of hostilities involving the United States or the declaration by the
United States of a national emergency or war, if the effect of any such event
specified in this Clause (iv) in the judgment of the Representatives makes it
impracticable or inadvisable to proceed with the public offering or the
delivery of the Shares being delivered at such Time of Delivery on the terms
and in the manner contemplated in the Prospectus;
(h) The Shares to be sold at such Time of Delivery shall have been
duly listed for quotation on NASDAQ;
(i) The Company has obtained and delivered to the Underwriters
executed copies of an agreement from each person listed on Annex IV attached
hereto, substantially to the effect set forth in Subsection 5(e) hereof in form
and substance satisfactory to you;
(j) The Company shall have complied with the provisions of Section
5(c) hereof with respect to the furnishing of prospectuses on the New York
Business Day next succeeding the date of this Agreement; and
(k) The Company shall have furnished or caused to be furnished to
you at such Time of Delivery certificates of officers of the Company
satisfactory to you as to the accuracy of the representations and warranties of
the Company herein at and as of such Time of Delivery, as to the performance by
the Company of all of its obligations hereunder to be performed at or prior to
such Time of Delivery, as to the matters set forth in subsections (a) and (e)
of this Section and as to such other matters as you may reasonably request.
8. (a) The Company will indemnify and hold harmless each
Underwriter against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions
in respect thereof) arise out of or are based upon an untrue statement or
alleged untrue statement of a material fact contained in any Preliminary
Prospectus, the Registration Statement or the Prospectus, or any amendment or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and will reimburse
each Underwriter for any legal or other expenses reasonably incurred by such
Underwriter in connection with investigating or defending any such action or
claim as such expenses are incurred; provided, however, that the Company shall
not be liable in any such case to the extent that any such loss,
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<PAGE> 16
claim, damage or liability arises out of or is based upon an untrue statement
or alleged untrue statement or omission or alleged omission made in any
Preliminary Prospectus, the Registration Statement or the Prospectus or any
such amendment or supplement in reliance upon and in conformity with written
information furnished to the Company by any Underwriter through Goldman, Sachs
& Co. expressly for use therein.
(b) Each Underwriter will indemnify and hold harmless the Company
against any losses, claims, damages or liabilities to which the Company may
become subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are
based upon an untrue statement or alleged untrue statement of a material fact
contained in any Preliminary Prospectus, the Registration Statement or the
Prospectus, or any amendment or supplement thereto, or arise out of or are
based upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, in each case to the extent, but only to the extent, that such
untrue statement or alleged untrue statement or omission or alleged omission
was made in any Preliminary Prospectus, the Registration Statement or the
Prospectus or any such amendment or supplement in reliance upon and in
conformity with written information furnished to the Company by such
Underwriter through Goldman, Sachs & Co. expressly for use therein; and will
reimburse the Company for any legal or other expenses reasonably incurred by
the Company in connection with investigating or defending any such action or
claim as such expenses are incurred.
(c) Promptly after receipt by an indemnified party under
subsection (a) or (b) above of notice of the commencement of any action, such
indemnified party shall, if a claim in respect thereof is to be made against
the indemnifying party under such subsection, notify the indemnifying party in
writing of the commencement thereof; but the omission so to notify the
indemnifying party shall not relieve it from any liability which it may have to
any indemnified party otherwise than under such subsection. In case any such
action shall be brought against any indemnified party and it shall notify the
indemnifying party of the commencement thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it shall wish, jointly
with any other indemnifying party similarly notified, to assume the defense
thereof, with counsel satisfactory to such indemnified party (who shall not,
except with the consent of the indemnified party, be counsel to the
indemnifying party), and, after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party shall not be liable to such indemnified party under such
subsection for any legal expenses of other counsel or any other expenses, in
each case subsequently incurred by such indemnified party, in connection with
the defense thereof other than reasonable costs of investigation. No
indemnifying party shall, without the written consent of the indemnified party,
effect the settlement or compromise of, or consent to the entry of any judgment
with respect to, any pending or threatened action or claim in respect of which
indemnification or contribution may be sought hereunder (whether or not the
indemnified party is an actual or potential party to such action or claim)
unless such settlement, compromise or judgment (i) includes an unconditional
release of the indemnified party from all liability arising out of such action
or claim and (ii) does not include a statement as to or an admission of fault,
culpability or a failure to act, by or on behalf of any indemnified party.
(d) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an indemnified party under
subsection (a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions in respect thereof) referred to therein, then each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities
(or actions in respect thereof) in such proportion as is appropriate to reflect
the relative benefits received by the Company on the one hand and the
Underwriters on the other from the offering of the Shares. If, however, the
allocation provided by
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the immediately preceding sentence is not permitted by applicable law or if the
indemnified party failed to give the notice required under subsection (c)
above, then each indemnifying party shall contribute to such amount paid or
payable by such indemnified party in such proportion as is appropriate to
reflect not only such relative benefits but also the relative fault of the
Company on the one hand and the Underwriters on the other in connection with
the statements or omissions which resulted in such losses, claims, damages or
liabilities (or actions in respect thereof), as well as any other relevant
equitable considerations. The relative benefits received by the Company on the
one hand and the Underwriters on the other shall be deemed to be in the same
proportion as the total net proceeds from the offering (before deducting
expenses) received by the Company bear to the total underwriting discounts and
commissions received by the Underwriters, in each case as set forth in the
table on the cover page of the Prospectus. The relative fault shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to
state a material fact relates to information supplied by the Company on the one
hand or the Underwriters on the other and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The Company and the Underwriters agree that it would
not be just and equitable if contributions pursuant to this subsection (d) were
determined by pro rata allocation (even if the Underwriters were treated as one
entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to above in this
subsection (d). The amount paid or payable by an indemnified party as a result
of the losses, claims, damages or liabilities (or actions in respect thereof)
referred to above in this subsection (d) shall be deemed to include any legal
or other expenses reasonably incurred by such indemnified party in connection
with investigating or defending any such action or claim. Notwithstanding the
provisions of this subsection (d), no Underwriter shall be required to
contribute any amount in excess of the amount by which the total price at which
the Shares underwritten by it and distributed to the public were offered to the
public exceeds the amount of any damages which such Underwriter has otherwise
been required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations in this subsection (d) to
contribute are several in proportion to their respective underwriting
obligations and not joint.
(e) The obligations of the Company under this Section 8 shall be
in addition to any liability which the Company may otherwise have and shall
extend, upon the same terms and conditions, to each person, if any, who
controls any Underwriter within the meaning of the Act; and the obligations of
the Underwriters under this Section 8 shall be in addition to any liability
which the respective Underwriters may otherwise have and shall extend, upon the
same terms and conditions, to each officer and director of the Company and to
each person, if any, who controls the Company within the meaning of the Act.
9. (a) If any Underwriter shall default in its obligation to
purchase the Shares which it has agreed to purchase hereunder at a Time of
Delivery, you may in your discretion arrange for you or another party or other
parties to purchase such Shares on the terms contained herein. If within
thirty-six hours after such default by any Underwriter you do not arrange for
the purchase of such Shares, then the Company shall be entitled to a further
period of thirty-six hours within which to procure another party or other
parties satisfactory to you to purchase such Shares on such terms. In the
event that, within the respective prescribed periods, you notify the Company
that you have so arranged for the purchase of such Shares, or the Company
notifies you that it has so arranged for the purchase of such Shares, you or
the Company shall have the right to postpone such Time of Delivery for a period
of not more than seven days, in order to effect whatever changes may
17
<PAGE> 18
thereby be made necessary in the Registration Statement or the Prospectus, or
in any other documents or arrangements, and the Company agrees to file promptly
any amendments to the Registration Statement or the Prospectus which in your
opinion may thereby be made necessary. The term "Underwriter" as used in this
Agreement shall include any person substituted under this Section with like
effect as if such person had originally been a party to this Agreement with
respect to such Shares.
(b) If, after giving effect to any arrangements for the purchase
of the Shares of a defaulting Underwriter or Underwriters by you and the
Company as provided in subsection (a) above, the aggregate number of such
Shares which remains unpurchased does not exceed one-eleventh of the aggregate
number of all the Shares to be purchased at such Time of Delivery, then the
Company shall have the right to require each non-defaulting Underwriter to
purchase the number of shares which such Underwriter agreed to purchase
hereunder at such Time of Delivery and, in addition, to require each
non-defaulting Underwriter to purchase its pro rata share (based on the number
of Shares which such Underwriter agreed to purchase hereunder) of the Shares of
such defaulting Underwriter or Underwriters for which such arrangements have
not been made; but nothing herein shall relieve a defaulting Underwriter from
liability for its default.
(c) If, after giving effect to any arrangements for the purchase
of the Shares of a defaulting Underwriter or Underwriters by you and the
Company as provided in subsection (a) above, the aggregate number of such
Shares which remains unpurchased exceeds one-eleventh of the aggregate number
of all the Shares to be purchased at such Time of Delivery, or if the Company
shall not exercise the right described in subsection (b) above to require
non-defaulting Underwriters to purchase Shares of a defaulting Underwriter or
Underwriters, then this Agreement (or, with respect to the Second Time of
Delivery, the obligations of the Underwriters to purchase and of the Company to
sell the Optional Shares) shall thereupon terminate, without liability on the
part of any non-defaulting Underwriter or the Company, except for the expenses
to be borne by the Company and the Underwriters as provided in Section 6 hereof
and the indemnity and contribution agreements in Section 8 hereof; but nothing
herein shall relieve a defaulting Underwriter from liability for its default.
10. The respective indemnities, agreements, representations,
warranties and other statements of the Company and the several Underwriters, as
set forth in this Agreement or made by or on behalf of them, respectively,
pursuant to this Agreement, shall remain in full force and effect, regardless
of any investigation (or any statement as to the results thereof) made by or on
behalf of any Underwriter or any controlling person of any Underwriter, or the
Company, or any officer or director or controlling person of the Company, and
shall survive delivery of and payment for the Shares.
11. If this Agreement shall be terminated pursuant to Section 9
hereof, the Company shall not then be under any liability to any Underwriter
except as provided in Sections 6 and 8 hereof; but, if for any other reason,
any Shares are not delivered by or on behalf of the Company as provided herein,
the Company will reimburse the Underwriters through you for all out-of-pocket
expenses approved in writing by you, including fees and disbursements of
counsel, reasonably incurred by the Underwriters in making preparations for the
purchase, sale and delivery of the Shares not so delivered, but the Company
shall then be under no further liability to any Underwriter except as provided
in Sections 6 and 8 hereof.
12. In all dealings hereunder, you shall act on behalf of each of
the Underwriters, and the parties hereto shall be entitled to act and rely upon
any statement, request, notice or agreement on behalf of any Underwriter made
or given by you jointly or by Goldman, Sachs & Co. on behalf of you as the
representatives.
18
<PAGE> 19
All statements, requests, notices and agreements hereunder shall be in
writing, and if to the Underwriters shall be delivered or sent by mail, telex
or facsimile transmission to you as the representatives in care of Goldman,
Sachs & Co., 85 Broad Street, New York, New York 10004, Attention:
Registration Department; and if to the Company shall be delivered or sent by
mail to the address of the Company set forth in the Registration Statement,
Attention: Secretary; provided, however, that any notice to an Underwriter
pursuant to Section 8(c) hereof shall be delivered or sent by mail, telex or
facsimile transmission to such Underwriter at its address set forth in its
Underwriters' Questionnaire, or telex constituting such Questionnaire, which
address will be supplied to the Company by you upon request. Any such
statements, requests, notices or agreements shall take effect upon receipt
thereof.
13. This Agreement shall be binding upon, and inure solely to the
benefit of, the Underwriters, the Company and, to the extent provided in
Sections 8 and 10 hereof, the officers and directors of the Company and each
person who controls the Company or any Underwriter, and their respective heirs,
executors, administrators, successors and assigns, and no other person shall
acquire or have any right under or by virtue of this Agreement. No purchaser of
any of the Shares from any Underwriter shall be deemed a successor or assign by
reason merely of such purchase.
14. Time shall be of the essence of this Agreement. As used
herein, the term "business day" shall mean any day when the Commission's office
in Washington, D.C. is open for business.
15. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
16. This Agreement may be executed by any one or more of the
parties hereto in any number of counterparts, each of which shall be deemed to
be an original, but all such counterparts shall together constitute one and the
same instrument.
19
<PAGE> 20
If the foregoing is in accordance with your understanding, please sign
and return to us six counterparts hereof, and upon the acceptance hereof by
you, on behalf of each of the Underwriters, this letter and such acceptance
hereof shall constitute a binding agreement between each of the Underwriters
and the Company. It is understood that your acceptance of this letter on
behalf of each of the Underwriters is pursuant to the authority set forth in a
form of Agreement among Underwriters, the form of which shall be submitted to
the Company for examination upon request, but without warranty on your part as
to the authority of the signers thereof.
Very truly yours,
Tom Brown, Inc.
By:
--------------------------
Name:
------------------------
Title:
-----------------------
Accepted as of the date hereof:
Goldman, Sachs & Co.
Howard, Weil, Labouisse, Friedrichs Incorporated
Petrie Parkman & Co.
Salomon Brothers Inc
By:
-------------------------------------------
(Goldman, Sachs & Co.)
On behalf of each of the Underwriters
20
<PAGE> 21
SCHEDULE I
<TABLE>
<CAPTION>
NUMBER OF OPTIONAL
SHARES TO BE
TOTAL NUMBER OF PURCHASED IF
FIRM SHARES MAXIMUM OPTION
UNDERWRITER TO BE PURCHASED EXERCISED
----------- --------------- ----------------------
<S> <C> <C>
Goldman, Sachs & Co.
Howard, Weil, Labouisse, Friedrichs Incorporated
Petrie Parkman & Co.
Salomon Brothers Inc
--------- -------
TOTAL 4,000,000 600,000
========= =======
</TABLE>
21
<PAGE> 22
ANNEX I
DESCRIPTION OF COMFORT LETTER
FOR REGISTRATION STATEMENTS ON FORMS S-3
Pursuant to Section 7(d)(i) of the Underwriting Agreement, Arthur
Andersen L.L.P. shall furnish letters to the Underwriters to the effect that:
(i) They are independent certified public accountants
with respect to the Company and its subsidiaries within the meaning of
the Act and the applicable published rules and regulations thereunder;
(ii) In their opinion, the financial statements and any
supplementary financial information and schedules (and, if applicable,
financial forecasts and/or pro forma financial information) examined
by them and included or incorporated by reference in the Registration
Statement or the Prospectus comply as to form in all material respects
with the applicable accounting requirements of the Act or the Exchange
Act, as applicable, and the related published rules and regulations
thereunder; and, if applicable, they have made a review in accordance
with standards established by the American Institute of Certified
Public Accountants of the consolidated interim financial statements,
selected financial data, pro forma financial information, financial
forecasts and/or condensed financial statements derived from audited
financial statements of the Company for the periods specified in such
letter, as indicated in their reports thereon, copies of which have
been separately furnished to the representatives of the Underwriters
(the "Representatives");
(iii) They have made a review in accordance with standards
established by the American Institute of Certified Public Accountants
of the unaudited condensed consolidated statements of income,
consolidated balance sheets and consolidated statements of cash flows
included in the Prospectus and/or included in the Company's quarterly
report on Form 10-Q incorporated by reference into the Prospectus as
indicated in their reports thereon copies of which have been
separately furnished to the Representatives; and on the basis of
specified procedures including inquiries of officials of the Company
who have responsibility for financial and accounting matters regarding
whether the unaudited condensed consolidated financial statements
referred to in paragraph (vi)(A)(i) below comply as to form in the
related in all material respects with the applicable accounting
requirements of the Act and the Exchange Act and the related published
rules and regulations, nothing came to their attention that caused
them to believe that the unaudited condensed consolidated financial
statements do not comply as to form in all material respects with the
applicable accounting requirements of the Act and the Exchange Act and
the related published rules and regulations;
(iv) The unaudited selected financial information with
respect to the consolidated results of operations and financial
position of the Company for the five most recent fiscal years included
in the Prospectus and included or incorporated by reference in Item 6
of the Company's Annual Report on Form 10-K for the most recent fiscal
year agrees with the corresponding amounts (after restatement where
applicable) in the audited consolidated financial statements for such
five fiscal years which were included or incorporated by reference in
the Company's Annual Reports on Form 10-K for such fiscal years;
(v) They have compared the information in the Prospectus
under selected captions with the disclosure requirements of Regulation
S-K and on the basis of limited procedures specified in such letter
nothing came to their attention as a result of the foregoing
procedures that caused them to believe that this information does not
conform in all material respects with the disclosure requirements of
Items 301, 302, 402 and 503(d), respectively, of Regulation S-K;
1
<PAGE> 23
(vi) On the basis of limited procedures, not constituting
an examination in accordance with generally accepted auditing
standards, consisting of a reading of the unaudited financial
statements and other information referred to below, a reading of the
latest available interim financial statements of the Company and its
subsidiaries, inspection of the minute books of the Company and its
subsidiaries since the date of the latest audited financial statements
included or incorporated by reference in the Prospectus, inquiries of
officials of the Company and its subsidiaries responsible for
financial and accounting matters and such other inquiries and
procedures as may be specified in such letter, nothing came to their
attention that caused them to believe that:
(A) (i) the unaudited condensed consolidated
statements of income, consolidated balance sheets and
consolidated statements of cash flows included in the
Prospectus and/or included or incorporated by reference in the
Company's Quarterly Reports on Form 10-Q incorporated by
reference in the Prospectus do not comply as to form in all
material respects with the applicable accounting requirements
of the Exchange Act and the related published rules and
regulations, or (ii) any material modifications should be made
to the unaudited condensed consolidated statements of income,
consolidated balance sheets and consolidated statements of
cash flows included in the Prospectus or included in the
Company's Quarterly Reports on Form 10-Q incorporated by
reference in the Prospectus, for them to be in conformity with
generally accepted accounting principles;
(B) any other unaudited income statement data and
balance sheet items included in the Prospectus do not agree
with the corresponding items in the unaudited consolidated
financial statements from which such data and items were
derived, and any such unaudited data and items were not
determined on a basis substantially consistent with the basis
for the corresponding amounts in the audited consolidated
financial statements included or incorporated by reference in
the Company's Annual Report on Form 10-K for the most recent
fiscal year;
(C) the unaudited financial statements which were
not included in the Prospectus but from which were derived the
unaudited condensed financial statements referred to in Clause
(A) and any unaudited income statement data and balance sheet
items included in the Prospectus and referred to in Clause (B)
were not determined on a basis substantially consistent with
the basis for the audited financial statements included or
incorporated by reference in the Company's Annual Report on
Form 10-K for the most recent fiscal year;
(D) any unaudited pro forma consolidated
condensed financial statements included or incorporated by
reference in the Prospectus do not comply as to form in all
material respects with the applicable accounting requirements
of the Act and the published rules and regulations thereunder
or the pro forma adjustments have not been properly applied to
the historical amounts in the compilation of those statements;
(E) as of a specified date not more than five
days prior to the date of such letter, there have been any
changes in the consolidated capital stock (other than
issuances of capital stock upon exercise of options and stock
appreciation rights, upon earn-outs of performance shares and
upon conversions of convertible securities, in each case which
were outstanding on the date of the latest balance sheet
included or incorporated by reference in the Prospectus) or
any increase in the consolidated long-term debt of the Company
and its subsidiaries, or any decreases in consolidated net
current assets or stockholders' equity or other items
specified by the Representatives, or any increases in any
items specified by the Representatives, in each case as
compared with amounts shown in the latest
2
<PAGE> 24
balance sheet included or incorporated by reference in the
Prospectus, except in each case for changes, increases or
decreases which the Prospectus discloses have occurred or may
occur or which are described in such letter; and
(F) for the period from the date of the latest
financial statements included or incorporated by reference in
the Prospectus to the specified date referred to in Clause (E)
there were any decreases in consolidated net revenues or
operating profit or the total or per share amounts of
consolidated net income or other items specified by the
Representatives, or any increases in any items specified by
the Representatives, in each case as compared with the
comparable period of the preceding year and with any other
period of corresponding length specified by the
Representatives, except in each case for increases or
decreases which the Prospectus discloses have occurred or may
occur or which are described in such letter; and
(vii) In addition to the examination referred to in their
report(s) included or incorporated by reference in the Prospectus and
the limited procedures, inspection of minute books, inquiries and
other procedures referred to in paragraphs (iii) and (vi) above, they
have carried out certain specified procedures, not constituting an
examination in accordance with generally accepted auditing standards,
with respect to certain amounts, percentages and financial information
specified by the Representatives which are derived from the general
accounting records of the Company and its subsidiaries, which appear
in the Prospectus (excluding documents incorporated by reference) or
in Part II of, or in exhibits and schedules to, the Registration
Statement specified by the Representatives or in documents
incorporated by reference in the Prospectus specified by the
Representatives, and have compared certain of such amounts,
percentages and financial information with the accounting records of
the Company and its subsidiaries and have found them to be in
agreement.
3
<PAGE> 25
ANNEX II
DESCRIPTION OF COMFORT LETTER
FOR REGISTRATION STATEMENTS ON FORMS S-3
Pursuant to Section 7(d)(ii) of the Underwriting Agreement, Deloitte &
Touche LLP shall furnish letters to the Underwriters to the effect that:
(i) They are independent certified public accountants
with respect to the Company and its subsidiaries within the meaning of
the Act and the applicable published rules and regulations thereunder;
(ii) In their opinion, the financial statements and any
supplementary financial information and schedules (and, if applicable,
financial forecasts and/or pro forma financial information) examined
by them and included or incorporated by reference in the Registration
Statement or the Prospectus comply as to form in all material respects
with the applicable accounting requirements of the Act or the Exchange
Act, as applicable, and the related published rules and regulations
thereunder; and, if applicable, they have made a review in accordance
with standards established by the American Institute of Certified
Public Accountants of the consolidated interim financial statements,
selected financial data, pro forma financial information, financial
forecasts and/or condensed financial statements derived from audited
financial statements of the Company for the periods specified in such
letter, as indicated in their reports thereon, copies of which have
been separately furnished to the representatives of the Underwriters
(the "Representatives") and are attached hereto.
4
<PAGE> 26
ANNEX IV
LIST OF PERSONS TO
EXECUTE LOCK-UP AGREEMENTS
Donald L. Evans
William R. Granberry
Peter R. Scherer
Thomas E. Klauss
Christopher E. Mullen
Clifford C. Drescher
Richard B. Porter
R. Kim Harris
B. Jack Reed
Bruce R. DeBoer
Thomas C. Brown
David M. Carmichael
Henry Groppe
Edward W. LeBaron, Jr.
Clyde E. McKenzie
James B. Wallace
Robert H. Whilden, Jr.
5
<PAGE> 1
(713) 758-2222 (713) 758-2346
September 11, 1997
Tom Brown, Inc.
508 West Wall Street, Suite 500
Midland, Texas 78701
Ladies and Gentlemen:
As set forth in the Registration Statement on Form S-3 (the
"Registration Statement"), to filed by Tom Brown, Inc., a Delaware corporation
(the "Company"), on September 12, 1997 under the Securities Act of 1933, as
amended (the "Act"), relating to the sale of up to 4,600,000 shares of the
Company's Common Stock, par value $0.10 per share (the "Shares"), certain legal
matters in connection with the Shares are being passed upon for you by us. At
your request, this opinion is being furnished to you for filing as Exhibit 5.1
to the Registration Statement and any registration statement filed pursuant to
Rule 462 (the "Rule 462 Registration Statement") to register additional shares
of Common Stock in accordance with such rule (the "Additional Shares").
We have acted as counsel for the Company in connection with the
registration of the Shares and, if applicable, the Additional Shares under the
Act. In connection therewith, we have examined such certificates, instruments
and documents and reviewed such questions of law as we have considered
necessary or appropriate for the purposes of this opinion.
Based upon the foregoing examination and review, we are of the opinion
that the Shares and the Additional Shares have been duly authorized for
issuance and, when the Registration Statement with respect to the Shares and
the Rule 462 Registration Statement with respect to the Additional Shares have
been declared effective, and the Shares and the Additional Shares, if
applicable, are issued in accordance with the provisions of the Underwriting
Agreement (as defined in the Registration Statement), such Shares and the
Additional Shares will be validly issued (assuming the certificates evidencing
such Shares and the Additional Shares have been duly executed by the Company's
transfer agent), fully paid and nonassessable.
In rendering this opinion we have relied, as to factual matters, on
certificates of certain public officials and officers of the Company. This
opinion is limited in all respects to the General Corporation Law of the State
of Delaware.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and the Rule 462 Registration Statement, if applicable,
and to the references to us under the caption "Legal Matters" in the Prospectus
forming a part of the Registration Statement and the Rule 462 Registration
Statement, if applicable. In giving this consent, we do not hereby admit that
we are within the category of persons whose consent is required under Section 7
of the Act and the rules and regulations of the Securities and Exchange
Commission thereunder.
Very truly yours,
VINSON & ELKINS L.L.P
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this registration statement of our report dated February 28, 1997
included in the Annual Report on Form 10-K of Tom Brown, Inc. for the year ended
December 31, 1996 and to all references to our Firm in this registration
statement.
ARTHUR ANDERSEN LLP
Houston, Texas
September 10, 1997
<PAGE> 1
EXHIBIT 23.2
CONSENT OF WILLIAMSON PETROLEUM CONSULTANTS, INC.
As independent petroleum engineers, we hereby consent to the use in the
Prospectus constituting part of this Registration Statement on Form S-3
of Tom Brown, Inc. of information from our reserve report dated
February 28, 1997 relating to the oil and gas reserves of Tom Brown,
Inc. at December 31, 1996. We also consent to the references to us as
experts under the heading "Experts" and elsewhere in such Prospectus.
WILLIAMSON PETROLEUM CONSULTANTS, INC.
Williamson Petroleum Consultants, Inc.
Midland, Texas
September 11, 1997
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS
We hereby consent to the use in the Prospectus constituting part of
this Registration Statement on Form S-3 of Tom Brown, Inc. of information from
our reserve report dated March 12, 1997 relating to the oil and gas reserves of
Tom Brown, Inc. at December 31, 1996. We also consent to the references to us
as experts under the heading "Experts" and elsewhere in such Prospectus.
Ryder Scott Company
Petroleum Engineers
-------------------
September 11, 1997
<PAGE> 1
EXHIBIT 23.4
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Registration Statement of
Tom Brown, Inc. on Form S-3 of our report dated April 5, 1996, appearing in the
Form 8-K of Tom Brown, Inc. dated December 23, 1996, and to the reference to us
under the heading "Experts" in the Prospectus, which is part of the
registration statement.
/s/ DELOITTE & TOUCHE LLP
- -------------------------
DELOITTE & TOUCHE LLP
Denver, Colorado
September 11, 1997
