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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-3880
TOM BROWN, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 95-1949781
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P. O. Box 2608
500 Empire Plaza Bldg.
Midland, Texas 79701
(Address of principal executive
offices) (Zip Code)
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915-682-9715
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.10 PAR VALUE
CONVERTIBLE PREFERRED STOCK, $.10 PAR VALUE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
The aggregate market value of the Registrant's Common Stock held by
non-affiliates (based upon the last sale price of $20.125 per share as quoted on
the NASDAQ National Market System) on March 20, 1998 was approximately
$588,514,952.
As of March 20, 1998, there were 29,242,979 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive proxy statement for the 1998 Annual
Meeting of Stockholders to be held on May 21, 1998 are incorporated by reference
into Part III.
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TOM BROWN, INC.
FORM 10-K
CONTENTS
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PART I
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 10
Item 3. Legal Proceedings........................................... 13
Item 4. Submission of Matters to a Vote of Security Holders......... 13
PART II
Item 5. Market for Registrant's Common Equity and Related 14
Stockholder Matters.......................................
Item 6. Selected Financial Data..................................... 15
Item 7. Management's Discussion and Analysis of Financial Condition 16
and Results of Operations.................................
Item 8. Financial Statements and Supplementary Data................. 20
Item 9. Changes in and Disagreements with Accountants on Accounting 45
and Financial Disclosure..................................
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 45
Item 11. Executive Compensation...................................... 45
Item 12. Security Ownership of Certain Beneficial Owners and 45
Management................................................
Item 13. Certain Relationships and Related Transactions.............. 45
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 46
8-K.......................................................
Signatures............................................................ 48
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PART I
ITEM 1. BUSINESS
GENERAL
Tom Brown, Inc. (the "Company") was organized as a Nevada corporation in
1931 under the name Gold Metals Consolidated Mining Company. The name of the
Company was changed to Tom Brown Drilling Company, Inc. in 1968 and to Tom
Brown, Inc. in 1971. In April 1987, the Company changed its state of
incorporation from Nevada to Delaware. The executive offices of the Company are
located at 500 Empire Plaza, Midland, Texas 79701 and its telephone number at
that address is (915) 682-9715. Unless the context otherwise requires, all
references to the "Company" include Tom Brown, Inc. and its subsidiaries.
The Company is engaged primarily in the domestic exploration for, and the
acquisition, development, production, marketing, and sale of, natural gas and
crude oil. The Company's activities are conducted principally in the Wind River
and Green River Basins of Wyoming, the Piceance Basin of Colorado, the Val Verde
Basin of west Texas and the Permian Basin of west Texas and southeastern New
Mexico, and the East Texas Basin. The Company also, to a lesser extent, conducts
exploration and development activities in other areas of the continental United
States.
The Company's industry segments are (i) the exploration for, and the
acquisition, development and production of, natural gas and crude oil, and (ii)
the marketing, gathering, processing and sale of natural gas, primarily through
Wildhorse Energy Partners, L.L.C. ("Wildhorse").
Except for its gas and oil leases with domestic governmental entities and
other third parties who enter into gas and oil leases or assignments with the
Company in the regular course of its business, the Company has no material
patents, licenses, franchises or concessions which it considers significant to
its gas and oil operations.
The nature of the Company's business is such that it does not maintain or
require a substantial amount of products, customer orders or inventory. The
Company's gas and oil operations are not subject to renegotiations of profits or
termination of contracts at the election of the federal government.
The Company has not been a party to any bankruptcy, receivership,
reorganization or similar proceeding, except in connection with reorganization
of Presidio Oil Company as described in Note 3 to Notes to Consolidated
Financial Statements.
BUSINESS STRATEGY
The Company's business strategy is to increase shareholder value through
the acquisition and development of long-lived gas and oil reserves in areas
where the Company has industry knowledge and operations expertise. The Company's
principal investments have been in natural gas prone basins, which the Company
believes will continue to provide the opportunity to accumulate significant
long-lived gas and oil reserves at attractive prices.
This strategy has enabled the Company to achieve the following:
Maintain a strong balance sheet
The Company emphasizes maintaining a strong balance sheet in order to
enhance its operating and financing flexibility. The Company received net
proceeds of approximately $121 million through an equity offering completed in
October 1997 and reduced long-term debt to $23 million outstanding at December
31, 1997.
Achieve critical mass in core areas
The Company's acreage position is approximately 3,065,000 gross (1,742,000
net) acres (including options) located primarily in the Wind River and Green
River Basins of Wyoming, the Piceance Basin of Colorado, and the Permian, Val
Verde and East Texas Basins of Texas where the Company can utilize its
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geological and technical expertise and its control of operations for the further
development and expansion of these areas. The Company has leases, or options to
lease, approximately 2,037,000 gross (1,289,000 net) developed and undeveloped
acres in these areas.
Increase reserves
The Company has significantly increased its reserves over the last two
years through several acquisitions and through development drilling. The Company
replaced its production over 4.6 times during the period from January 1, 1996
through December 31, 1997. During this period, the Company's proved reserves
increased by approximately 108% to 390 billion cubic feet of natural gas
equivalents.
Increase production
The Company increased its net production of natural gas and oil to 106
million cubic feet equivalent ("Mmcfe") of natural gas in 1997, an increase of
approximately 207% as compared with its production in 1995.
Enhance gas marketing
Primarily through the formation of Wildhorse, the Company has strengthened
its ability to control and market its production by accumulating natural gas
gathering assets and increasing its marketing efforts in its core areas of
activity.
Make strategic acquisitions
The Company plans to continue to selectively pursue acquisitions of gas and
oil properties in its core areas of activity and, in connection therewith, the
Company from time to time will be involved in evaluations of, or discussions
with, potential acquisition candidates. The consideration for any such
acquisition might involve the payment of cash and/or the issuance of equity or
debt securities.
Notwithstanding the Company's historical ability to implement the above
strategy, there can be no assurance that the Company will be able to continue to
successfully implement its strategy in the future.
AREAS OF ACTIVITY
The following discussion focuses on areas the Company considers to be its
core areas of operations and those that offer the Company the greatest
opportunities for further exploration and development activities.
Wind River, Green River, and Piceance Basins
The Wind River and Green River Basins of Wyoming, and Piceance Basin of
Colorado account for a major portion of the Company's current and anticipated
exploration and development activities with approximately 65% of the Company's
proved reserves at December 31, 1997. The Company owns interests in 910
producing wells in these basins that averaged net daily production of 44 million
cubic feet of natural gas equivalent ("Mmcfe") for 1997. The Company has
approximately 1,810,000 gross (1,180,000 net) developed acres and undeveloped
acres in these basins. Additionally, the Company has options to lease
approximately 963,000 gross (548,000 net) undeveloped acres in the Wind River
Basin. The Company's interest in the leases and options to lease are subject to
the Company performing certain 3-D seismic operations and drilling certain
exploratory wells.
Although the Wind River Basin has experienced limited natural gas
transportation capacity, market forces are working to correct this capacity
constraint. In January 1996, KN Energy, Inc. ("KNE") announced that it reached
an agreement to acquire an 850-mile oil pipeline owned by Amoco Pipeline
Company, which extends from Riverton, Wyoming southwest to Kansas City,
Missouri. The pipeline, renamed Pony Express, has been converted to transport
natural gas and has a capacity of 200 Mmcf per day. The Company expects Pony
Express to generate significant opportunities for Wildhorse, which has
contracted for firm transportation of 30 Mmcf of natural gas per day on this
line.
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Val Verde Basin
The Val Verde Basin accounted for approximately 11% of the Company's proved
reserves at December 31, 1997. The Company holds a 50% working interest in
approximately 37,000 gross acres and 38 producing wells in this basin.
Production from this basin averaged 28 Mmcfe per day of natural gas net to the
Company's interest for 1997.
Permian Basin
The Permian Basin contains significant oil reserves for the Company and
accounted for approximately 4% of the Company's proved reserves as of December
31, 1997. The Company's properties in the Permian Basin are located primarily in
the Spraberry Field. The Company operates 115 wells and has approximately 32,000
net developed and undeveloped acres in this basin.
East Texas Basin
In January 1996 the Company began an exploration program in the Cotton
Valley Pinnacle Reef Trend of the East Texas Basin. At year-end 1997, it had
accumulated approximately 105,000 gross (58,000 net) acres in three prospect
areas containing over 40 2-D anomalies. The Company anticipates drilling an
exploratory well in the summer of 1998.
RECENT DEVELOPMENTS
Acquisition of Sauer Drilling Company
On January 7, 1998, the Company completed the acquisition of W. E. Sauer
Companies L.L.C. of Casper, Wyoming for approximately $8.1 million. The assets
purchased include five drilling rigs, tubular goods, a yard and related assets.
The Company operates the assets under the name Sauer Drilling Company and will
continue to serve the drilling needs of operators in the central Rocky Mountain
region in addition to drilling for the Company.
Acquisition of the Assets of Genesis Gas and Oil, L.L.C.
On October 21, 1997, the Company completed the acquisition of the assets of
Genesis Gas and Oil, L.L.C. The Genesis assets are located primarily in the
Piceance Basin of western Colorado and are principally operated by the Company.
The properties provide current net production of approximately 6 million cubic
feet of gas and 150 barrels of oil per day. The acquisition increases the
Company's acreage position in the Piceance Basin from approximately 54,000 to
86,000 net developed and 100,000 to 148,000 net undeveloped acres. The Company's
working interest has doubled from 23% to 46% in 238 producing wells and from 34%
to 68% in 500 potential development locations. The purchase price for these
assets was approximately $35.5 million.
Acquisition of Gathering and Processing Assets by Wildhorse
On December 19, 1997, KNE completed the acquisition of all of the assets of
Interenergy Corporation. The assets consist of gas gathering and processing
facilities located in Wyoming, Montana, North Dakota and South Dakota, as well
as a marketing division. KNE retained the marketing assets and Wildhorse
acquired the gathering and processing assets valued at $23.4 million. These
assets consist of over 300 miles of pipeline and a processing plant. The
Company, through its 45% share of Wildhorse, will benefit from the acquisition
as it develops its acreage in the Big Horn Basin.
Acquisition of KN Production Company
Pursuant to a letter of intent entered into in December 1995, the Company
and 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
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connection with the KNPC Acquisition was determined to be $36.25 million, of
which $25 million was paid in the form of 1.0 million shares of the Company's
$1.75 Convertible Preferred Stock, Series A (the "Preferred Stock") and the
remaining $11.25 million was paid in the form of 918,367 shares of the Company's
Common Stock, based on a price per share of $12.25. Additionally, the Company
dedicated a significant amount of its Rocky Mountain gas production to Wildhorse
and KNE contributed gas marketing contracts and gas storage assets located in
western Colorado. 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 Company also acquired a natural gas storage facility in
western Colorado. The properties acquired by the Company included approximately
243,000 net undeveloped acres in Colorado, Wyoming, Kansas and Nebraska and
approximately 64,000 net developed acres located in Colorado and Wyoming.
An integral part of the KNPC Acquisition was the formation of Wildhorse,
which is owned fifty-five percent (55%) by KNE and forty-five percent (45%) by
the Company. The business and affairs of Wildhorse are managed by KNE under the
direction of an operating team consisting of two representatives appointed by
the Company and two representatives appointed by KNE.
The principal purpose of Wildhorse is to provide for 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 (the "Presidio Acquisition"), following the
issuance by the U.S. Bankruptcy Court, District of Delaware, on December 10,
1996, of an Order confirming Presidio Oil Company's reorganization under Chapter
11 of the U.S. Bankruptcy Code. The purchase price was approximately $202.6
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, plus the assumption
of certain liabilities. Such amount does not include 2.64 million shares of the
Company's Common Stock which were not issued due to the Company's ownership of
$56.15 million principal amount of Presidio Oil Company's Senior Gas Indexed
Notes (the "GINs"). The GINs were purchased in June 1995 for approximately $51
million 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 credit agreement with its bank lender. The assets acquired
consist of primarily proved oil and gas properties and approximately 865,000
gross (403,000 net) developed and undeveloped acres located primarily in
Wyoming, North Dakota, Oklahoma and Louisiana. The Wyoming properties are
concentrated in the Green River and Powder River Basins.
Joint Ventures
In December 1994 and December 1995, the Company and the Shoshone and
Northern Arapaho Tribes ("the Tribes") finalized the negotiations of six gas and
oil option agreements, which in addition to one option acquired earlier in 1993,
encompass approximately 663,000 gross acres (400,000 net acres) in the Wind
River Basin of Fremont County, Wyoming. The agreements, which were approved by
the Bureau of Indian Affairs, grant the Company the right to explore for and
develop gas and oil reserves on the option acreage over a ten-year period of
time once the options are exercised.
In June 1996, the Company and the Tribes entered into an Exploration
License Agreement covering in excess of 300,000 gross acres in the Wind River
Basin of Wyoming. The agreement provided the Company the opportunity over the
next twelve months to enter into two Exploration Option Agreements covering a
minimum of 100,000 gross acres and a maximum of 150,000 gross acres each. The
Company has a 50% working interest in this agreement.
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In October 1996, the Company and Louisiana Land and Exploration Company
(now Burlington Resources Inc. ("Burlington")) announced the execution of a
letter of intent to form a joint exploration alliance in connection with the
Exploration License Agreement that the Company entered into with the Tribes. At
December 31, 1997 the Company had leases or options to lease approximately
963,000 gross (548,000 net) acres in the Wind River Basin. Upon execution of a
definitive participation agreement and receipt of tribal and regulatory agency
approval, the Company will operate the jointly held interest and have a fifty
percent (50%) working interest. Burlington will have a forty percent (40%)
working interest with the remaining ten percent (10%) being held by a third
party.
In December 1996, the Company and American Exploration Company (now Louis
Dreyfus Natural Gas Corp ("LDNG")) announced the execution of a definitive
agreement to form an exploration joint venture that covers approximately 50,000
gross (40,000 net) acres of the Company's Lost Prairie and Lake Tyler Prospects
in Anderson, Cherokee and Smith Counties of east Texas located in the Cotton
Valley Pinnacle Reef Trend. In exchange for a forty percent (40%) working
interest ownership, LDNG has agreed to invest approximately $7.3 million for the
acquisition of land and a 3-D seismic survey. The Company retained the remaining
sixty percent (60%) working interest and serves as operator of the properties.
Acquisition of Gathering and Processing Assets by Wildhorse
In November 1996, Wildhorse completed the acquisition of the Williams Field
Services' gathering and processing assets in western Colorado and eastern Utah.
The acquired assets access existing Company production, as well as approximately
240,000 acres of undeveloped leasehold held by the Company in the Piceance
Basin. Such assets will also provide gathering to undeveloped third-party
acreage throughout the Piceance and Uinta Basins. The assets acquired include
approximately 955 miles of natural gas gathering lines, two processing plants, a
carbon dioxide treatment plant and a dew point control plant. The acquisition
has provided a significant upstream position in an area of the Rocky Mountains
that has a great potential for developing additional natural gas reserves and
deliverability.
MARKETS
The Company's gas production has historically been sold under
month-to-month contracts with marketing companies. During 1997, there was a
significant amount of volatility in the prices received for natural gas. Monthly
closing gas prices as measured on the New York Mercantile Exchange ("NYMEX")
varied from a high of $3.99 per million British thermal unit ("Mmbtu") in
January 1997 to a low of $1.78 per Mmbtu in March 1997. Additionally, the
Company produces approximately 50% of its gas production in the Rocky Mountain
area where the price of gas varied as compared to NYMEX prices (the "Basis
Differential") from $1.25 per Mmbtu below NYMEX prices in October 1997 to $.19
per Mmbtu above NYMEX prices in January 1997.
The Company markets most of its oil production with independent third-party
resellers and refiners at market ("posted") prices. These posted prices
generally reflect the prices determined by the trading of West Texas
Intermediate ("WTI") oil futures contracts on the NYMEX, with adjustments due to
Basis Differential and for the quality of oil produced.
NYMEX prices for both gas and oil are influenced by seasonal demand, levels
of storage, production levels and a variety of political and economic factors
over which the Company has no control.
PRODUCTION VOLUMES, UNIT PRICES AND COSTS
The following table sets forth certain information regarding the Company's
volumes of production sold and average prices received associated with its
production and sales of natural gas and crude oil for each of the years ended
December 31, 1997, 1996 and 1995.
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YEARS ENDED DECEMBER 31,
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1997 1996 1995
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Production Volumes:
Natural Gas (MMcf)........................................ 31,842 16,762 10,585
Crude Oil (MBbls)......................................... 1,159 545 387
Net Average Daily
Production Volumes:
Natural Gas (Mcf)...................................... 87,238 45,798 29,000
Crude Oil (Bbls)....................................... 3,175 1,489 1,060
Average Sales Prices:
Natural Gas (per Mcf)..................................... $ 2.25 $ 1.77 $ 1.31
Crude Oil (per Bbl)....................................... $ 18.02 $ 20.45 $ 16.80
Average Production
Cost (per Mcfe)(1)........................................ $ .62 $ .49 $ .53
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(1) Includes production costs and taxes on production. (Mcfe means one thousand
cubic feet of natural gas equivalent, calculated on the basis of six barrels
of oil to one Mcf of gas.)
COMPETITION
The Company encounters strong competition from major oil companies and
independent operators in acquiring properties and leases for the exploration
for, and the development and production of, natural gas and crude oil.
Competition is particularly intense with respect to the acquisition of desirable
undeveloped gas and oil leases. The principal competitive factors in the
acquisition of undeveloped gas and oil leases include the availability and
quality of staff and data necessary to identify, investigate and purchase such
leases, and the financial resources necessary to acquire and develop such
leases. Many of the Company's competitors have financial resources, staffs and
facilities substantially greater than those of the Company. In addition, the
producing, processing and marketing of natural gas and crude oil is affected by
a number of factors which are beyond the control of the Company, the effect of
which cannot be accurately predicted.
The principal raw materials and resources necessary for the exploration and
development of natural gas and crude oil are leasehold prospects under which gas
and oil reserves may be discovered, drilling rigs and related equipment to drill
for and produce such reserves and knowledgeable personnel to conduct all phases
of gas and oil operations. The Company must compete for such raw materials and
resources with both major oil companies and independent operators.
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company at March 20, 1998 were as follows:
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NAME AGE POSITION WITH COMPANY SINCE
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Donald L. Evans.......... 51 Chairman of the Board and Chief Executive Officer 1976
William R. Granberry..... 55 President, Chief Operating Officer and Director 1996
Peter R. Scherer......... 41 Executive Vice President 1986
Clifford C. Drescher..... 45 Vice President -- Operations 1991
Thomas E. Klauss......... 54 Vice President -- Exploration -- Southern Division 1995
Christopher E. Mullen.... 37 Vice President -- Exploration -- Northern Division 1995
Richard B. Porter........ 42 Vice President -- Land 1995
Bruce R. DeBoer.......... 44 Vice President and General Counsel/Secretary 1997
R. Kim Harris............ 41 Controller 1986
B. Jack Reed............. 48 Treasurer 1990
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Each executive officer is elected annually by the Company's Board of
Directors to serve at the Board's discretion.
EMPLOYEES
At December 31, 1997, the Company had 158 employees. None of the Company's
employees are represented by labor unions or covered by any collective
bargaining agreement. The Company considers its relations with its employees to
be satisfactory.
REGULATION
Regulation of Gas and Oil Production
Gas and oil operations are subject to various types of regulation by state
and federal agencies. Legislation affecting the gas and oil industry is under
constant review for amendment or expansion. Also, numerous departments and
agencies, both federal and state, are authorized by statute to issue rules and
regulations binding on the gas and oil industry and its individual members, some
of which carry substantial penalties for failure to comply. The regulatory
burden on the gas and oil industry increases the Company's cost of doing
business and, consequently, affects its profitability.
Gas Price Controls
Prior to January 1993, certain natural gas sold by the Company was subject
to regulation by the Federal Energy Regulatory Commission ("FERC") under the
Natural Gas Act of 1938 and the Natural Gas Policy Act of 1978 ("NGPA"). The
NGPA prescribed maximum lawful prices for natural gas sales effective December
1, 1978. Effective January 1, 1993, natural gas prices were completely
deregulated and sales of the Company's natural gas are now made at market
prices. The majority of the Company's gas sales contracts either contain
decontrolled price provisions or already provide for market prices.
In April 1992, FERC issued Order 636, a rule designed to restructure the
interstate natural gas transportation and marketing system to remove various
barriers and practices that have historically limited non-pipeline gas sellers,
including producers, from effectively competing with pipelines. The
restructuring process was implemented on a pipeline-by-pipeline basis through
negotiations in individual pipeline proceedings. Since the issuance of Order
636, FERC has issued several orders making minor modification to Order 636.
Because the restructuring requirements that emerge from the lengthy
administrative and judicial review process may be significantly different from
those currently in effect, and because implementation of the restructuring may
vary by pipeline, it is not possible to predict what, if any, effect the
restructuring resulting from Order 636 will have on the Company.
When it issued Order 636, FERC recognized that in an effort to enable
non-pipeline gas sellers to compete more effectively with pipelines, it should
not allow pipelines to be penalized by their existing contracts which require
the pipelines to pay above-market prices for natural gas. FERC recognized that
it did not have authority to nullify these contracts, and instead encouraged
pipelines and producers to negotiate in good faith to terminate or amend these
contracts to conform them to market conditions. Under Order 636, a pipeline
company is permitted to pass through to certain of its customers the costs
incurred by the pipeline in terminating or amending these agreements as
transition costs. Order 636 allows customers to challenge these costs, in which
case the pipeline will be permitted to pass through costs only to the extent the
pipeline established at a FERC hearing, among other things, that the contract
was prudent at the time it was entered into, that the costs incurred in the
settlement were prudent and that the costs were incurred solely in response to
Order 636.
Oil Price Controls
Sales of crude oil, condensate and gas liquids by the Company are not
regulated and are made at market prices.
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State Regulation of Gas and Oil Production
States in which the Company conducts its gas and oil activities regulate
the production and sale of natural gas and crude oil, including requirements for
obtaining drilling permits, the method of developing new fields, the spacing and
operation of wells and the prevention of waste of gas and oil resources. In
addition, most states regulate the rate of production and may establish maximum
daily production allowables for wells on a market demand or conservation basis.
Environmental Regulation
The Company's activities are subject to federal and state laws and
regulations governing environmental quality and pollution control. The existence
of such regulations has had no material effect on the Company's operations and
the cost of such compliance has not been material to date. However, the Company
believes that the gas and oil industry may experience increasing liabilities and
risks under the Comprehensive Environmental Response, Compensation and Liability
Act, as well as other federal, state and local environmental laws, as a result
of increased enforcement of environmental laws by various regulatory agencies.
As an "owner" or "operator" of property where hazardous materials may exist or
be present, the Company, like all others in the petroleum industry, could be
liable for fines and/or "clean-up" costs, regardless of whether the Company was
responsible for the release of any hazardous substances.
Rocno Corporation, a wholly-owned subsidiary of the Company, was named as a
defendant in a Complaint filed by the United States on behalf of the
Environmental Protection Agency ("EPA") and has, along with approximately 117
other defendants, entered into a Consent Decree with the United States, pursuant
to which the defendant companies will carry out a clean-up plan. See Item 3,
Legal Proceedings.
Indian Lands
The Company's Muddy Ridge and Pavillion Fields are located on the Wind
River Indian Reservation. The Shoshone and Northern Arapaho Tribes regulate
certain aspects of the production and sale of natural gas and crude oil,
drilling operations, and the operation of wells and levy taxes on the production
of hydrocarbons. The Bureau of Indian Affairs and the Minerals Management
Service of the United States Department of the Interior perform certain
regulatory functions relating to operation of Indian gas and oil leases. The
Company owns interests in three leases in the Pavillion Field which were issued
pursuant to the provisions of the Act of August 21, 1916, for initial terms of
20 years each, with a preferential right by the lessee to renew the leases for
subsequent ten-year terms. The leases were renewed for ten-year terms in 1992,
effective as of June 1, 1993.
ITEM 2. PROPERTIES
GAS AND OIL PROPERTIES
The principal properties of the Company consist of developed and
undeveloped gas and oil leases. Generally, the terms of developed gas and oil
leaseholds are continuing and such leases remain in force by virtue of, and so
long as, production from lands under lease is maintained. Undeveloped gas and
oil leaseholds are generally for a primary term, such as five or ten years,
subject to maintenance with the payment of specified minimum delay rentals or
extension by production.
TITLE TO PROPERTIES
As is customary in the gas and oil industry, the Company makes only a
cursory review of title to undeveloped gas and oil leases at the time they are
acquired by the Company. However, before drilling commences, the Company causes
a thorough title search to be conducted, and any material defects in title are
remedied prior to the time actual drilling of a well on the lease begins. The
Company believes that it has good title to its gas and oil properties, some of
which are subject to immaterial encumbrances, easements and restrictions. The
gas and oil properties owned by the Company are also typically subject to
royalty and other
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similar non-cost bearing interests customary in the industry. The Company does
not believe that any of these encumbrances or burdens materially affects the
Company's ownership or use of its properties.
ACREAGE
The following table sets forth the gross and net acres of developed and
undeveloped gas and oil leases held by the Company at December 31, 1997.
Excluded from the table are approximately 963,000 gross (548,000 net) acres in
Wyoming under gas and oil option agreements acquired from certain Indian tribes.
<TABLE>
<CAPTION>
DEVELOPED UNDEVELOPED
------------------ --------------------
GROSS NET GROSS NET
------- ------- --------- -------
<S> <C> <C> <C> <C>
Colorado.......................................... 123,870 101,015 368,336 319,348
Kansas............................................ 1,920 1,560 4,081 3,887
Louisiana......................................... 12,099 3,799 17,049 5,712
Michigan.......................................... 333 129 303 121
Mississippi....................................... 821 347 28,420 2,525
Montana........................................... 4,751 718 158,307 26,443
Nebraska.......................................... -- -- 49,370 45,677
New Mexico........................................ 17,225 6,723 2,480 1,207
North Dakota...................................... 920 1 7,159 518
Oklahoma.......................................... 33,997 11,080 6,461 2,300
Texas............................................. 121,631 44,193 123,302 61,487
Utah.............................................. -- -- 7,684 7,684
West Virginia..................................... 73,451 973 153,584 81,497
Wyoming........................................... 155,612 60,317 628,088 404,204
Other............................................. 360 80 50 12
------- ------- --------- -------
Total 546,990 230,935 1,554,674 962,622
======= ======= ========= =======
</TABLE>
"Gross" acres refer to the number of acres in which the Company owns a
working interest. "Net" acres refer to the sum of the fractional working
interests owned by the Company in gross acres.
GAS AND OIL RESERVES
Estimates of the Company's gas and oil reserves at December 31, 1997, 1996
and 1995 including future net revenues and the present value of future net cash
flows, were made by Williamson Petroleum Consultants, Inc. and by Ryder Scott at
December 31, 1997 and 1996, (both are independent petroleum consultants), in
accordance with guidelines established by the Securities and Exchange Commission
(the "SEC"). Estimates of gas and oil reserves and their estimated values
require numerous engineering assumptions as to the productive capacity and
production rates of existing geological formations and require the use of
certain SEC guidelines as to assumptions regarding costs to be incurred in
developing and producing reserves and prices to be realized from the sale of
future production. Accordingly, estimates of reserves and their value are
inherently imprecise and are subject to constant revision and change and should
not be construed as representing the actual quantities of future production or
cash flows to be realized from the Company's gas and oil properties or the fair
market value of such properties.
Certain additional unaudited information regarding the Company's reserves,
including the present value of future net cash flows, is set forth in Note 13 of
the Notes to Consolidated Financial Statements included herein.
The Company has no gas and oil reserves or production subject to long-term
supply or similar agreements with foreign governments or authorities.
Estimates of the Company's total proved gas and oil reserves have not been
filed with or included in reports to any federal authority or agency other than
the SEC.
11
<PAGE> 12
PRODUCTIVE WELLS
The following table sets forth the gross and net productive gas and oil
wells in which the Company owned an interest at December 31, 1997.
<TABLE>
<CAPTION>
PRODUCTIVE WELLS
-----------------------------
GROSS NET
----------- ---------------
GAS OIL GAS OIL
----- --- ------ ------
<S> <C> <C> <C> <C>
Colorado.................................................... 442 63 203.68 31.95
Louisiana................................................... 50 38 13.29 13.93
New Mexico.................................................. 35 28 7.32 12.15
North Dakota................................................ 6 5 2.13 3.49
Oklahoma.................................................... 128 36 31.37 10.18
Texas....................................................... 107 313 44.95 104.57
West Virginia............................................... 56 -- 18.39 --
Wyoming..................................................... 434 144 143.75 39.09
Other....................................................... 17 15 4.65 1.99
----- --- ------ ------
Total............................................. 1,275 642 469.53 217.35
===== === ====== ======
</TABLE>
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.
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>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1997 1996 1995
------------ ----------- ------------
TYPE OF WELL GROSS NET GROSS NET GROSS NET
------------ ----- ---- ----- --- ----- ----
<S> <C> <C> <C> <C> <C> <C>
Exploratory
Gas................................................... -- -- -- -- -- --
Oil................................................... -- -- -- -- -- --
Dry................................................... 7 3.7 5 2.8 3 1.1
-- ---- -- --- -- ----
7 3.7 5 2.8 3 1.1
Development
Gas................................................... 72 27.7 14 3.9 34 9.7
Oil................................................... 7 2.2 -- -- 3 1.5
Dry................................................... 3 1.1 5 1.7 10 3.9
-- ---- -- --- -- ----
82 31.0 19 5.6 47 15.1
Total......................................... 89 34.7 24 8.4 50 16.2
== ==== == === == ====
</TABLE>
At December 31, 1997, 11 gross (6.6 net) development wells and 4 gross and
(2.6 net) exploration wells were in various stages of drilling and completion in
Texas and Wyoming.
During 1997, the Company's drilling activities were conducted on a contract
basis with independent drilling contractors. At December 31, 1997, the Company
owned no drilling equipment. In January 1998, the Company acquired Sauer
Drilling Company for approximately $8.1 million. See Note 3 of the Notes to
Consolidated Financial Statements.
OTHER PROPERTIES
The Company leases its home office facilities in Midland, Texas. The lease
covers approximately 32,000 square feet for a term of five years and expires
December 31, 2003.
12
<PAGE> 13
The Company owns a 3,200 square foot office building located on a 2.94 acre
tract in Midland, Texas. The facility is used primarily for storage of pipe and
oilfield equipment.
The Company also leases office facilities in Denver, Colorado. The lease
covers approximately 38,000 square feet for a term of 5 years and expires
January 31, 2003.
The Company has subleased approximately 41,000 square feet of leased office
space which was obtained through the Presidio acquisition. Both leases will
expire on March 31, 1999.
ITEM 3. LEGAL PROCEEDINGS
The Company is a defendant in several routine legal proceedings incidental
to its business which the Company believes will not have a significant effect on
its consolidated financial position, results of operations or cash flows.
In addition to routine legal proceedings incidental to the Company's
business, Rocno Corporation ("Rocno"), a wholly-owned subsidiary of the Company,
is a defendant in a Complaint filed by the United States of America which, among
other things, alleges that Rocno arranged for the disposal of "hazardous
materials" (within the meaning of the Comprehensive Environmental Response,
Compensation and Liability Act) in Waller County, Texas (the "Sheridan Superfund
Site"). In addition to Rocno, approximately 117 other companies were named as
defendants in the same matter with similar allegations by the Government of the
release by them of hazardous materials at the Sheridan Superfund Site. Effective
August 31, 1989, Rocno and thirty-six other defendants executed the Sheridan
Site Trust Agreement (the "Trust") for the purpose of creating a trust to
perform agreed upon remedial action at the Sheridan Superfund Site. In
connection with the establishment of the Trust, the parties to the Trust have
agreed to the terms of a Consent Decree entered December 3, 1991 in the United
States District Court, Southern District of Texas, Houston Division, Civil
Action No. H-91-3529, pursuant to which the defendants joining the Consent
Decree will carry out the clean-up plan prescribed by the Consent Decree. The
court has not yet approved the Consent Decree. The estimate of the total
clean-up cost is approximately $30 million. Under terms of the Trust, each party
is allocated a percentage of costs necessary to fund the Trust for clean-up
costs. Rocno's proportionate share of the estimated clean-up costs is 0.33% or
$99,000, of which $16,000 has been paid, and the remainder was accrued in the
Company's consolidated financial statements at December 31, 1997. If the
clean-up costs exceed the projected amount, Rocno will be required to pay its
pro rata share of the excess clean-up costs.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders in the
fourth quarter of the year ended December 31, 1997.
13
<PAGE> 14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded in the over-the-counter market and
appears on the NASDAQ National Market System under the symbol "TMBR". The
following table sets forth the range of high and low closing quotations for each
quarterly period during the past two fiscal years as reported by NASDAQ National
Market System. The quotations are inter-dealer prices without retail mark-ups,
mark-downs or commissions and may not represent actual transactions.
<TABLE>
<CAPTION>
CLOSING SALE
PRICE
-------------
QUARTER ENDED HIGH LOW
------------- ---- ---
<S> <C> <C>
March 31, 1996.............................................. 15 3/8 12 1/8
June 30, 1996............................................... 17 7/8 12 7/8
September 30, 1996.......................................... 19 1/4 14 1/4
December 31, 1996........................................... 22 3/8 16 7/8
March 31, 1997.............................................. 18 1/2 18
June 30, 1997............................................... 21 9/16 20 1/4
September 30, 1997.......................................... 24 7/8 24 1/2
December 31, 1997........................................... 19 3/4 17 9/16
</TABLE>
On March 20, 1998 the last sale price of the Company's Common Stock, as
reported by the NASDAQ National Market System, was $20.125 per share.
The transfer agent for the Company's Common Stock is Boston EquiServe,
L.P., Canton, Massachusetts.
On December 31, 1997, the outstanding shares of the Company's Common Stock
(29,210,354 shares) were held by approximately 4,300 holders of record.
The Company has never declared or paid any cash dividends to the holders of
Common Stock and has no present intention to pay cash dividends to the holders
of Common Stock in the future. Under the terms of the Company's Credit
Agreement, the Company is prohibited from paying cash dividends to the holders
of Common Stock without the written consent of the bank lenders. Additionally,
the Company's ability to declare and pay dividends on its Common Stock is
further restricted by the rights of the holder of the Series A Preferred Stock.
On December 23, 1996, the Company completed the acquisition of Presidio Oil
Company and its subsidiaries (collectively, "Presidio"), following the issuance
by the U.S. Bankruptcy Court, District of Delaware, on December 10, 1996, of an
order confirming Presidio's reorganization under Chapter 11 of the U.S.
Bankruptcy Code. The Company issued 2,711,137 shares of its Common Stock to
creditors and shareholders of Presidio pursuant to Section 1145 of the United
States Bankruptcy Code.
On March 1, 1991, the Board of Directors adopted a Rights Plan designed to
help assure that all stockholders receive fair and equal treatment in the event
of a 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
14
<PAGE> 15
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.
ITEM 6. SELECTED FINANCIAL DATA
The following tables set forth selected financial information for the
Company for each of the years shown.
The Company's historical results of operations have been materially
affected by the substantial increase in the Company's size as a result of the
Presidio Acquisition and the KNPC Acquisition, making comparisons of individual
line items between 1997 and 1996 and 1996 and 1995 difficult. (See Note 3 to
Notes to Consolidated Financial Statements of the Company included elsewhere
herein)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Revenues................................... $128,737 $ 66,720 $ 41,053 $ 29,071 $ 28,708
======== ======== ======== ======== ========
Net income (loss) attributable to common
stock.................................... 6,860 6,263 5,785 (160) (2,318)
======== ======== ======== ======== ========
Weighted average number of common shares
outstanding(1)
Basic.................................... 25,110 21,116 16,292 15,464 11,898
======== ======== ======== ======== ========
Diluted.................................. 26,407 22,525 16,887 16,053 12,421
======== ======== ======== ======== ========
Net income (loss) per common share(1)
Basic.................................... .27 .30 .36 (.01) (.19)
======== ======== ======== ======== ========
Diluted.................................. .26 .28 .34 (.01) (.19)
======== ======== ======== ======== ========
Total assets............................... 450,926 406,374 164,174 115,092 108,084
======== ======== ======== ======== ========
Long-term debt, net of current
maturities............................... 23,000 119,000 -- -- --
======== ======== ======== ======== ========
</TABLE>
- ---------------
(1) In accordance with Statement of Financial Accounting Standards ("SFAS") No.
128 "Earnings per Share", net income per common share has been restated for
all periods presented.
The following tables set forth selected information for the Company's gas
and oil sales volumes and proved reserves for each of the years shown.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Volumes sold:
Gas (Mmcf)................................. 31,842 16,762 10,585 7,087 7,041
Oil (Mbbls)................................ 1,159 545 387 276 317
Proved reserves at period end:
Gas (Mmcf)................................. 347,104 359,167 163,303 180,306 130,995
Oil (Mbbls)................................ 7,227 12,306 4,068 4,522 3,300
</TABLE>
15
<PAGE> 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The Company's historical results of operations have been materially
affected by the substantial increase in the Company's size as a result of the
Presidio Acquisition and the KNPC Acquisition, making comparisons of individual
line items between 1997 and 1996 and 1996 and 1995 difficult. (See Note 3 to
Notes to Consolidated Financial Statements of the Company included elsewhere
herein)
Revenues
During 1997, revenues from gas and oil production increased 127% to $92.6
million, as compared to $40.8 million in 1996. Such increase in gas and oil
revenues was the result of an increase in (i) average gas prices received by the
Company from $1.77 per Mcf to $2.25 per Mcf which increased revenues by
approximately $8.1 million, (ii) gas sales volumes of 90% which increased
revenues by approximately $33.9 million, and (iii) oil sales volumes of 113%
which increased revenues by approximately $11.1 million. A decrease in the
average oil prices from $20.45 to $18.02 reduced the revenues by approximately
$1.3. The increase in gas and oil volumes was primarily due to the Presidio
acquisition and development drilling.
During 1996, revenues from gas and oil production increased 100% to $40.8
million as compared to $20.4 million in 1995. Such increase in gas and oil
revenues was the result of an increase in (i) average gas prices received by the
Company from $1.31 per Mcf to $1.77 per Mcf which increased revenues by
approximately $4.9 million, (ii) gas sales volumes of 58% which increased
revenues by approximately $10.9 million, (iii) average oil prices received from
$16.80 per barrel to $20.45 per barrel which increased revenues by approximately
$1.4 million and, (iv) oil sales volumes of 41% which increased revenues by
approximately $3.2 million. The increase in gas and oil production levels was
primarily due to the KNPC Acquisition and to a lesser extent, successful
drilling results primarily in the Val Verde Basin of west Texas.
The following table reflects the Company's revenues, average prices
received for gas and oil, and amount of gas and oil production in each of the
years shown:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1997 1996 1995
-------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Natural gas sales.................................. $ 71,694 $29,639 $13,883
Crude oil sales.................................... 20,887 11,150 6,502
Marketing, gathering and processing................ 34,998 25,122 15,572
Gain on sales of gas and oil properties............ -- 267 4,402
Interest income and other.......................... 1,158 542 694
-------- ------- -------
Total revenues............................. $128,737 $66,720 $41,053
======== ======= =======
Net income attributable to common stock.............. $ 6,860 $ 6,263 $ 5,785
======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Natural gas production sold (Mmcf).................... 31,842 16,762 10,585
Crude oil production (Mbbls).......................... 1,159 545 387
Average natural gas sales price ($/Mcf)............... $ 2.25 $ 1.77 $ 1.31
Average crude oil sales price ($/Bbl)................. $ 18.02 $ 20.45 $ 16.80
</TABLE>
In 1997 the Company sold the majority of its properties located in North
Dakota for $11.0 million and another property located in Oklahoma for $1.6
million. No gain or loss was recorded for either sale. The Company had no
significant property sales during 1996 whereas in 1995 the Company sold all of
its properties in Arkansas, resulting in a gain of $4.1 million.
Marketing, gathering and processing revenues increased 39% in 1997 as
compared to 1996 and 61% in 1996 as compared to 1995. Such increase is due to
higher gas prices and higher volumes of gas marketed due to the Company's
increased production and marketing of additional third party gas.
16
<PAGE> 17
Costs and Expenses
Expenses related to gas and oil production, production taxes, and
depreciation, depletion and amortization have increased in each of the last two
years due to increased production and revenue levels resulting from successful
drilling operations as well as the KNPC and Presidio Acquisitions. On an Mcfe
basis, the Company's costs have increased during the past year as a result of
the Presidio acquisition. Costs of gas and oil production rose to $.43 per Mcfe
in 1997, as compared to $.33 per Mcfe and $.37 per Mcfe in 1996 and 1995,
respectively. Taxes on gas and oil production, which are generally calculated as
a percentage of gas and oil sales, remained at 8% of gas and oil sales in 1997
as compared to 8% and 10% of gas and oil sales during 1996 and 1995,
respectively. Such decline from 1995 to 1996 was due to the increase of natural
gas and oil produced in the Val Verde Basin in 1996 where the Company
experiences lower production tax rates as compared to its other areas of
operation.
The Company's depletion, depreciation and amortization rate increased on an
Mcfe basis to $.93 per Mcfe for 1997 from $.76 per Mcfe in 1996 and $.77 per
Mcfe in 1995. The increase was the result of the costs of the Presidio
acquisition.
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 decreased to 15% of revenues in 1997 as compared to 18% in 1996 and
16% in 1995.
Costs associated with exploration activities and impairments of leasehold
costs increased to $10.3 million in 1997 as compared to $3.8 million in 1996 and
$4.2 million in 1995. The increase was the result of an aggressive exploratory
drilling program during 1997 in which the Company began to more fully explore
for oil and gas on its large undeveloped acreage position.
General and administrative expenses increased in each of the last two years
as a result of the Company's significantly higher level of operations. The
Company has benefited from the economies of scale in its growth, resulting in a
decrease in general and administrative expenses on an Mcfe of production basis
to $.24 in 1997 as compared to $.29 and $.32 per Mcfe of production in 1996 and
1995, respectively.
Interest expense increased in 1997 as compared to 1996 as a result of the
debt incurred in connection with the Presidio Acquisition in December 1996. A
large portion of the debt was repaid in October 1997 with the proceeds from the
sale of 5.0 million shares of the Company's Common Stock. Interest expense
decreased in 1996 as compared to 1995 as debt was repaid in November 1995 with
the proceeds from the sale of 4.6 million shares of the Company's Common Stock.
The Company incurred a current tax liability in the amount of $403,000,
$290,000 and $77,000 in 1997, 1996 and 1995, respectively, as a result of the
application of the alternate minimum tax rules as provided under the Internal
Revenue Code. The Company had not paid, prior to the year ended December 31,
1990, Federal income taxes for the past six years due to its net operating loss
carryforward. At December 31, 1997, such carryforward for tax purposes was
approximately $48.8 million.
The Company reduced its net deferred tax asset to $2.6 million in 1997.
Deferred tax assets (related primarily to the Company's net operating loss and
investment tax credit carryforwards) were initially recorded in 1993 with the
adoption of SFAS No. 109, "Accounting for Income Taxes", but had been reserved
entirely by a valuation allowance until 1995. Based on additions to the
Company's gas and oil reserves and the resulting increases in anticipated future
income, the Company now expects to realize the future benefit of its net
operating loss carryforwards prior to their expiration. A valuation allowance of
approximately $5.6 million at December 31, 1997 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 inability to use certain 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 expires and the levels of
taxable income necessary for utilization. In this regard, full valuation
allowances were provided for investment tax credit carryforwards and option plan
compensation. 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 carryforward for which valuation allowances were not provided.
17
<PAGE> 18
CAPITAL RESOURCES AND LIQUIDITY
Growth and Acquisitions
The Company's total assets have grown from $164 million at December 31,
1995 to $451 million at December 31, 1997. During this period, the Company's
proved gas and oil reserves increased from 188 Bcfe to 390 Bcfe. Most of the
growth of the Company resulted from recent acquisitions; and, to a lesser
extent, from the Company's successful exploration and development drilling.
The Company continues to pursue opportunities which will add value by
increasing its reserve base and presence in significant natural gas areas, and
further developing the Company's ability to control and market the production of
natural gas. As the Company continues to evaluate potential acquisitions and
property development opportunities, it will benefit from its financing
flexibility and the leverage potential of the Company's overall capital
structure.
Capital and Exploration Expenditures
The Company's capital and exploration expenditures decreased to $107.9
million for the year ended December 31, 1997 as compared to capital expenditures
of $281.0 million (including $250.5 million for the KNPC and Presidio
acquisitions) and $25.2 million for the years ended December 31, 1996 and 1995,
respectively. Capital expenditures for exploratory and developmental drilling
for 1997 were approximately $42.2 million, which relates to the Company's
strategy of developing its large undeveloped acreage position. The acquisition
of the assets of Genesis Gas and Oil L.L.C. for $35.5 million was also included
in the capital expenditures for 1997. The Company anticipates capital
expenditures of approximately $103 million in 1998, $69.9 million being
allocated to exploration and development drilling. The timing of most of the
Company's capital expenditures is discretionary and there are no material
long-term commitments associated with the Company's capital expenditure plans.
Consequently, the Company is able to adjust the level of its capital
expenditures as circumstances warrant. The level of capital expenditures by the
Company will vary in future periods depending on energy market conditions and
other related economic factors.
Historically, the Company has funded capital expenditures and working
capital requirements with both internally generated cash and borrowings. Net
cash flow provided by operating activities increased to $43.3 million for 1997
as compared to $26.5 million and $8.8 million.
Bank Credit Facility
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 net proved reserves. At December 31, 1997, the aggregate outstanding
balance under the Credit Facility was $23 million, bearing interest at 6.9% per
annum, and the Company was in compliance with the covenants contained in the
Credit Facility. 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%. The Credit
Facility contains certain financial covenants which require the Company to
maintain a minimum consolidated tangible net worth as well as certain financial
ratios. See Note 4 to Notes to Consolidated Financial Statements of the Company
included elsewhere herein.
Public Offering
In October 1997, the Company sold 5,035,800 shares of its Common Stock in a
public offering. Net proceeds from the offering were approximately $121 million
which were used to repay a majority of the Company's outstanding debt and to
fund the acquisition of all of the assets of Genesis Gas and Oil, L.L.C.
Markets and Prices
Wildhorse, which was created to provide gathering, processing, marketing,
storage and field services to Rocky Mountain gas and oil producers, will
continue to pursue the construction or acquisition of gathering,
18
<PAGE> 19
processing and storage areas of the Rocky Mountain region. During 1997,
Wildhorse invested approximately $40.9 million for gas gathering and processing
assets. The Company (45 percent) and KNE (55 percent) jointly own Wildhorse.
Wildhorse is operated by KNE under the direction of an operating team with equal
representation from KNE and the Company.
The Company has dedicated significant amounts of its Rocky Mountain gas
production to Wildhorse for gathering, processing and marketing. KNE contributed
gas marketing contracts and storage assets in western Colorado.
The Company's revenues and associated cash flows are significantly impacted
by changes in gas and oil prices. All of the Company's gas and oil production is
currently market sensitive as no amounts of the Company's future gas and oil
production have been sold at contractually specified prices. During 1997, the
average prices received for gas and oil by the Company were $2.25 per Mcf and
$18.02 per barrel, respectively, as compared to $1.77 Mcf and $20.45 per barrel
in 1996 and $1.31 per Mcf and $16.80 per barrel in 1995.
Year 2000
The Company utilizes software and technologies throughout its operations
that will be effected by the date change in the year 2000 (Year 2000 Issue). An
assessment of the systems that will be affected by the Year 2000 Issue is
underway. The Company does not believe the costs related to the Year 2000 Issue
will materially impact its results of operations. However, there can be no
guarantee that the systems of other companies, on which the Company's systems
rely, will be timely converted or that a failure to convert by another company
or a conversion that is incompatible with the Company's systems would not have a
material adverse effect on the Company.
Forward-Looking Statements and Risk
Certain statements in this report, including statements of the future
plans, objectives, and expected performance of the Company, are forward-looking
statements that are dependent on certain events, risks and uncertainties that
may be outside the Company's control which could cause actual results to differ
materially from those anticipated. Some of these include, but are not limited
to, economic and competitive conditions, inflation rates, legislative and
regulatory changes, financial market conditions, political and economic
uncertainties, future business decisions, and other uncertainties, all of which
are difficult to predict.
There are numerous uncertainties inherent in estimating quantities of
proven oil and gas reserves and in projecting future rates of production and
timing of development expenditures. The total amount or timing of actual future
production may vary significantly from reserves and production estimates. The
drilling of exploratory wells can involve significant risks including those
related to timing, success rates and cost overruns. Lease and rig availability,
complex geology and other factors can affect these risks. Future oil and gas
prices also could affect results of operations and cash flows.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standard Board (FASB) issued SFAS
No. 130, "Reporting Comprehensive Income", which requires the presentation of
comprehensive income in an entity's financial statements. Comprehensive income
represents all changes in equity of an entity during the reporting period,
including net income and charges made directly to equity which are excluded from
net income. This statement is not anticipated to have a material impact on the
Company's financial disclosures.
In June 1997, the FASB also issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information" which establishes standards
for the way public enterprises are to report information about operating
segments in annual financial statements and requires the reporting of selected
information about operating segments in interim financial reports issued to
shareholders. SFAS No. 131 also establishes standards for related disclosures
about products and services, geographic areas, and major customers. SFAS No. 131
is effective for periods beginning after December 15, 1997, at which time the
Company will adopt the provision. This statement is not anticipated to have a
material impact on the Company's financial disclosures.
19
<PAGE> 20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Index to Consolidated Financial Statements
Report of Independent Public Accountants.................. 21
Consolidated Balance Sheets, December 31, 1997 and 1996... 22
Consolidated Statements of Operations, Years ended
December 31, 1997, 1996 and 1995....................... 23
Consolidated Statements of Changes in Stockholders'
Equity, Years ended December 31, 1997, 1996 and 1995... 24
Consolidated Statements of Cash Flows, Years ended
December 31, 1997, 1996 and 1995....................... 25
Notes to Consolidated Financial Statements................ 26
</TABLE>
20
<PAGE> 21
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, 1997 and 1996,
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, 1997. 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, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
February 25, 1998
21
<PAGE> 22
TOM BROWN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 6,537 $ 20,504
Accounts receivable....................................... 40,949 33,080
Inventories............................................... 365 302
Other..................................................... 271 889
-------- --------
Total current assets.............................. 48,122 54,775
-------- --------
PROPERTY AND EQUIPMENT, AT COST:
Gas and oil properties, successful efforts method of
accounting............................................. 500,561 436,879
Other..................................................... 55,735 35,216
-------- --------
Total property and equipment...................... 556,296 472,095
Less: Accumulated depreciation, depletion and
amortization........................................... 160,480 124,834
-------- --------
Net property and equipment........................ 395,816 347,261
-------- --------
OTHER ASSETS:
Deferred income taxes, net................................ 2,606 2,865
Other assets.............................................. 4,382 1,473
-------- --------
Total other assets................................ 6,988 4,338
-------- --------
$450,926 $406,374
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 32,367 $ 25,033
Accrued expenses.......................................... 7,332 10,562
Note payable -- current................................... 5,168 --
-------- --------
Total current liabilities......................... 44,867 35,595
-------- --------
BANK DEBT................................................... 23,000 119,000
-------- --------
OTHER NON-CURRENT LIABILITIES............................... 6,661 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... 100 100
Common Stock, $.10 par value
Authorized 40,000,000 shares; Outstanding 29,210,354
shares and 23,898,431 shares, respectively............ 2,921 2,390
Additional paid-in capital................................ 430,502 307,631
Accumulated deficit....................................... (57,125) (63,985)
-------- --------
Total stockholders' equity........................ 376,398 246,136
-------- --------
$450,926 $406,374
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE> 23
TOM BROWN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1997 1996 1995
----------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
REVENUES:
Gas and oil sales........................................ $ 92,581 $40,789 $20,385
Marketing, gathering and processing...................... 34,998 25,122 15,572
Gain on sales of gas and oil properties.................. -- 267 4,402
Interest income and other................................ 1,158 542 694
-------- ------- -------
Total revenues................................... 128,737 66,720 41,053
-------- ------- -------
COSTS AND EXPENSES:
Gas and oil production................................... 16,698 6,576 4,834
Taxes on gas and oil production.......................... 7,437 3,258 2,043
Cost of gas sold......................................... 29,734 20,496 13,146
Exploration costs........................................ 8,963 3,471 3,644
Impairments of leasehold costs........................... 1,350 331 582
General and administrative............................... 9,411 5,786 4,184
Depreciation, depletion and amortization................. 36,230 15,140 9,994
Writedown of properties.................................. -- -- 8,368
Interest expense......................................... 5,920 389 1,369
-------- ------- -------
Total costs and expenses......................... 115,743 55,447 48,164
-------- ------- -------
Income (loss) before income taxes.......................... 12,994 11,273 (7,111)
INCOME TAX BENEFIT (PROVISION):
Recognition of deferred tax asset........................ -- -- 13,170
Income tax expense....................................... (4,384) (3,338) (274)
-------- ------- -------
Net income................................................. 8,610 7,935 5,785
Preferred stock dividends.................................. (1,750) (1,672) --
-------- ------- -------
Net income attributable to common stock.................... $ 6,860 $ 6,263 $ 5,785
======== ======= =======
Weighted average number of common shares outstanding:
Basic.................................................... 25,110 21,116 16,292
======== ======= =======
Diluted.................................................. 26,407 22,525 16,887
======== ======= =======
Net income per common share:
Basic.................................................... $ .27 $ .30 $ .36
======== ======= =======
Diluted.................................................. $ .26 $ .28 $ .34
======== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE> 24
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, 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......................... -- -- -- 7,935 7,935
Preferred stock dividends.......... -- -- -- (1,672) (1,672)
---- ------ -------- -------- --------
Balance as of December 31, 1996...... 100 2,390 307,631 (63,985) 246,136
Stock options exercised............ -- 24 1,558 -- 1,582
Common stock issuance.............. -- 507 121,705 -- 122,212
Stock issuance costs............... -- -- (392) -- (392)
Net income......................... -- -- -- 8,610 8,610
Preferred stock dividends.......... -- -- -- (1,750) (1,750)
---- ------ -------- -------- --------
Balance as of December 31, 1997...... $100 $2,921 $430,502 $(57,125) $376,398
==== ====== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE> 25
TOM BROWN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1997 1996 1995
--------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 8,610 $ 7,935 $ 5,785
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation, depletion and amortization................ 36,230 15,140 9,994
Gain on sales of assets................................. (19) (267) (4,402)
Writedown of properties................................. -- -- 8,368
Deferred taxes.......................................... 259 2,701 (13,170)
Option plan compensation................................ -- 22 97
Exploration costs....................................... 8,963 3,471 3,644
Impairments of leasehold costs.......................... 1,350 331 582
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable............ (7,869) (15,408) 990
(Increase) decrease in inventories.................... (63) 75 886
Decrease (increase) in other current assets........... 618 220 (12)
Increase (decrease) in accounts payable and accrued
expenses........................................... (2,847) 9,919 (3,050)
Decrease (increase) in other assets, net.............. (1,891) 2,406 (922)
--------- -------- -------
Net cash provided by operating activities................... $ 43,341 $ 26,545 $ 8,790
--------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of assets............................. $ 12,635 $ 593 $ 9,044
Investment in securities.................................. -- -- (51,093)
KNPC and Presidio Acquisitions............................ -- (95,529) --
Capital and exploration expenditures...................... (102,546) (36,293) (27,157)
Changes in accounts payable and accrued expenses for oil
and gas expenditures.................................... 7,498 2,364 (1,657)
--------- -------- -------
Net cash used in investing activities.............. (82,413) (128,865) (70,863)
--------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock.................... 121,665 -- 47,932
Borrowings of long-term bank debt......................... 27,000 119,000 51,000
Repayments of long-term bank debt......................... (123,000) -- (51,000)
Preferred stock dividends................................. (1,750) (1,672) --
Proceeds from exercise of stock options................... 1,582 519 261
Stock issuance costs...................................... (392) (5) (285)
--------- -------- -------
Net cash provided by financing activities.......... 25,105 117,842 47,908
--------- -------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (13,967) 15,522 (14,165)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.............. 20,504 4,982 19,147
--------- -------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR.................... $ 6,537 $ 20,504 $ 4,982
========= ======== =======
Cash paid during the year for:
Interest.................................................. $ 6,027 $ 136 $ 1,369
Income taxes.............................................. 429 190 77
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE> 26
TOM BROWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(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, production, and sale 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, the Permian Basin
of west Texas and southeastern New Mexico, and east Texas. The Company also, to
a lesser extent, conducts exploration and development activities in other areas
of the continental United States.
Substantially all of the Company's production is sold under
market-sensitive contracts. The Company's revenue, profitability and future rate
of growth are substantially dependent upon the price of, and demand for, oil,
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 (82 percent in 1997 on a volumetric equivalent basis)
is 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 1997 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 effort method of accounting. Under
such method, costs of productive exploratory wells, development dry holes and
productive wells and undeveloped leases are capitalized. Gas and oil lease
acquisition costs are also capitalized. Exploration costs, including geological
and geophysical expenses and delay rentals for gas and oil leases, are charged
to expense as incurred. Exploratory drilling costs are initially capitalized,
but charged to expense if and when the well is determined not to have found
reserves in commercial quantities.
Maintenance and repairs are charged to expense; renewals and betterments
are capitalized to the appropriate property and equipment accounts. Upon
retirement or disposition of assets, the costs and related
26
<PAGE> 27
TOM BROWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 ("SFAS") No. 121, "Accounting for the Impairment of Long-lived
Assets". SFAS No. 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 from 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, 1997, the Company had net
gas balancing liabilities of approximately $3.0 million associated with
approximately 2.7 billion cubic feet ("Bcf") of gas.
Income Taxes
The Company provides for income taxes using the 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" in 1996 had no effect on
the Company's results of operations but proforma disclosure is made of the
effect on net income had the accounting recommended by SFAS No. 123 been
implemented (See Note 7).
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
27
<PAGE> 28
TOM BROWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 Per Common Share
The Company has adopted SFAS No. 128, "Earnings Per Share". Under SFAS No.
128, primary earnings per share ("Primary EPS") has been replaced by basic
earnings per share ("Basic EPS"), and fully diluted earnings per share ("Fully
Diluted EPS") has been replaced by diluted earnings per share ("Diluted EPS").
Basic EPS differs from Primary EPS in that it only includes the weighted average
impact of outstanding shares of the Company's common stock (i.e., it excludes
the dilutive effect of common stock equivalents such as the Preferred Stock, as
described in Note 6, stock options, etc.). Diluted EPS is substantially similar
to Fully Diluted EPS. The provision of SFAS No. 128 resulted in the retroactive
restatement for all periods of previously reported net income per common share
figures.
Basic net income per share is calculated by dividing net income
attributable to common stock by the weighted average number of common shares
outstanding during the period including the weighted average impact of the
shares of common stock issued during the year from the date of issuance.
Diluted net income per share calculations also include the dilutive effect
of stock options which are convertible into common stock.
The following is a reconciliation of the numerators and denominators used
in the calculation of basic and diluted net income per common share for the
years ended December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------- --------------------------- ---------------------------
NET PER SHARE NET PER SHARE NET PER SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------ ------ --------- ------ ------ --------- ------ ------ ---------
IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic EPS:
Net Income Attributable to
Common Stock and Share
Amounts................. $6,860 25,110 $.27 $6,263 21,116 $.30 $5,785 16,292 $.36
Dilutive Securities:
Stock Options............. -- 1,297 -- -- 1,409 -- -- 595 --
------ ------ ---- ------ ------ ---- ------ ------ ----
Diluted EPS:
Net Income Attributable to
Common Stock and Assumed
Share Amounts........... $6,860 26,407 $.26 $6,263 22,525 $.28 $5,785 16,887 $.34
====== ====== ==== ====== ====== ==== ====== ====== ====
</TABLE>
Consolidated Statements of Cash Flows
The Company considers investments purchased with an original maturity of
three months or less to be cash equivalents. In connection with the acquisition
of Interenergy, Wildhorse assumed $11.5 million in debt, $5.2 million net to the
Company. (See notes 3 and 4.) 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.
28
<PAGE> 29
TOM BROWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(3) ACQUISITIONS AND DIVESTITURES
Acquisition of Sauer Drilling Company
In January 1998, the Company completed the acquisition of W. E. Sauer
Companies L.L.C. of Casper, Wyoming for approximately $8.1 million. The assets
purchased include five drilling rigs, tubular goods, a yard and related assets.
The Company will operate the assets under the name Sauer Drilling Company and
will continue to serve the drilling needs of operators in the central Rocky
Mountain region in addition to drilling for the Company.
Acquisition of Gathering and Processing Assets by Wildhorse
In December 1997, KNE completed the acquisition of all of the assets of
Interenergy Corporation, ("Interenergy"). The assets consist of gas gathering
and processing facilities located in Wyoming, Montana, North Dakota and South
Dakota, as well as a marketing division. KNE retained the marketing assets and
Wildhorse acquired the gathering and processing assets valued at $23.4 million.
The Company's share of this purchase was approximately $10.5 million. These
assets consist of over 300 miles of pipeline and a processing plant. The Company
will benefit from the acquisition as it develops its acreage in the Big Horn
Basin.
Acquisition of the Assets of Genesis Gas and Oil, L.L.C.
In October 1997, the Company completed the acquisition of the assets of
Genesis Gas and Oil, L.L.C. ("Genesis"). The Genesis assets are located
primarily in the Piceance Basin of western Colorado and the Green River Basin of
Wyoming and are principally operated by the Company. The properties provide
current net production of approximately 6 million cubic feet of gas and 150
barrels of oil per day. The acquisition increases the Company's acreage position
in the Piceance Basin from approximately 54,000 to 86,000 net developed and
100,000 to 148,000 net undeveloped acres. The Company's working interest has
doubled from 23% to 46% in 238 producing wells and from 34% to 68% in 500
potential development locations. The purchase price for these assets was
approximately $35.5 million.
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 1.0 million shares of the Company's $1.75 Convertible
Preferred Stock, Series A (the "Preferred Stock") and the remaining $11.25
million was paid in the form of 918,367 shares of the Company's Common Stock,
based on a price per share of $12.25. The KNPC Acquisition has been recorded
under the purchase method of accounting.
As a result of the KNPC Acquisition, the Company acquired interests in 624
gross producing wells in Colorado and Wyoming, of which the Company became
operator of 308. The properties acquired by the Company included approximately
243,000 net undeveloped acres in Colorado, Wyoming, Kansas and Nebraska and
approximately 64,000 net developed acres located in Colorado and Wyoming.
An integral part of the KNPC Acquisition was the formation of Wildhorse,
which is owned fifty-five percent (55%) by KNE and forty-five percent (45%) by
the Company. The business and affairs of Wildhorse are managed by KNE under the
direction of an operating team consisting of two representatives appointed by
the Company and two representatives appointed by KNE. The Company dedicated a
significant amount of its Rocky Mountain gas reserves to Wildhorse and KNE
contributed substantial gas marketing contracts. The
29
<PAGE> 30
TOM BROWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company also acquired a natural gas storage facility in western Colorado that
was simultaneously transferred 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.
Acquisition of Presidio Oil Company
In December 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' 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. 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 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 of accounting. The cash portion of the Presidio
Acquisition was funded by borrowings under the Company's credit 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, 1997
and 1996 assuming that the KNPC Acquisition, the Presidio Acquisition and the
Genesis Acquisition occurred on January 1, 1996.
<TABLE>
<CAPTION>
YEARS ENDED
---------------------
1997 1996
-------- --------
(IN THOUSANDS,
EXCEPT FOR PER SHARE
AMOUNTS)
<S> <C> <C>
Revenues................................................... $132,322 $110,214
======== ========
Net income................................................. $ 9,712 $ 9,298
======== ========
Net income attributable to common stock.................... $ 7,962 $ 7,626
======== ========
Net income per common share
Basic.................................................... $ .32 $ .36
======== ========
Diluted.................................................. $ .30 $ .34
======== ========
</TABLE>
Sale of North Dakota Properties
In May 1997, the Company sold the majority of its properties located in
North Dakota for $11.0 million. The properties had a net book value of $11.0
million and, accordingly, no gain was recorded on the sale. Proceeds from the
sale of these properties were used to repay a portion of the Company's
outstanding indebtedness under its Credit Facility.
Sale of Arkoma Assets
In September 1995, the Company sold its properties in the Arkoma Basin in
western Arkansas for $9.0 million. As a result of this sale, the Company
realized an after-tax book gain of $3.0 million. Proceeds
30
<PAGE> 31
TOM BROWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
from the sale of these properties were used to repay a portion of the Company's
outstanding indebtedness under its Credit Facility.
(4) DEBT
In December 1996, the Company entered into a bank credit agreement. The
credit agreement provided for a $125 million revolving credit facility (the
"Credit Facility") maturing in December 1999. 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 .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. At December 31, 1997, the
outstanding balance was $23 million at an average interest rate of 6.90%.
Financial covenants of the Credit Facility require the Company to maintain
a minimum consolidated tangible net worth of not less than $289 million as of
December 31, 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 December 31, 1997.
Subsequent to December 31, 1997, the Company was out of compliance with one
of the non financial covenants of the Credit Facility. The Company received a
waiver from the lenders regarding this event of noncompliance.
Standby letters of credit of approximately $3,880,000 have been issued
under two agreements. One agreement expires in April 1999 and the letter of
credit being maintained is security for performance on a long term contract
entered into by Presidio. The second letter of credit is held as security by a
surety company for two oil and gas performance bonds issued to agencies of the
U.S. Government. The bonds will remain in place until released by the government
agencies.
In connection with the acquisition of gathering and processing assets of
Interenergy, Wildhorse assumed $11.5 million in debt, $5.2 million net to the
Company. At December 31, 1997, the interest rate was 8.5%. The debt was
extinguished in February 1998.
(5) 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.
31
<PAGE> 32
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 1997 and 1996 and 34% in 1995 was used in the following
reconciliation of the Company's effective income tax expense:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1997 1996 1995
------- ------ -------
(IN THOUSANDS)
<S> <C> <C> <C>
Federal income tax provision (benefit) at statutory
rate............................................... $ 4,548 $3,946 $(2,418)
Revision of previous tax estimates................... (1,111) -- --
Adjustment to valuation allowance.................... (474) (596) 2,357
Other................................................ 395 (583) 33
------- ------ -------
3,358 2,767 (28)
AMT provisions....................................... 403 290 105
State income and franchise taxes..................... 623 281 197
------- ------ -------
Income tax expense................................... $ 4,384 $3,338 $ 274
======= ====== =======
</TABLE>
The significant components, which give rise to the Company's deferred tax
assets (liabilities), are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
------- --------
(IN THOUSANDS)
<S> <C> <C>
Net operating loss carryforwards............................ $17,072 $ 18,689
Gas and oil acquisition, exploration and development costs
deducted for tax purposes in excess of book............... (16,819) (14,520)
Investment tax credit carryforwards......................... 857 2,463
Option plan compensation.................................... 1,559 1,559
Other....................................................... 5,492 2,309
------- --------
Net deferred tax asset...................................... 8,161 10,500
Valuation allowance......................................... (5,555) (7,635)
------- --------
Recognized net deferred tax asset........................... $ 2,606 $ 2,865
======= ========
</TABLE>
A valuation allowance of approximately $5.6 million and $7.6 million at
December 31, 1997 and 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 inability to use certain 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 expires and the levels of
taxable income necessary for utilization. In this regard, full valuation
allowances were provided for investment tax credit carryforwards and option plan
compensation. 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 carryforward for which valuation allowances were not provided.
At December 31, 1997, the Company had investment tax credit carryforwards
of approximately $.9 million and net operating loss carryforward of
approximately $48.8 million. The Company currently has no liability for deferred
Federal income taxes because of these net operating loss and investment tax
credit carryforward. 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 1998
and 2004. Additionally, the
32
<PAGE> 33
TOM BROWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company has approximately $1.7 million of statutory depletion carryforwards and
$3.7 million of AMT credit carryforwards that may be carried forward until
utilized.
In 1995, the Company reversed valuation allowances associated with net
operating loss carryforwards in the amount of $13.2 million, based on 1993 and
1994 additions to the Company's oil and gas reserves and resulting increases in
anticipated future income.
(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 29,210,354 shares and
23,898,431 shares were outstanding as of December 31, 1997 and 1996,
respectively.
In October 1997, the Company sold 5,035,800 shares of Common Stock in a
public offering. The net proceeds of such offering were approximately $121.0
million and were used to repay a majority of the Company's outstanding long-term
debt and to fund the acquisition of all of the assets of Genesis Gas and Oil,
L.L.C. (See Note 3).
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.
33
<PAGE> 34
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 1.666 shares of Common Stock for each
share of Preferred Stock, subject to customary adjustments.
The Preferred Stock is exchangeable, in whole or in part, at the option of
the Company on any dividend payment date at any time on or after March 15, 1999,
and prior to March 15, 2001, for shares of Common Stock at the exchange rate of
1.666 shares of Common Stock for each share of Preferred Stock; provided that
(i) on or prior to the date of exchange, the Company shall have declared and
paid or set apart for payment to the holders of Preferred Stock all accumulated
and unpaid dividends to the date of exchange, and (ii) the current market price
of the Common Stock is above $18.375 (the "Threshold Price"). The exchange rate
is subject to adjustment in the same manner and under the same circumstances as
the conversion rate is subject to adjustment, and the Threshold Price is also
subject to adjustment in the same manner and under the same circumstances.
Upon the dissolution, liquidation or winding up of the Company, whether
voluntary or involuntary, the holders of the Preferred Stock are entitled to
receive out of the assets of the Company available for distribution to
stockholders, the amount of $25.00 per share plus an amount equal to all
dividends on such shares (whether or not earned or declared) accrued and unpaid
thereon to the date of final distribution, before any payment or distribution
may be made on the Common Stock or on any class of stock ranking junior to the
Preferred Stock with respect to distributions upon dissolution, liquidation or
winding up.
If at any time dividends payable on the Preferred Stock are in arrears and
unpaid in an amount equal to or exceeding the amount of dividends payable
thereon for four quarterly dividend periods, the total number of Directors on
the Company's Board of Directors will be limited to a maximum of nine and the
holders of the outstanding Preferred Stock will have the exclusive right, voting
separately as a class without regard to series,
34
<PAGE> 35
TOM BROWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
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 2,000,000 shares.
The exercise price of the options granted to employees and directors prior
to 1991, which was originally set at $5.25 per share, was reduced effective
September 4, 1991 to $4.00 per share, the market value at that date. The options
expire ten years from the date of grant.
1993 Plan
In May 1990 and March 1992, the Board of Directors adopted the 1990 Phantom
Stock Option Plan and the 1992 Phantom Stock Option Plan for Non-employee
Directors (the "Phantom Plans").
In February 1993, the Board of Directors adopted the Company's 1993 Stock
Option Plan (the "1993 Plan"). The 1993 Plan provides for issuance of options to
certain employees and directors to purchase shares of Common Stock. The
aggregate number of shares of Common Stock that may be issued under the 1993
Plan is 1,200,000 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.
35
<PAGE> 36
TOM BROWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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,
---------------------------------------------------
1997 1996 1995
--------------- --------------- ---------------
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......... 2,110 $11.06 1,525 $ 8.72 1,120 $ 6.51
Granted................................ 307 19.12 673 15.70 470 12.96
Exercised.............................. (244) 5.54 (88) 5.89 (60) 4.41
Forfeited.............................. -- -- -- -- (5) 3.86
----- ----- -----
Outstanding, end of year............... 2,173 12.84 2,110 11.06 1,525 8.72
===== ===== =====
Exercisable, end of year............... 1,501 10.77 1,457 8.99 1,309 8.28
===== ===== =====
Available for grant, end of year....... 741 31 429
===== ===== =====
</TABLE>
The weighted average fair value of options granted during the years ended
December 31, 1997, 1996, and 1995 was $10.35, $9.19, and $6.71, respectively.
The following table summarizes information about stock options outstanding at
December 31, 1997:
<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)
<S> <C> <C> <C> <C> <C>
$ 3.810-7.620................... 491 4.71 $ 4.33 491 $ 4.33
11.125-13.320.................. 479 7.74 12.17 445 12.13
14.687-21.653.................. 1,203 8.55 16.59 565 15.30
----- -----
2,173 7.50 12.84 1,501 10.77
===== =====
</TABLE>
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
36
<PAGE> 37
TOM BROWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
with SFAS No. 123, the Company's net income and net income per share would
approximate the following pro forma amounts:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
Net Income
As Reported............................................ $6,860 $6,263 $5,785
Pro Forma.............................................. 4,708 4,729 5,105
Basic Net Income per Common Share:
As Reported............................................ $ 0.27 $ 0.30 $ 0.36
Pro Forma.............................................. 0.19 0.22 0.31
Diluted Net Income per Common Share:
As Reported............................................ $ 0.26 $ 0.28 $ 0.34
Pro Forma.............................................. 0.18 0.21 0.30
</TABLE>
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 1997, 1996, and 1995 respectively: (i) risk-free
interest rates of 6.20, 6.35 and 7.59 percent; (ii) expected lives of seven
years, (iii) expected volatility of 40.9 and 45.4, and 46.9 percent, and (iv) no
dividend yields. The pro forma amounts shown above may not be representative of
future results because the SFAS No. 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 could contribute to a trust either stock or cash in
such amounts as the Company deemed advisable. The Company contributed $30,000
for 1995 to the Profit Sharing Plan.
Effective April 1, 1986, the Company adopted an employee stock ownership
plan (the "ESOP") for the benefit of all employees. Under the ESOP, the Company
could contribute cash or the Company's Common Stock to a trust in such amounts
as the Company deemed advisable. The Company contributed $30,000 to the trust
for 1995, for the purchase by the trust of 2,110 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 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
1997 and 1996 respectively.
(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, 1997 and 1996.
37
<PAGE> 38
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.
Debt
The carrying value approximates fair value because the interest rate is
variable and is reflective of current market conditions.
Letters of Credit
The letters of credit reflect fair values as a condition of the underlying
purpose and are subject to fees competitively determined in the market place.
(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 served as an officer
through May 1997. The amounts paid to each of these firms for the years ended
December 31, 1997, 1996 and 1995 were approximately $189,000, and $110,000;
$56,000 and $268,000; and $103,000 and $159,000, respectively. The Company also
paid approximately $32,000, $74,000 and $35,000 during the years ended December
31, 1997, 1996 and 1995, respectively, to a consulting firm that has a partner
who serves as a director of the Company.
The Company participates in exploration activity with a partnership, one of
whose partners is a director of the Company. During the years ended December 31,
1997, 1996, and 1995 the Company billed $960,000, $239,000 and $153,000,
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, 1997, 1996 and 1995, the Company charged the former
subsidiary approximately $80,000, $75,000 and $70,000, respectively, for such
services. The former subsidiary performs drilling services on certain wells
operated by the Company and charged approximately $11,000, $42,000 and $934,000
for such services during the years ended December 31, 1997, 1996 and 1995,
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 Conoco, Inc. accounted for 28% of gas and oil sales
and marketing, gathering and processing revenues for the year ended December 31,
1997. For the years ended 1996 and 1995, gas and oil sales to three purchasers,
Coastal Oil and Gas, Conoco, Inc. and KN Gas Marketing, Inc. accounted for 15%,
14% and 13% and 14%, 25% and 12%, respectively. Because there are numerous other
parties available to purchase the Company's production, the Company believes the
loss of these purchasers would not materially affect its ability to sell natural
gas or crude oil.
Concentration of Credit Risk
The Company's revenues are derived principally from uncollateralized sales
to customers in the oil and gas industry. The concentration of credit risk in a
single industry affects the Company's overall exposure to
38
<PAGE> 39
TOM BROWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 1997
Assets.......................... $394,762 $57,628 $(1,464) $450,926
Revenues........................ 93,716 41,853 (6,832) 128,737
Income before taxes............. 9,703 3,291 -- 12,994
Capital expenditures............ 90,643 17,213 -- 107,856
Depreciation and amortization... 35,229 1,001 -- 36,230
Year ended December 31, 1996
Assets.......................... $383,697 $24,923 $(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
</TABLE>
(11) COMMITMENTS AND CONTINGENCIES
The Company's operations are subject to numerous Federal and state
government regulations that 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.
39
<PAGE> 40
TOM BROWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Lease Commitments
At December 31, 1997, 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 as
follows:
<TABLE>
<CAPTION>
YEARS ENDING COMMITMENT
DECEMBER 31, AMOUNT
------------ --------------
(IN THOUSANDS)
<S> <C>
1998........................................................ $1,059
1999........................................................ 964
2000........................................................ 874
2001........................................................ 872
2002........................................................ 858
Thereafter.................................................. 293
------
$4,920
======
</TABLE>
Total rental expense incurred for the years ended December 31, 1997, 1996
and 1995 was approximately $741,000, $394,000 and $262,000, respectively, all of
which represented minimum rentals under non-cancelable operating leases.
Firm Transportation Commitments
As of December 31, 1997, 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>
YEARS ENDING COMMITMENT
DECEMBER 31 AMOUNT
------------ --------------
(IN THOUSANDS)
<S> <C>
1998........................................................ $ 4,114
1999........................................................ 4,114
2000........................................................ 4,114
2001........................................................ 3,760
2002........................................................ 2,873
Thereafter.................................................. 2,644
-------
$21,619
=======
</TABLE>
On January 23, 1998 KN Energy filed for a rate increase on their Pony
Express pipeline. The requested increase would raise the rate from approximately
$.45 to $.76. Should the rate increase be approved by F.E.R.C., the commitment
amount from firm transportation would increase by approximately $8.2 million net
to the Company. F.E.R.C. has currently stated that a rate increase, if allowed,
will not become effective until August 1, 1998.
Environmental Matters
A wholly owned subsidiary of the Company is a party to an environmental
cleanup proceeding. The subsidiary's share of the estimated cleanup costs was
accrued in the consolidated financial statements at December 31, 1997. 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.
40
<PAGE> 41
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, 1997
Revenues.................................. $36,350 $26,888 $27,659 $37,840 $128,737
Gross profit(1)........................... 23,351 15,211 14,742 20,406 $ 73,710
Net income (loss) attributable to common
stock.................................. 6,015 252 (338) 931 $ 6,860
Net income (loss) per common share(2)(3)
Basic.................................. .25 .01 (.01) .03 $ .27
Diluted................................ .24 .01 (.01) .03 $ .26
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 attributable to common stock... 870 1,012 122 4,259 $ 6,263
Net income per common share(2)(3)
Basic.................................. .04 .05 .01 .20 $ .30
Diluted................................ .04 .05 .01 .19 $ .28
</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 and marketing, gathering and processing revenues and include
lease operations, gas and oil related taxes cost of gas sold and other
expenses.
(2) 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.
(3) Net income per common share has been restated in accordance with SFAS No.
128. (See Note 2.)
(13) SUPPLEMENTAL INFORMATION RELATED TO GAS AND OIL ACTIVITIES (UNAUDITED)
The following tables set forth certain historical costs and operating
information related to the Company's gas and oil producing activities:
Capitalized Costs and Costs Incurred
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Capitalized costs
Proved gas and oil properties................... $ 456,093 $ 392,192 $ 184,424
Unproved gas and oil properties................. 44,468 44,687 2,200
--------- --------- ---------
Total gas and oil properties.................... 500,561 436,879 186,624
Less: Accumulated depreciation, depletion and
amortization................................. (151,544) (118,635) (105,442)
--------- --------- ---------
Net capitalized costs................... $ 349,017 $ 318,244 $ 81,182
========= ========= =========
</TABLE>
41
<PAGE> 42
TOM BROWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1997 1996 1995
------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Costs incurred
Proved property acquisition costs.................... $35,540 $194,869 $ 44
Unproved property acquisition costs.................. 6,128 42,877 657
Exploration costs.................................... 11,777 3,471 3,144
Development costs.................................... 33,731 13,177 21,747
------- -------- -------
Total........................................ $87,176 $254,394 $25,592
======= ======== =======
</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, 1997,
1996 and 1995 were principally prepared by independent petroleum consultants.
Proved reserves are estimated quantities of natural gas and crude oil which
geological and engineering data demonstrate with reasonable certainty to be
recoverable in future years from known reservoirs under existing economic and
operating conditions. Proved developed reserves are proved reserves that can be
recovered through existing wells with existing equipment and operating methods.
All of the Company's gas and oil reserves are located in the United States.
The standardized measure of discounted future net cash flows from
production of proved reserves was developed as follows:
1. Estimates are made of quantities of proved reserves and the future
periods during which they are expected to be produced based on year end
economic conditions.
2. The estimated future cash flows from proved reserves were
determined based on year-end prices, except in those instances where fixed
and determinable price escalations are included in existing contracts.
3. The future cash flows are reduced by estimated production costs and
costs to develop and produce the proved reserves, all based on year end
economic conditions and by the estimated effect of future income taxes
based on the then-enacted tax law, the Company's tax basis in its proved
gas and oil properties and the effect of net operating loss, investment tax
credit and other carryforwards.
The standardized measure of discounted future net cash flows does not
purport to present, nor should it be interpreted to present, the fair value of
the Company's gas and oil reserves. An estimate of fair value would also take
into account, among other things, the recovery of reserves not presently
classified as proved, anticipated future changes in prices and costs and a
discount factor more representative of the time value of money and the risks
inherent in reserve estimates.
42
<PAGE> 43
TOM BROWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Quantities of Gas and Oil Reserves (Unaudited)
The following table presents estimates of the Company's net proved and
proved developed natural gas and oil reserves (including natural gas liquids).
<TABLE>
<CAPTION>
RESERVE QUANTITIES
-------------------
GAS OIL
(MMCF) (MBLS)
------- ------
<S> <C> <C>
Proved reserves:
Estimated reserves at December 31, 1994..................... 180,306 4,522
Revisions of previous estimates........................... (11,071) (476)
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
Revisions of previous estimates........................... (41,299) (2,763)
Purchase of minerals in place............................. 23,341 268
Extensions and discoveries................................ 38,487 189
Sales of minerals in place................................ (750) (1,614)
Production................................................ (31,842) (1,159)
------- ------
Estimated reserves at December 31, 1997..................... 347,104 7,227
======= ======
Proved developed reserves:
December 31, 1994......................................... 114,061 2,877
December 31, 1995......................................... 109,267 2,862
December 31, 1996......................................... 257,241 8,994
December 31, 1997......................................... 258,756 5,749
</TABLE>
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Gas
and Oil Reserves (Unaudited)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1997 1996 1995
--------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Future cash flows........................................ $ 805,645 $1,523,845 $308,965
Future production costs.................................. (225,488) (380,453) (86,735)
Future development costs................................. (50,839) (62,124) (13,344)
--------- ---------- --------
Future net cash flows before tax......................... 529,318 1,081,268 208,886
Future income taxes...................................... (77,277) (265,260) (31,016)
--------- ---------- --------
Future net cash flows after tax.......................... 452,041 816,008 177,870
Annual discount at 10%................................... (186,867) (349,795) (74,523)
--------- ---------- --------
Standardized measure at discounted future net cash
flows.................................................. $ 265,174 $ 466,213 $103,347
========= ========== ========
Discounted future net cash flows before income taxes..... $ 300,814 $ 608,746 $114,586
========= ========== ========
</TABLE>
43
<PAGE> 44
TOM BROWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Natural gas and oil prices have declined significantly since December 31,
1997. 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.
Changes in Standardized Measure of Discounted Future Net Cash Flows (Unaudited)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
--------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Gas and oil sales, net of production costs............... $ (68,446) $ (30,955) $(13,509)
Net changes in anticipated prices and production cost.... (267,369) 129,492 (10,077)
Extensions and discoveries, less related costs........... 28,816 81,675 10,803
Changes in estimated future development costs............ 21,347 (1,985) 2,254
Previously estimated development costs incurred.......... 315 428 4,152
Net change in income taxes............................... 106,893 (131,293) 1,872
Purchase of minerals in place............................ 16,059 288,643 --
Sales of minerals in place............................... (11,534) (37) (6,133)
Accretion of discount.................................... 60,875 11,458 12,494
Revision of quantity estimates........................... (49,263) 16,993 (8,337)
Changes in production rates and other.................... (38,732) (1,553) (2,002)
--------- --------- --------
Change in Standardized Measure........................... $(201,039) $ 362,866 $ (8,483)
========= ========= ========
</TABLE>
44
<PAGE> 45
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information regarding Directors of the Company will be included in
the Company's definitive proxy statement to be filed with the Securities and
Exchange Commission not later than 120 days after the end of the Company's
fiscal year covered by this Form 10-K and such information is incorporated by
reference to the Company's definitive proxy statement. Information concerning
the Executive Officers of the Company appears under Item I of this Annual Report
on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Certain information regarding compensation of executive officers of the
Company will be included in the Company's definitive proxy statement to be filed
with the Securities and Exchange Commission not later than 120 days after the
end of the Company's fiscal year covered by this Form 10-K and such information
is incorporated by reference to the Company's definitive proxy statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Certain information regarding security ownership of certain beneficial
owners and management will be included in the Company's definitive proxy
statement to be filed with the Securities and Exchange Commission not later than
120 days after the end of the Company's fiscal year covered by this Form 10-K
and such information is incorporated by reference to the Company's definitive
proxy statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain information regarding transactions with management and other
related parties will be included in the Company's definitive proxy statement to
be filed with the Securities and Exchange Commission not later than 120 days
after the end of the Company's fiscal year covered by this Form 10-K and such
information is incorporated by reference to the Company's definitive proxy
statement.
45
<PAGE> 46
PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(1) See Index to Consolidated Financial Statements under Item 8 of this
Annual Report on Form 10-K.
(2) None
(3) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
(2.1) -- Exchange Agreement dated August 5, 1996 by and among
Presidio Oil Company, Presidio Exploration, Inc.,
Presidio West Virginia, Inc., Palisade Oil, Inc. and the
Registrant (Incorporated by reference to Exhibit No. 2.1
in the Registrant's Quarterly Report on Form 10-Q for the
six months ended June 30, 1996).
(2.2) -- First Amendment to Exchange Agreement dated August 20,
1996 by and among Presidio Oil Company, Presidio
Exploration, Inc., Presidio West Virginia, Inc., Palisade
Oil, Inc. and the Registrant (Incorporated by reference
to Exhibit No. 2.2 in the Registrant's Form 8-K Report
dated December 23, 1996 and filed with the Securities and
Exchange Commission on January 6, 1997).
(2.3) -- Second Amendment to Exchange Agreement dated September 5,
1996 by and among Presidio Oil Company, Presidio
Exploration, Inc., Presidio West Virginia, Inc., Palisade
Oil, Inc. and the Registrant (Incorporated by reference
to Exhibit No. 2.3 in the Registrant's Form 8-K Report
dated December 23, 1996 and filed with the Securities and
Exchange Commission on January 6, 1997).
(2.4) -- Third Amendment to Exchange Agreement dated November 20,
1996 by and among Presidio Oil Company, Presidio
Exploration, Inc., Presidio West Virginia, Inc., Palisade
Oil, Inc. and the Registrant (Incorporated by reference
to Exhibit No. 2.4 in the Registrant's Form 8-K Report
dated December 23, 1996 and filed with the Securities and
Exchange Commission on January 6, 1997).
(3.1) -- Certificate of Incorporation, as amended, of the
Registrant (Incorporated by reference to Exhibit No. 4 in
the Registrant's Form 10-Q Report for the quarterly
period ended June 30, 1996 and filed with the Securities
and Exchange Commission on August 14, 1996).
(3.2) -- Bylaws of the Registrant (Incorporated by reference to
Exhibit No. 3.2 in the Registrant's Form 8-B Registration
Statement dated July 15, 1987 and filed with the
Securities and Exchange Commission on July 17, 1987).
(4.1) -- Rights Agreement dated as of March 5, 1991 between the
Registrant and The First National Bank of Boston,
successor in interest to American Stock Transfer & Trust
Company (Incorporated by reference to Exhibit No. 4(a) in
the Registrant's Form 8-K Report dated March 12, 1991 and
filed with the Securities and Exchange Commission on
March 15, 1991).
(10.1) -- Wind River Gathering Company Joint Venture Agreement
between Retex Gathering Company, Inc. and KN Gas
Gathering, Inc. dated March 18, 1991 (Incorporated by
reference to Exhibit No. 10.5 in the Registrant's Form
S-1 Registration Statement dated May 3, 1993 and filed
with the Securities and Exchange Commission on May 4,
1993).
</TABLE>
46
<PAGE> 47
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
(10.2) -- Agreement and Plan of Reorganization, dated January 31,
1996, by and among the Registrant, TBI Acquisition, Inc.,
KN Production Company and KN Energy, Inc. (Incorporated
by reference to Exhibit No. 10.1 in the Registrant's Form
8-K Report dated January 31, 1996 and filed with the
Securities and Exchange Commission on February 15, 1996).
(10.3) -- Limited Liability Company Agreement, dated January 31,
1996, of Wildhorse Energy Partners, LLC, between the
Registrant and KN Energy, Inc. (Incorporated by reference
to Exhibit No. 10.2 in the Registrant's Form 8-K Report
dated January 31, 1996 and filed with the Securities and
Exchange Commission on February 15, 1996).
(10.4) -- Registration Rights Agreement, dated January 31, 1996,
between the Registrant and KN Energy, Inc. (Incorporated
by reference to Exhibit No. 10.4 in the Registrant's Form
8-K Report dated January 31, 1996 and filed with the
Securities and Exchange Commission on February 15, 1996).
(10.5) -- Credit Agreement, dated as of December 23, 1996, among
the Registrant, The Chase Manhattan Bank and the other
lenders parties thereto. (Incorporated by reference to
Exhibit 10.8 in the Registrant's Form 10-K Report dated
March 24, 1997 and filed with the Securities and Exchange
Commission on March 27, 1997).
(10.6)* -- Purchase and Sale Agreement between Genesis Gas and Oil,
L.L.C. and TBI Production Company, dated October 1, 1997)
Executive Compensation Plans and Arrangements (Exhibits 10.7
through 10.10):
(10.7) -- 1989 Stock Option Plan (Incorporated by reference to
Exhibit No. 10.17 in the Registrant's Form S-1
Registration Statement dated February 14, 1990 and filed
with the Securities and Exchange Commission on February
13, 1990).
(10.8) -- Tom Brown, Inc. KSOP Plan (Incorporated by reference to
Exhibit 10.19 in the Registrants' Form 10-K Report dated
March 24, 1997 and filed with the Securities and Exchange
Commission on March 27, 1997).
(10.9) -- Second Amended and Restated Employment Agreement dated
January 1, 1997 between the Registrant and Donald L.
Evans (Incorporated by reference to Exhibit 10.15 in the
Registrants' Form 10-K Report dated March 24, 1997 and
filed with the Securities and Exchange Commission on
March 27, 1997).
(10.10) -- 1993 Stock Option Plan (Incorporated by reference to
Exhibit 10.25 in the Registrant's Form 10-K Report dated
March 26, 1993 and filed with the Securities and Exchange
Commission on March 31, 1993).
(21.1)* -- Subsidiaries of the Registrant.
(23.1)* -- Consent of Arthur Andersen LLP.
(23.2)* -- Consent of Williamson Petroleum Consultants, Inc.
(23.3)* -- Consent of Ryder Scott Company.
(27.1)* -- Financial Data Schedule
</TABLE>
- ---------------
* Filed herewith
(4) Reports on Form 8-K:
The Company filed a Report on Form 8-K on October 10, 1997 for its purchase
of the assets of Genesis Gas and Oil, L.L.C.
47
<PAGE> 48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TOM BROWN, INC.
By: /s/ DONALD L. EVANS
----------------------------------
Donald L. Evans
Chairman of the Board of Directors
and Chief Executive Officer
Date: March 26, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ DONALD L. EVANS Chairman of the Board and Chief March 26, 1998
- ----------------------------------------------------- Executive Officer
Donald L. Evans
/s/ R. KIM HARRIS Controller and Principal March 26, 1998
- ----------------------------------------------------- Financial Officer
R. Kim Harris
/s/ WILLIAM R. GRANBERRY President, Chief Operating March 26, 1998
- ----------------------------------------------------- Officer and Director
William R. Granberry
/s/ THOMAS C. BROWN Director March 26, 1998
- -----------------------------------------------------
Thomas C. Brown
/s/ EDWARD W. LEBARON, JR. Director March 26, 1998
- -----------------------------------------------------
Edward W. LeBaron, Jr.
/s/ HENRY GROPPE Director March 26, 1998
- -----------------------------------------------------
Henry Groppe
/s/ ROBERT H. WHILDEN, JR. Director March 26, 1998
- -----------------------------------------------------
Robert H. Whilden, Jr.
/s/ JAMES B. WALLACE Director March 26, 1998
- -----------------------------------------------------
James B. Wallace
/s/ DAVID M. CARMICHAEL Director March 26, 1998
- -----------------------------------------------------
David M. Carmichael
/s/ CLYDE MCKENZIE Director March 26, 1998
- -----------------------------------------------------
Clyde McKenzie
</TABLE>
48
<PAGE> 49
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT
--------- -------
<C> <S>
10.6 -- Purchase and Sale Agreement between Genesis Gas and Oil,
L.L.C. and TBI Production Company, dated October 1, 1997.
21.1 -- Subsidiaries of the Registrant.
23.1 -- Consent of Arthur Andersen LLP.
23.2 -- Consent of Williamson Petroleum Consultants, Inc.
23.3 -- Consent of Ryder Scott Company.
27.1 -- Financial Data Schedule.
</TABLE>
<PAGE> 1
================================================================================
PURCHASE AND SALE AGREEMENT
BETWEEN
GENESIS GAS & OIL, LLC
AS SELLER
AND
TBI PRODUCTION COMPANY
AS PURCHASER
DATED AS OF OCTOBER 1, 1997
================================================================================
<PAGE> 2
PURCHASE AND SALE AGREEMENT
This Purchase and Sale Agreement (the "Agreement"), dated as of
October 1, 1997, is made and entered into by and between GENESIS GAS & OIL,
LLC, a Kansas limited liability company ("Seller"), whose address is 14
Corporation Woods, 8717 W. 110th Street, Suite 420, Overland Park, Kansas
66210, and TBI PRODUCTION COMPANY, a Delaware corporation ("Purchaser"), whose
address is 508 W. Wall Street, Suite 500, Midland, Texas 79702.
RECITALS:
A. Seller owns various oil and gas properties, either of record
or beneficially;
B. Seller desires to sell to Purchaser and Purchaser desires to
purchase from Seller the assets, properties and rights of Seller hereinafter
described, in the manner and upon the terms and conditions hereinafter set
forth.
NOW, THEREFORE, in consideration of the premises and of the mutual
promises, representations, warranties, covenants, conditions and agreements
contained herein, and for other valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto, intending to
be legally bound by the terms hereof, agree as follows:
ARTICLE I
PURCHASE AND SALE
1.1 PURCHASE AND SALE. Subject to the terms and conditions of
this Agreement, Seller agrees to sell and convey to Purchaser and Purchaser
agrees to purchase, accept and pay for the Assets (as defined in Section 1.2).
1.2 ASSETS. As used herein, the term "Assets" means the following:
(a) All of Seller's right, title and interest in and to
(i) the estates and mineral rights created by the oil and gas leases and
mineral estates (the "Leases"), described in Exhibit "A", and (ii) all oil,
gas, water disposal and other wells located on the Leases or on lands pooled
therewith (the "Wells"), including, but not limited to, the wells set forth in
Exhibit "A", together with all of Seller's interest in the rights and
appurtenances incident thereto;
(b) The Overriding Royalty (as defined in Section 5.15
below);
(c) All of Seller's rights in, to and under, and
obligations arising from, all agreements relating to the Leases or Wells,
including, but not limited to, joint operating agreements,
-1-
<PAGE> 3
unitization agreements, pooling agreements, farmout agreements, drilling
agreements, exploration agreements, oil or gas product purchase and sale
contracts, gas processing or transportation agreements, leases, permits,
rights-of-way, easements, licenses, options, orders and decisions of state and
federal regulatory authorities establishing units which appear of record or in
the Records or which have been otherwise disclosed to Purchaser;
(d) All of Seller's interest in fixtures, personal
property, facilities and equipment, used or held for use or charged to the
Leases or Wells for the production, treatment, transportation, sale or disposal
of hydrocarbons or water produced therefrom or attributable thereto; and
(e) All books, files, data and records in Seller's
possession relating to the Leases or Wells, or the maintenance or operation
thereof, that Seller is not otherwise precluded from transferring to a third
party by proscription of contract (the "Records"); reserving, however, the
rights with respect to such Records granted to Seller in Section 1.5 hereof.
1.3 EFFECTIVE TIME. Possession of the Assets shall be transferred
from Seller to Purchaser at the Closing, but ownership shall be effective as of
7:00 A.M. (local time where the Assets are located) on June 1, 1997 (the
"Effective Time"). Seller shall be entitled to any production revenues or
other amounts realized from and accruing to the Assets prior to the Effective
Time, and shall be liable for the payment of all expenses attributable to the
Assets prior to the Effective Time except expenses attributable to obligations
assumed by Purchaser in Section 9.3. Purchaser shall be entitled to any
production revenues or other amounts realized from and accruing to the Assets
and arising subsequent to the Effective Time, and shall be liable for the
payment of all expenses attributable to the Assets subsequent to the Effective
Time and attributable to pre-Effective Time obligations assumed by Purchaser in
Section 9.3.
1.4 GAUGING AND STRAPPING. Seller has caused the oil storage
facilities on, or utilized in connection with, the Assets to be gauged or
strapped as of the Effective Time. The production in such storage facilities
as of the Effective Time is owned by Seller and production placed in such
storage facilities thereafter shall belong to Purchaser.
1.5 RECORDS. In all other cases, Seller shall deliver the original
Records to Purchaser at Closing or within a reasonable amount of time after
Closing; however, Purchaser (for a period of four (4) years after Closing)
shall make available to Seller (at the location of such original Records in
Purchaser's organization), access to the original Records, upon written request
of Seller during normal business hours, and Seller shall have the right to copy
and retain such copies of the original Records as are necessary and reasonable.
-2-
<PAGE> 4
ARTICLE II
PURCHASE PRICE
2.1 PURCHASE PRICE. The cash purchase price for the Assets shall
be Thirty-Five Million Dollars ($35,000,000) (the "Purchase Price") subject to
adjustment as set forth in Section 2.2.
2.2 ADJUSTMENTS TO PURCHASE PRICE. The Purchase Price for the
Assets shall be adjusted as follows and the resulting amount shall be referred
to herein as the "Adjusted Purchase Price":
(a) Reduced by the aggregate amount of the following
described proceeds received by Seller between the Effective Time and the
Closing Date (with the full period between the Effective Time and the Closing
Date referred to as the "Adjustment Period"): (i) for the sale of oil, gas,
liquids or other associated minerals (net of any applicable royalties or other
lease burdens, marketing, gathering and transportation costs and production,
severance or sales taxes not reimbursed to Seller by the purchaser of
production) produced from the Assets during the Adjustment Period, and (ii) for
the sale, salvage or other disposition during the Adjustment Period of any
property, equipment or rights included in the Assets without Purchaser having
received full payment therefor;
(b) Reduced by an amount established pursuant to Section
10.4 for ad valorem and similar production taxes payable with respect to the
Assets for all periods ending on or prior to the Effective Time or prorated to
the Effective Time to the extent not paid prior to the Closing Date, if and
only if Purchaser expressly assumes the responsibility for and agrees to pay
such taxes when due and indemnifies Seller therefrom;
(c) Reduced by an amount equal to the value of any
Exclusion Adjustment or Defect Adjustment as defined in Section 3.4(b) or 3.5 ;
(d) Reduced with respect to each Well that is
overproduced relative to the other undivided interests in such Well as set
forth on Schedule 5.8, by an amount equal to the overproduced volumes as of the
Effective Time multiplied by $1.00 per thousand cubic feet or per million
british thermal units;
(e) Increased by the amount of all costs listed below
paid by Seller during the Adjustment Period: (i) all costs of the ordinary
course of Seller's exploration, development or production operations directly
related to the Assets, (ii) all costs for the normal maintenance of any Assets,
and (iii) otherwise from the ownership of the Assets during the Adjustment
Period;
(f) Increased by the amount equal to the value of all
merchantable oil in storage above the pipeline connection at the Effective Time
that is credited to the Assets (value to be market or contract price in effect
as of the Effective Time net of any production royalties, transportation costs
and of any production, severance or sales taxes);
-3-
<PAGE> 5
(g) Increased by the amount of property taxes, if any,
paid by Seller relating to the Assets for any period of time after the
Effective Time;
(h) Increased with respect to each Well that is
underproduced relative to the other undivided interests in such Well as set
forth on Schedule 5.8, by an amount equal to the underproduced volumes as of
the Effective Time multiplied by $1.00 per thousand cubic feet or per million
british thermal units; and
(i) Further adjusted by any other amount agreed upon by
Seller and Purchaser.
2.3 PAYMENT OF ADJUSTED PURCHASE PRICE. The Adjusted Purchase
Price shall be paid as follows:
(a) Purchaser shall pay to Seller at Closing, the amount
mutually agreed upon at least three (3) business days prior to Closing as an
estimate of the final computation of the Adjusted Purchase Price in excess of
the amount of Two Hundred Thousand Dollars ($200,000) which shall be held in
trust by legal counsel for Seller, Payne & Jones, to accommodate any final
adjustments to the Purchase Price as described below. Payment of such amount
held in trust shall be made by Payne & Jones in the manner agreed to or as
decided in Section 2.3(b).
(b) As soon as reasonably practicable after the Closing
but not later than ninety (90) days following the Closing Date, Purchaser shall
prepare and deliver to Seller a statement setting forth each final adjustment
to the Purchase Price (including a credit to Seller in the amount held out of
the payment made pursuant to Section 2.3(a) above) and showing the calculation
of each such adjustment. As soon as reasonably practicable but not later than
twenty (20) days following receipt of Purchaser's statement hereunder and any
substantiating records reasonably requested by Seller within such time, Seller
shall deliver to Purchaser a written report containing any changes that Seller
proposes be made to such statement. The parties shall undertake to agree on
the final statement of the Purchase Price no later than one hundred twenty
(120) days after the Closing Date and the required payments indicated thereon
shall be remitted no later than such time. In the event that the parties
cannot reach agreement within such period of time, they shall designate an
independent accounting firm mutually acceptable to both parties whose decision
as to adjustments shall be binding upon both parties and whose costs shall be
shared equally between Purchaser and Seller.
(c) All such payments shall be by electronic funds
transfer of immediately available funds to an account designated by the payee,
unless otherwise instructed.
2.4 ALLOCATION OF PURCHASE PRICE. Schedule 2.4 sets forth the
allocation of the Purchase Price among certain of the Assets (known as the
"Allocated Values" of the respective Assets). Seller and Purchaser are
obligated to recognize or give effect to such Allocated Values, or any
allocation of the Purchase Price that may be extrapolated from assignment of
such values with respect to Sections 3.4 and 3.5 and Article V.
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ARTICLE III
TITLE MATTERS
3.1 SELLER'S TITLE.
(a) Except as set forth on Schedule 3.1, Seller
represents that Seller's title to the Assets as of the Effective Time is (and
as of the Closing shall be) Defensible Title as defined in Section 3.2. Except
for the special warranty of title set forth in Section 3.1(b) which shall
survive Closing, the foregoing title representation shall not survive Closing.
(b) The conveyance to be delivered by Seller to Purchaser
shall be substantially in the form of Exhibit "B" and shall be without warranty
of title other than against the claims of third parties claiming the same or
any part thereof by, through and under Seller. As reasonably requested by
Purchaser, Seller also agrees to execute and deliver at and after Closing such
other assignments, bills of sale and other documents which are appropriate to
transfer the Assets to Purchaser.
3.2 DEFINITION OF DEFENSIBLE TITLE. As used in this Agreement, the
terms "Defensible Title" shall mean:
(a) As to each Lease that title of Seller which:
(i) is filed of record and free from reasonable
doubt such that a prudent person engaged in the business of
the ownership, development and operation of producing oil and
gas properties, with knowledge of all the facts and their
legal effect, would be willing to accept the same; and
(ii) is free and clear (except for Permitted
Encumbrances as defined in Section 3.3 below) of all liens,
encumbrances, obligations or defects which are of record prior
to Closing.
(b) As to each Well that title of Seller which:
(i) entitles Seller to own at least the "Net
Revenue Interest" for the Wells identified on Schedule 2.4 as
being associated with such Wells, without reduction,
suspension or termination throughout the productive life of
such Well, except for any reduction, suspension or termination
as set forth in Schedule 2.4;
(ii) requires Seller to bear no greater "Working
Interest" than the Working Interest for each of the Wells
identified on Schedule 2.4 as being associated with such
Wells, without increase throughout the productive life of such
Well, except for any increase as set forth in Schedule 2.4; and
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(iii) is free and clear (except for Permitted
Encumbrances as defined in Section 3.3 below) of all liens,
encumbrances, obligations or defects.
(c) As to the Assets other than each Lease, that title of
Seller which grants to Seller the benefits and burdens of ownership therein to
the following extent: (i) with respect to personal property, facilities and
equipment located on the Leases, that title of Seller that is free and clear of
all liens, encumbrances and defects arising by, through or under Seller, except
for Permitted Encumbrances, and (ii) with respect to all other personal
property, facilities and equipment included in the Assets, all of Seller's
right, title and interest therein.
As used in this Agreement, the term "Title Defect" shall mean any
defect which causes Seller not to have Defensible Title.
3.3 DEFINITION OF PERMITTED ENCUMBRANCES. As used herein, the term
"Permitted Encumbrances" shall mean:
(a) Lessor's royalties, overriding royalties other than
the Overriding Royalty, reversionary interests and similar burdens of record;
(b) Division orders and sales contracts;
(c) Preferential rights to purchase and required
third-party consents and similar agreements, all of which are set forth on
Schedule 3.5, with respect to which waivers or consents are obtained from the
appropriate parties or the appropriate time period for asserting the right has
expired without an exercise of the rights;
(d) All rights to consent by, required notices to,
filings with, or other actions by governmental entities in connection with the
sale or conveyance of oil and gas leases or interests therein if they are
customarily obtained subsequent to the sale or conveyance;
(e) Conventional rights of reassignment prior to release
of a leasehold interest requiring ninety (90) days or less notice to the
holders of the rights;
(f) Easements, rights-of-way, servitudes, permits,
surface leases and other rights in respect of surface operations;
(g) All rights reserved to or vested in any governmental,
statutory or public authority to control or regulate any of the Leases or Wells
in any manner, and all applicable laws, rules and orders of governmental
authority;
(h) Any encumbrance on or affecting the Assets which is
assumed or paid by Purchaser at or prior to Closing or which is discharged at
or prior to Closing; and
(i) Any Title Defects that Purchaser shall have expressly
waived in writing or which are deemed to have been waived by operation of
Section 3.4.
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3.4 TITLE FAILURE; DEFECT ADJUSTMENTS.
(a) "Defective Interests" shall mean that portion of the
value of any of the Assets as described on Schedule 2.4 affected by a Title
Defect or that Purchaser is otherwise entitled under Section 3.4 or 3.5 to
treat as Defective Interests, and of which Seller has been given notice by
Purchaser on or before a date which is three (3) business days prior to the
Closing Date. Such notice shall be in writing and shall include (i) a
description of the Defective Interests, (ii) the basis for the defect that
Purchaser believes causes such Assets to be treated as Defective Interests,
(iii) the Allocated Values of the Defective Interests, and (iv) the amount by
which Purchaser reasonably believes the Allocated Values of the Defective
Interests has been reduced and the computations and information upon with
Purchaser's belief is based. Purchaser shall be deemed to have waived all
Title Defects and any Defective Interests of which Seller has not been given
such notice; provided, however that such waiver shall not apply with respect to
any defect under Section 3.5(a) if such defect did not exist on or before the
date such notice is due, but arose after such date.
(b) Subject to subsection (d) of this Section 3.4,
Defective Interests shall be excluded from the Assets to be purchased by
Purchaser hereunder and the Purchase Price shall be reduced in accordance with
Section 2.2(c) by an amount equal to the Allocated Values thereof as agreed
upon by Seller and Purchaser (which reduction shall be called an "Exclusion
Adjustment" unless (i) prior to the Closing, the basis for treating such Assets
as Defective Interests has been removed to the mutual satisfaction of the
parties, (ii) Seller agrees to provide Purchaser an indemnity acceptable to
Purchaser indemnifying Purchaser against all losses, costs, expenses and
liabilities with respect to such Defective Interests arising from the defect or
basis for such Assets being treated as Defective Interests, or (iii) Purchaser
and Seller agree to an amount by which the Allocated Values of the Defective
Interests has been reduced and the Purchase Price is reduced by such amount in
accordance with Section 2.2(c), the amount of which reduction will in no event
exceed the Allocated Value amount set forth on Schedule 2.4 (which reduction
shall be called a "Defect Adjustment").
(c) In determining which portion of the Assets are
Defective Interests, it is the intent of the parties to include, when
practical, only that portion of the Assets materially affected by the defect or
the basis for such Assets being treated as Defective interests.
(d) If the aggregate Allocated Values of all Defective
Interests at the Closing exceed ten percent (10%) of the Purchase Price,
Purchaser or Seller shall have the additional right to terminate this Agreement
without penalty pursuant to Section 8.1(b).
3.5 IDENTIFICATION OF ADDITIONAL DEFECTIVE INTERESTS.
(a) CONSENTS. On or prior to Closing, Seller shall
furnish to Purchaser copies of all written waivers or consents to the sale and
transfer of the Assets which have been obtained from any third party. If any
third party waiver or consent to the sale and transfer of the Assets set forth
on
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Schedule 3.5 is not obtained prior to the Closing, Purchaser may elect to treat
that portion of the Assets subject to such consent requirement as Defective
Interests by giving Seller notice thereof on or before Closing.
(b) PREFERENTIAL RIGHTS. If any preferential right to
purchase set forth on Schedule 3.5 is exercised on or before Closing, that
portion of the Assets affected by the exercise of or notice of the intent to
exercise such preferential right shall be treated as Defective Interests.
(c) CASUALTY LOSS. As used herein, the term "Casualty
Loss" shall mean, with respect to all or any portion of any of the Assets, any
destruction by fire, blowout, storm or other casualty prior to Closing. Seller
shall promptly notify Purchaser of any Casualty Loss of which Seller becomes
aware. Purchaser shall assume any Casualty Loss which occurs during the
Adjustment Period as to any Asset operated by Purchaser and Seller shall
transfer to Purchaser all rights to insurance proceeds, claims, awards and
other payments arising out of such Casualty Loss. If any Casualty Loss occurs
during the Adjustment Period to any of the Assets not operated by Purchaser and
such Casualty Loss may be repaired prior to Closing and, when repaired, the
value of such Asset shall not be materially diminished, then Seller may repair
such Casualty Loss prior to Closing and shall immediately notify Purchaser of
such election. If Seller elects to repair such Casualty Loss in respect of an
Asset not operated by Purchaser and such repair is not completed prior to
Closing or the repair completed by Seller does not cause the value of such
Asset to be substantially the same as such value prior to the Casualty Loss, or
Seller does not elect to repair the Casualty Loss, then Purchaser may elect to
(i) cause Seller to retain the Asset affected by the Casualty Loss, and to
treat the Casualty Loss as a Defective Interest, in which case Seller shall
retain all insurance proceeds relating to the Casualty Loss or (ii) require
Seller to (1) transfer to Purchaser such Asset notwithstanding such Casualty
Loss, (2) transfer to Purchaser all rights to unpaid insurance proceeds,
claims, awards and other payments arising out of such Casualty Loss, and (3)
pay to Purchaser all sums paid to Seller as insurance proceeds, awards or other
payment arising out of such Casualty Loss.
ARTICLE IV
PRE-CLOSING, AND CLOSING ACTIONS
4.1 TIME AND PLACE OF CLOSING.
(a) The parties hereto shall use their best efforts to
consummate the purchase and sale transaction as contemplated by this Agreement
(the "Closing") at the law firm of Holme, Roberts & Owen, Denver, Colorado on
October 21, 1997 or as soon thereafter that the conditions to Closing set forth
in this Agreement are satisfied, but in no event shall Closing occur after
October 30, 1997 unless otherwise agreed to in writing by Purchaser and Seller.
(b) The date on which the Closing occurs is herein
referred to as the "Closing Date". The Conveyance shall be effective as of the
Effective Time.
4.2 ACCESS TO RECORDS. Between the date of this Agreement and the
Closing Date, Seller shall, subject to Section 4.8 hereof, give Purchaser and
its representatives access to, and the right to
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copy, at Purchaser's expense, the Records in Seller's possession directly
relating to the Assets, but only to the extent that Seller may do so without
violating any confidentiality or contractual obligation to a third party and to
the extent that Seller has authority to grant such access. Such access by
Purchaser shall be limited to Seller's normal business hours, by appointment
only, and shall be without disruption of Seller's normal and usual operations.
4.3 GOVERNMENT REVIEWS. Seller and Purchaser shall in a timely
manner (a) make all required filings, if any, with and prepare applications to
and conduct negotiations with, each governmental agency as to which such
filings, applications or negotiations are necessary or appropriate in the
consummation of the transactions contemplated hereby, and (b) provide such
information as each may reasonably request to make such filings, prepare such
applications and conduct such negotiations. Each party shall cooperate with
and use all reasonable efforts to assist the other with respect to such
filings, applications and negotiations.
4.4 PRE-CLOSING ACTION. Seller and Purchaser shall use all
reasonable efforts to cause all of the conditions precedent to the consummation
of the transactions contemplated by this Agreement applicable to each of them
to be met as promptly as possible and to take all such other actions as may be
reasonably necessary to effect the consummation of the transactions
contemplated by this Agreement.
4.5 LETTERS-IN-LIEU, ASSIGNMENTS AND NOTICES.
(a) Seller shall execute on the Closing Date Letters in
Lieu of Division and Transfer Orders relating to the Assets on forms prepared
by Purchaser and reasonably satisfactory to Seller to reflect the transactions
contemplated hereby.
(b) Purchaser shall prepare and Seller and Purchaser
shall execute on the Closing Date all assignments necessary to convey to
Purchaser the Assets, which assignments shall be substantially in the form of
Exhibit "B".
(c) Purchaser shall prepare and Seller and Purchaser
shall execute on the Closing Date all assignments necessary to convey to
Purchaser all federal, state or Indian leases in the form as prescribed by the
applicable governmental body.
4.6 PUBLIC ANNOUNCEMENTS. Each party hereto shall consult with the
other party hereto prior to any public announcement by such party regarding the
existence of this Agreement, the contents hereof or the transactions
contemplated hereby.
4.7 INDEMNITY REGARDING ACCESS. Purchaser agrees to indemnify,
defend and hold harmless Seller, its directors, officers, employees, agents and
representatives from and against any and all claims, liabilities, losses, costs
and expenses (including, without limitation, court costs, expenses of
litigation and reasonable attorneys' fees) in connection with personal
injuries, including death or property damage arising out of or relating to the
access of Purchaser, its officers, employees, and representatives to the Assets
and to the records and other related information as permitted under this
Agreement.
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ARTICLE V
REPRESENTATIONS AND WARRANTIES OF SELLER
5.1 DISCLAIMERS. Except as specifically set forth in this Article
V and Section 3.1, Seller makes no warranties or representations, express or
implied, in connection with the Assets, and expressly disclaims any warranties
or representations with regard to any information or data disclosed or provided
by them, their agents, representatives, employees or advisors to Purchaser or
Purchaser's agents, representatives, employees, or advisors. Subject to this
Section 5.1, Seller makes the warranties and representations set forth in
Sections 5.2 through 5.15. SELLER EXPRESSLY DISCLAIMS ANY WARRANTY AS TO THE
CONDITION OF ANY PERSONAL PROPERTY, FIXTURES AND ITEMS OF MOVABLE PROPERTY
COMPRISING ANY PART OF THE ASSETS INCLUDING (a) ANY IMPLIED OR EXPRESS WARRANTY
OF MERCHANTABILITY, (b) ANY IMPLIED OR EXPRESS WARRANTY OF FITNESS FOR A
PARTICULAR PURPOSE, (c) ANY IMPLIED OR EXPRESS WARRANTY OF CONFORMITY TO MODELS
OR SAMPLES OF MATERIALS, (d) ANY RIGHTS OF PURCHASER UNDER APPLICABLE STATUTES
TO CLAIM DIMINUTION OF CONSIDERATION, AND (e) ANY CLAIM BY PURCHASER FOR
DAMAGES BECAUSE OF DEFECTS, WHETHER KNOWN OR UNKNOWN, IT BEING EXPRESSLY
UNDERSTOOD BY PURCHASER THAT THE PERSONAL PROPERTY, FIXTURES AND ITEMS ARE
BEING CONVEYED TO PURCHASER AS IS, WHERE IS, WITH ALL FAULTS, AND IN THEIR
PRESENT CONDITION AND STATE OF REPAIR AND THAT PURCHASER HAS MADE OR CAUSED TO
BE MADE SUCH INSPECTIONS AS PURCHASER DEEMS APPROPRIATE.
5.2 EXISTENCE. Seller is a limited liability company duly formed,
validly existing and in good standing under the laws of the State of Kansas and
is duly registered to do business as a foreign limited liability company in
the states where the Assets are located.
5.3 POWER. Seller has the power to enter into and perform this
Agreement and the transactions contemplated by this Agreement. Subject to
preferential purchase rights and restrictions on assignment of the type
generally found in the oil and gas industry, and to rights to consent by,
required notices to, and filings with or other actions by governmental entities
where the same are customarily obtained subsequent to the assignment of oil and
gas interests, the execution, delivery and performance of this Agreement by
Seller, and the transactions contemplated by this Agreement, will not violate
(a) any provision of the certificate or agreement of formation of Seller, (b)
any material agreement or instrument to which Seller is a party or by which
Seller or any of the Assets are bound, (c) any judgment, order, ruling, or
decree applicable to Seller as a party in interest, or (d) any law, rule or
regulation applicable to Seller relating to the Assets other than a violation
which would not have a material adverse effect on Seller or the Assets.
5.4 AUTHORIZATION AND ENFORCEABILITY. The execution, delivery and
performance of this Agreement, and the transaction contemplated hereby, have
been duly and validly authorized by all necessary action on the part of Seller.
This Agreement constitutes the valid and binding obligation of
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Seller, enforceable in accordance with its terms except as such enforceability
may be limited by applicable bankruptcy or other similar laws affecting the
rights and remedies of creditors generally as well as to general principles of
equity (regardless of whether such enforceability is considered in a proceeding
in equity or at law).
5.5 LIABILITY FOR BROKERS' FEES. Purchaser shall not directly or
indirectly incur any liability or expense, as a result of undertakings or
agreements of Seller, for brokerage fees, finder's fees, agent's commissions or
other similar forms of compensation in connection with this Agreement or any
agreement or transaction contemplated hereby.
5.6 CLAIMS AND LITIGATION. To the actual knowledge of Seller,
there are no claims, actions, suits or proceedings pending or threatened
against Seller which, if determined adversely to Seller, would have a material
adverse affect on the Assets or which would materially and adversely affect
Seller's ability to perform its obligations under this Agreement.
5.7 TAXES AND ASSESSMENTS. To the actual knowledge of Seller, all
material ad valorem, production, severance, excise, and similar taxes and
assessments based upon or measured by the ownership of or the production of
hydrocarbons from the Assets which have become due and payable have been
properly paid or are being challenged in good faith by Seller, all applicable
tax returns have been filed, and Seller knows of no claim by any applicable
taxing authority against Seller in connection with the payment of such taxes.
5.8 PRODUCTION IMBALANCES. Schedule 5.8 sets forth all of the
estimated production imbalances net to Seller's working interest with respect
to certain wells as of the Effective Time, and Purchaser expressly assumes any
and all obligations attributable to the production imbalances. The value
determined by mutual agreement of the parties hereto of all production
imbalances as set forth on Schedule 5.8 shall be adjustments to the Purchase
Price in accordance with Section 2.2.
5.9 CONSENTS AND PREFERENTIAL RIGHTS. All required notices in
respect of consents to assignment and preferential rights to purchase relating
to the Assets set forth on Schedule 3.5 shall be prepared by Purchaser for
execution by Seller on forms customarily used in the industry and shall be
furnished to Purchaser at Closing. Seller shall use its best efforts to cause
such consents and preferential rights to purchase to be obtained and delivered
on or before Closing. Purchaser shall cooperate with the Seller in seeking to
obtain such consents and preferential rights. Should a third party fail to
exercise its preferential right to purchase as to any portion of the Assets
prior to Closing, such portion of the Assets shall be conveyed to Purchaser
subject to such right and Purchaser agrees to perform the obligations of Seller
with respect to such preferential rights.
5.10 ENVIRONMENTAL LAWS. To the actual knowledge of Seller and as
to that portion of the Assets not operated by Purchaser, (i) such Assets are in
compliance in all material respects with all Environmental Laws (as hereinafter
defined) and all orders or requirements of any court or federal, state, or
local governmental authority, and possess and are in compliance with all
required permits, licenses, or similar authorizations, (ii) such Assets and
related operations are not subject to any existing or threatened suit,
investigation, or proceeding related to any obligation under any Environmental
Law, and (iii) there is no liability (contingent or otherwise) in connection
with the release or threatened
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release into the environment of any Hazardous Substance (as defined below) as a
result of or in connection with such Assets or the operations related thereto.
As used in this Agreement, the term "Environmental Laws" shall mean any and all
laws, regulations, ordinances and judicial interpretations pertaining the
prevention, abatement or elimination of pollution or to the protection of
public health or the environment that are in effect in all jurisdictions in
which any of the Assets or related operations are located or conducted,
including, without limitation, the federal Comprehensive Environmental
Response, Compensation and Liability Act ("CERCLA"), the Resource Conservation
and Recovery Act, the Clean Water Act, the Safe Drinking Water Act, the Toxic
Substance Control Act, the Hazardous Materials Act and the Clean Air Act and
the term "Hazardous Substance" shall have the meaning described under Section
101 of CERCLA at 42 U.S.C. Section 9601(14), except that it shall also include
petroleum, natural gas, natural gas liquids, nitrous oxide, carbon monoxide and
sulphur oxide.
5.11 SALE OF PRODUCTION. Except as set forth on Schedule 5.11 and
as to that portion of the Assets not operated by Purchaser, no hydrocarbons
produced from such Assets or existing as in-ground reserves in such Assets are
subject to a sales contract (other than a contract or division order
terminable upon no more than 30 days notice), and no person or entity other
than a lessor under the Leases has any call upon, option to purchase or similar
rights with respect to production from such Assets. Except as set forth on
Schedule 5.11, Seller is receiving proceeds from the sale of production from
the Wells from the production purchasers or from operator(s) of the Assets in a
timely manner, and the proceeds payable to Seller are not being held in
suspense by any production purchaser or operator.
5.12 LEASES. To the actual knowledge of Seller, the Leases are in
full force and effect and are valid and existing documents covering the entire
estates which they purport to cover; all royalties, rentals and other payments
due under the Leases which are the responsibility of Seller to pay have been
fully, properly and timely paid; no party to any Lease is in breach of any
provision thereof; no such breach has been alleged by any lessor; the Leases,
other than federal Leases, do not contain express development obligations; and
all conditions necessary to keep the Leases in force have been performed.
5.13 FURTHER ASSURANCES. From the date of execution of this
Agreement, without the prior written consent of Purchaser, Seller will not: (i)
enter into any new agreements or commitments with respect to the Assets; (ii)
incur any liabilities other than in the ordinary course for normal operating
expenses associated with individual Wells; (iii) abandon, or consent to
abandonment of, any producing or shut-in Well or any injection well located on
the premises associated with the Assets, nor release or abandon all or any
portion of the Leases; (iv) modify or terminate any of the agreements relating
to the Assets or waive any right thereunder; (v) encumber, sell or otherwise
dispose of any of the Assets other than personal property which is replaced
with equivalent property or consumed in the ordinary course of operation of the
Assets and other than hydrocarbons sold in the ordinary course of business;
and (vi) purchase any additional interests.
5.14 MATERIAL AGREEMENTS. All agreements with respect to which
Seller is a party and Purchaser is not a party and that are material to the
ownership or value of the Assets are set forth on Schedule 5.14 and, as to such
agreements, (i) all are in full force and effect; (ii) all payments due
thereunder have been made by Seller; (iii) Seller is not in breach or default
thereunder; (iv) no other party is in breach or default with respect to its
obligations thereunder; and (v) neither Seller nor any
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other party to any such contract has given or threatened to give notice of any
action to terminate, cancel, rescind or procure a judicial reformation of any
such contract. [note: schedule to include loan agreement]
5.15 BURDENS. Schedule 3.1 identifies (and sets forth all
recording and filing information to the extent recorded or filed) all liens,
encumbrances or other burdens on the Assets whether recorded or unrecorded as
of the Effective Time. Such liens, encumbrances or other burdens have not
changed since the Effective Time and no additional liens, encumbrances or other
burdens have been incurred since the Effective Time in respect of any of the
Assets. Seller has assigned of record an overriding royalty interest equal to
ten percent (10%), proportionately reduced, of the net revenue interest owned
by Seller in the Leases (the "Overriding Royalty") to Endowment Energy
Co-Investment Partnership, a Delaware general partnership (the "Royalty
Owner"), which is identified on Schedule 3.1. The Overriding Royalty is
included in the net revenue interests set forth on Schedule 2.4 and Seller
shall assign, or cause Royalty Owner to assign, the interests represented by
the Overriding Royalty to Purchaser at Closing.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF PURCHASER
Purchaser represents and warrants to Seller the following:
6.1 EXISTENCE. Purchaser is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware, and is
duly qualified to do business as a foreign corporation in the state(s) where
the Assets are located, except where the failure to so qualify would not have a
material adverse effect on Purchaser or its properties.
6.2 POWER. Purchaser has the corporate power to enter into and
perform this Agreement and the transactions contemplated by this Agreement.
Subject to preferential purchase rights and restrictions on assignment of the
type generally found in the oil and gas industry, and to rights to consent by,
required notices to, and filings with or other actions by governmental entities
where the same are customarily obtained subsequent to the assignment of oil and
gas interests, the execution, delivery and performance of this Agreement by
Purchaser, and the transactions contemplated by this Agreement, will not
violate (a) any provision of the certificate of incorporation or bylaws of
Purchaser, (b) any material agreement or instrument to which Purchaser is a
party or by which Purchaser or any of the Assets are bound, (c) any judgment,
order, ruling, or decree applicable to Purchaser as a party in interest, or (d)
any law, rule or regulation applicable to Purchaser relating to the Assets
other than a violation which would not have a material adverse effect on
Purchaser.
6.3 AUTHORIZATION AND ENFORCEABILITY. The execution, delivery and
performance of this Agreement, and the transaction contemplated hereby, have
been duly and validly authorized by all necessary action on the part of
Purchaser. This Agreement constitutes the valid and binding obligation of
Purchaser, enforceable in accordance with its terms except as such
enforceability may be limited by applicable bankruptcy or other similar laws
affecting the rights and remedies of creditors generally as
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well as to general principles of equity (regardless of whether such
enforceability is considered in a proceeding in equity or at law).
6.4 LIABILITY FOR BROKERS' FEES. Seller shall not directly or
indirectly incur any liability or expense, as a result of undertakings or
agreements of Purchaser, for brokerage fees, finder's fees, agent's commissions
or other similar forms of compensation in connection with this Agreement or any
agreement or transaction contemplated hereby.
6.5 DISTRIBUTION. Purchaser is an experienced and knowledgeable
investor in the oil, gas and mineral resources industry that has previously
expended substantial amounts in the acquisition and development of oil and gas
properties. Prior to entering into this Agreement, Purchaser has been advised
by its counsel and such other persons as it has deemed appropriate concerning
this Agreement. The Assets to be acquired by Purchaser pursuant to this
Agreement are being acquired by Purchaser for its own account, for investment
and not with a view to distribution or resale within the meaning of the
Securities Act of 1933, as amended, or any other applicable securities law,
rule, regulation or order.
6.6 CLAIMS AND LITIGATION. To the actual knowledge of Purchaser,
there are no claims, actions, suits, or proceedings pending or threatened
against Purchaser which, if determined adversely to Purchaser, would materially
and adversely affect Purchaser's ability to perform its obligations under this
Agreement.
ARTICLE VII
CONDITIONS TO CLOSING
7.1 CONDITIONS OF SELLER TO CLOSING. The obligations of Seller to
consummate the transaction contemplated by this Agreement are subject, at the
option of Seller, to the satisfaction on or prior to Closing of each of the
following conditions:
(a) REPRESENTATIONS. The representations and warranties
of Purchaser set forth in this Agreement herein shall be true and correct in
all material respects as of the date of this Agreement and as of the Closing
Date as though made on and as of the Closing Date.
(b) PERFORMANCE. Purchaser shall have performed all
obligations, covenants and agreements hereunder and shall have complied with
all covenants and conditions applicable to it contained in this Agreement prior
to or on the Closing Date.
(c) PENDING MATTERS. No suit, action or other proceeding
by a third party or a governmental authority shall be pending or threatened
which seeks to restrain, enjoin or otherwise prohibit, the consummation of the
transactions contemplated by this Agreement.
(d) OPINION. Purchaser shall have delivered to Seller an
opinion of its legal counsel in form and substance reasonably satisfactory to
Seller, dated as of the date of Closing, to the effect that:
-14-
<PAGE> 16
(i) Purchaser is a corporation duly organized,
validly existing and in good standing under the laws of the
State of Delaware and is duly qualified to carry on its
business in the States of Wyoming, Colorado and Texas;
(ii) The execution, delivery and performance of
this Agreement and the transactions contemplated hereby have
been duly and validly authorized by all requisite corporate
action on the part of Purchaser; and
(iii) This Agreement and all documents and
instruments executed by Purchaser at Closing have been duly
executed and delivered on behalf of Purchaser and constitute
legal, valid and binding obligations of Purchaser enforceable
in accordance with their terms and, subject to obtaining
required consents to assignment and the exercise of
preferential rights to purchase, do not violate any contract,
order or agreement to which Purchaser is a party or is
subject.
In giving this opinion, Purchaser's counsel may rely upon certificates
of governmental officials and of Purchaser's officers as to matters of fact,
and may qualify the opinion with such other assumptions and exceptions as are
reasonable under the circumstances.
7.2 CONDITIONS OF PURCHASER TO CLOSING. The obligations of
Purchaser to consummate the transaction contemplated by this Agreement are
subject, at the option of Purchaser, to the satisfaction on or prior to Closing
of each of the following conditions:
(a) REPRESENTATIONS. The representations and warranties
of Seller set forth in this Agreement shall be true and correct in all material
respects as of the date of this Agreement and as of the Closing Date as though
made on and as of the Closing Date.
(b) PERFORMANCE. Seller shall have performed all
obligations, covenants and agreements hereunder and shall have complied with
all covenants and conditions applicable to it contained in this Agreement prior
to or on the Closing Date and shall have executed and delivered the Conveyance
on the Closing Date.
(c) PENDING MATTERS. No suit, action or other proceeding
by a third party or governmental authority shall be pending or threatened to
restrain, enjoin or otherwise prohibit, the consummation of the transactions
contemplated by this Agreement.
(d) OPINION. Seller shall have delivered to Purchaser an
opinion of Seller's legal counsel, in form and substance reasonably
satisfactory to Purchaser, dated as of the date of Closing, to the effect that:
(i) Seller is a limited liability company duly
organized, validly existing and in good standing under the
laws of the State of Kansas and is duly qualified to carry on
its business in the States of Wyoming, Colorado and Texas;
-15-
<PAGE> 17
(ii) The execution, delivery and performance of
this Agreement and the transactions contemplated hereby have
been duly and validly authorized by all requisite action on
the part of Seller; and
(iii) This Agreement and all documents and
instruments executed by Seller at Closing have been duly
executed and delivered on behalf of Seller and constitute
legal, valid and binding obligations of Seller enforceable in
accordance with their terms and, subject to obtaining required
consents to assignment and the exercise of preferential rights
to purchase, do not violate any contract, order or agreement
to which Seller is a party or is subject.
In giving this opinion, Seller's counsel may rely upon
certificates of governmental officials and of Seller's officers as to
matters of fact, and may qualify the opinion with such other
assumptions and exceptions as are reasonable under the circumstances.
7.3 OBLIGATIONS OF SELLER AT CLOSING. At the Closing, upon the
terms and subject to the conditions of this Agreement, Seller shall execute and
deliver or cause to be executed and delivered to Purchaser, among other things,
the following:
(a) Conveyances of the Assets, in sufficient original
counterparts to allow recording;
(b) Assignments, on appropriate forms, of state and
federal leases comprising portions of the Assets;
(c) Assignments of the Overriding Royalty, in sufficient
original counterparts to allow recording;
(d) Letters-in-lieu of transfer orders covering the
Assets;
(e) Copies of all consents, waivers and approvals of the
third parties set forth on Schedule 3.5, other than unexercised preferential
rights;
(f) Opinion of legal counsel set forth in Section 7.2(d);
(g) Certificate by an authorized member of Seller dated
as of Closing, certifying on behalf of Seller that the conditions set forth in
Sections 7.2(a) and 7.2(b) have been fulfilled; and
(h) Mortgage releases, financing statement terminations
and any other releases or documentation sufficient to remove the liens,
encumbrances or other burdens set forth on Schedule 3.1, in sufficient original
counterparts to allow full recording and filing.
7.4 OBLIGATIONS OF PURCHASER AT CLOSING. At the Closing, upon the
terms and subject to the conditions of this Agreement, Purchaser shall execute
and deliver or cause to be executed and delivered to Seller, among other
things, the following:
-16-
<PAGE> 18
(a) A wire transfer of the Adjusted Purchase Price, as
required hereunder;
(b) Opinion of legal counsel set forth in Section 7.1(d);
and
(c) Certificate by an authorized attorney-in-fact or
corporate officer of Purchaser dated as of Closing, certifying on behalf of
Purchaser that the conditions set forth in Sections 7.1(a) and 7.1(b) have been
fulfilled.
ARTICLE VIII
TERMINATION AND AMENDMENT
8.1 TERMINATION. This Agreement may be terminated at any time
prior to the Closing Date: (a) by the mutual prior written consent of Seller
and Purchaser, (b) by Purchaser or Seller if the provisions of Section 3.4(d)
give it the right to terminate, (c) at the option of the non-breaching party if
the other party is in material default of its obligations under this Agreement,
or (d) by Seller, if Closing has not occurred by [October 31], 1997. Any party
shall exercise a right of termination provided above by written notice to the
other party.
8.2 EFFECT OF TERMINATION. If this Agreement is terminated
pursuant to Section 8.1(a), (b) or (d), this Agreement shall become void and of
no further force or effect (except for the provisions of Section 4.7 which
shall continue in full force and effect); provided, however, that if either
party is in material default of its obligations under this Agreement at the
time this Agreement is so terminated pursuant to Section 8.1(c), such
defaulting party shall continue to be liable to the other party for damages or
specific performance relating to such default and such liability shall not be
affected by such termination.
ARTICLE IX
POST-CLOSING OBLIGATIONS
9.1 STATEMENT OF ADJUSTED PURCHASE PRICE. Seller and Purchaser
shall agree on a final statement of the Purchase Price and make any payments
required thereby in accordance with the provisions of Section 2.3 above.
9.2 RECEIPTS AND CREDITS. Following final adjustment of the
Purchase Price, all monies, proceeds, receipts, credits and income attributable
to the Assets for all periods of time subsequent to the Effective Time shall be
the sole property and entitlement of Purchaser, and, to the extent received by
Seller, Seller shall fully disclose, account for and transmit the same promptly
to Purchaser. Following final adjustment of the Purchase Price, all monies,
proceeds, receipts and income attributable to the Assets, except as otherwise
provided in this Agreement, for all periods of time prior to the Effective
Time, shall be the sole property and entitlement of Seller and, to the extent
received by
-17-
<PAGE> 19
Purchaser, Purchaser shall fully disclose, account for and transmit the same
promptly to Seller. Except as otherwise provided in this Agreement, all costs,
expenses, disbursements, obligations and liabilities attributable to the Assets
for periods of time prior to the Effective Time, regardless of when due or
payable, shall be the sole obligation of Seller and Seller shall promptly pay,
or if paid by Purchaser, promptly reimburse Purchaser for and hold Purchaser
harmless from and against same. All costs, expenses, disbursements,
obligations, and liabilities attributable to the Assets for periods of time
subsequent to the Effective Time, regardless of when due or payable, shall be
the sole obligation of the Purchaser and Purchaser shall promptly pay, or if
paid by Seller, promptly reimburse Seller for and hold Seller harmless from and
against same. Seller shall be entitled to a credit for and reimbursement in an
amount equal to any amount received by Purchaser after Closing for any delivery
or performance by Seller prior to the Effective Time.
9.3 ASSUMPTION AND INDEMNITY. If the Closing occurs,
(a) Purchaser assumes all obligations that are
attributable to the Assets from and after the Effective Time including, but not
limited to, any obligation to cash balance or to allow third parties to make-up
gas according to the terms and conditions of the applicable gas balancing or
other contracts or governing law, rule or regulation, all obligations to
properly plug and abandon all wells now or thereafter located on the Leases and
restore the surface of the Leases in accordance with applicable lease or other
agreements and governmental (including environmental) laws, orders, and
regulations (regardless of whether any such obligation to plug, abandon and
restore is attributable to periods of time prior to or after the Effective
Time) and the obligation to pay ad valorem and similar production taxes with
respect to the Assets as set forth in Sections 10.4 and 2.2(b);
(b) Purchaser agrees to indemnify, defend and hold
harmless Seller, its affiliates, officers, directors, agents and
representatives from and against any and all claims, liabilities, losses, costs
and expenses (including, without limitation, court costs, expenses of
litigation and reasonable attorneys' fees) that are attributable to the Assets
after the Effective Time (including, without limitation, (i) the obligation to
cash balance or to allow third parties to make-up gas according to the terms
and conditions of the applicable gas balancing or other contracts or governing
law, rule or regulation, (ii) the obligation to properly plug and abandon all
wells now or hereafter located on the Leases, (iii) the obligation to restore
the surface of the Leases in accordance with applicable lease or other
agreements and governmental laws, orders and regulations, and (iv) damage to
property, or injury to or death of persons attributable to the Assets and
occurring after the Effective Time). Notwithstanding the foregoing, Purchasers'
indemnification obligations exclude liabilities in respect of Environmental
Laws as to the Assets and to conditions that existed prior to the Effective
Time;
(c) Seller agrees to indemnify, defend and hold harmless
Purchaser, its affiliates, officers, directors, agents and representatives from
and against any and all claims, liabilities, losses, costs and expenses
(including, without limitation, court costs, expenses of litigation and
reasonable attorneys' fees) that are attributable to the Assets before the
Effective Time (other than (i) the obligation to cash balance or to allow third
parties to make-up gas according to the terms and conditions of the applicable
gas balancing or other contracts or governing law, rule or regulation, (ii) the
obligation to properly plug and abandon wells now or hereafter located on the
Leases, (iii) the obligation to restore the surface of the Leases in accordance
with applicable lease or other agreements
-18-
<PAGE> 20
and governmental laws, orders and regulations, and (iv) damage to property, or
injury to or death of persons attributable to the Assets and occurring after
the Effective Time). Notwithstanding the foregoing, Seller's indemnification
obligations include liabilities in respect of Environmental Laws as to the
Assets and to conditions that existed prior to the Effective Time; and
(d) The indemnity, defense and hold harmless obligations
set forth above shall not apply to (i) any amount, other than as set forth in
Section 9.2, that was taken into account as an adjustment to the Purchase Price
pursuant to the provisions of this Agreement, (ii) any liability of one party
to the other party under the provisions of this Agreement, (iii) any liability
Purchaser would ordinarily have vis-a-vis Seller under the terms of applicable
operating agreements, and (iv) either party's costs and expenses with respect
to the negotiation and consummation of this Agreement and the purchase and sale
of the Assets.
9.4 RECORDING. As soon as practicable after Closing, Purchaser
shall record the conveyances in the appropriate counties.
9.5 FURTHER ASSURANCES. After Closing, Seller and Purchaser agree
to take such further actions and to execute, acknowledge and deliver all such
further documents that are necessary or useful in carrying out the purposes of
this Agreement or of any document delivered pursuant to this Agreement.
ARTICLE X
MISCELLANEOUS
10.1 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original instrument, but all
such counterparts together shall constitute but one agreement.
10.2 NOTICE. All notices which are required or may be given
pursuant to this Agreement shall be sufficient in all respects if given in
writing and delivered personally, by overnight courier, by telecopy or by
registered or certified mail, postage prepaid, as follows:
If to Seller:
Genesis Gas & Oil, LLC
14 Corporation Woods
8717 W. 110th Street, Suite 420
Overland Park, Kansas 66210
Attention: G. H. Mohajir
Telephone: (913) 345-8117
Telecopy: (913) 345-9094
-19-
<PAGE> 21
If to Purchaser:
Tom Brown, Inc.
508 West Wall, Suite 500
Midland, TX 79701
Attention: General Counsel
Telephone: (915) 682-9715
Telecopy: (915) 688-9598
All notices shall be deemed to have been duly given at the time of receipt by
the party to which such notice is addressed.
10.3 SALES TAX, RECORDING FEES AND SIMILAR COSTS. Purchaser shall
bear any tax, recording fees and similar costs incurred and imposed upon, or
with respect to, the property transfers contemplated hereby.
10.4 AD VALOREM TAXES. All unpaid ad valorem and similar taxes that
are payable with respect to the Assets for all periods ending on or prior to
the Effective Time shall be as estimated by the parties and shall be an
adjustment to the Purchase Price. In the case of tax periods that included but
did not end on the Effective Time, taxes shall be prorated to the Effective
Time and be an adjustment to the Purchase Price. Purchaser shall pay all such
taxes payable for all such periods which are adjusted or prorated.
10.5 EXPENSES. All expenses incurred by Seller in connection with
or related to the authorization, preparation or execution of this Agreement,
the Conveyance and the Exhibits and Schedules hereto and thereto, and all other
matters related to the Closing, including without limitation, all fees and
expenses of counsel, accountants and financial advisers employed by Seller,
shall be borne solely and entirely by Seller; and all such expenses incurred by
Purchaser shall be borne solely and entirely by Purchaser.
10.6 GOVERNING LAW. This Agreement and the legal relations between
the parties shall be governed by and construed in accordance with the laws of
the State of Colorado without regard to principles of conflicts of laws
otherwise applicable to such determinations. In the event any dispute arises
with respect to this Agreement, the parties hereby consent to jurisdiction and
litigation of such disputes in the State of Colorado.
10.7 CAPTIONS. The captions in this Agreement are for convenience
only and shall not be considered a part of or affect the construction or
interpretation of any provision of this Agreement.
10.8 WAIVERS. Any failure by any party or parties to comply with
any of its or their obligations, agreements or conditions herein contained may
be waived in writing, but not in any other manner, by the party or parties to
whom such compliance is owed. No waiver of, or consent to a change in, any of
the provisions of this Agreement shall be deemed or shall constitute a waiver
of, or consent to a change in, other provisions hereof (whether or not similar)
nor shall such waiver constitute a continuing waiver unless otherwise expressly
provided.
-20-
<PAGE> 22
10.9 ASSIGNMENT. No party shall assign all or any part of this
Agreement, nor shall any party assign or delegate any of its rights or duties
hereunder, without the prior written consent of the other party and any
assignment made without such consent shall be void except as otherwise provided
in this Section.
10.10 ENTIRE AGREEMENT. This Agreement and the documents to be
executed hereunder and the Exhibits and Schedules attached hereto constitute
the entire agreement between the parties pertaining to the subject matter
hereof, and supersede all prior agreements, understandings, negotiations and
discussions, whether oral or written, of the parties pertaining to the subject
matter hereof.
10.11 SURVIVAL. The representations and warranties of Seller and
Purchaser set forth in Articles V and VI of this Agreement shall survive the
Closing and shall only be applicable for one hundred eighty (180) days
thereafter.
10.12 AMENDMENT.
(a) At any time prior to the Closing Date this Agreement
may be amended or modified in any respect by the parties by an agreement in
writing executed in the same manner as this Agreement.
(b) No supplement, modification, waiver or termination of
this Agreement shall be binding unless executed in writing by the party to be
bound thereby.
10.13 EXHIBITS AND SCHEDULES. All Exhibits and Schedules attached to
or referred to in this Agreement are incorporated into and made a part of this
Agreement.
-21-
<PAGE> 23
IN WITNESS WHEREOF, this Agreement has been signed by each of the
parties hereto, all as of the date above written.
Seller:
GENESIS GAS & OIL, LLC
By:___________________________________
Jaffer A. Mohajir
Manager
Purchaser:
TBI PRODUCTION COMPANY
By:___________________________________
Peter R. Scherer
Executive Vice President
-22-
<PAGE> 24
EXHIBIT "A"
TO PURCHASE AND SALE AGREEMENT
BETWEEN GENESIS GAS & OIL, LLC
AND TBI PRODUCTION COMPANY
LIST OF LEASES
<PAGE> 25
EXHIBIT "A"
TO PURCHASE AND SALE AGREEMENT
BETWEEN GENESIS GAS & OIL, LLC
AND TBI PRODUCTION COMPANY
LIST OF WELLS
<PAGE> 26
EXHIBIT "B"
TO PURCHASE AND SALE AGREEMENT
BETWEEN GENESIS GAS & OIL, LLC
AND TBI PRODUCTION COMPANY
AGREEMENT, ASSIGNMENT AND BILL OF SALE
GENESIS GAS & OIL, LLC, a Kansas limited liability company, 14
Corporation Woods, 8717 W. 110th Street, Suite 420, Overland Park, Kansas 66210
("Assignor"), for the payment of Ten and no/100 Dollars ($10.00) and other
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged and subject to the terms and conditions hereof, hereby grants,
sells, assigns, and conveys to TBI PRODUCTION COMPANY, a Delaware corporation
("Assignee"), 555 Seventeenth Street, Suite 1850, Denver, Colorado 80202, all
of Assignor's right, title and interest (including, without limitation,
overriding royalties and royalties) in and to the following:
(a) The estates and rights created by the oil and gas leases and
mineral estates described on Exhibit "A" attached hereto (the "Leases"),
subject to any other royalties, overriding royalties, production payments or
other similar interests burdening the Leases;
(b) All oil, gas, water disposal and other wells (whether
producing or non-producing) (the "Wells") located on the Leases or on lands
pooled therewith, together with all of Assignor's interest in the rights and
appurtenances incident thereto, including, but not limited to, all of
Assignor's interest in fixtures, personal property (including pits and ponds),
facilities and equipment, used or held for use or charged to the Leases or
Wells for the production, treatment, sale, or disposal of hydrocarbons or water
produced therefrom or attributable thereto;
(c) The oil, natural gas liquids or condense inventory, including
"line fill" and inventory below the pipeline connection in tanks as of 7:00
a.m., local time, June 1, 1997 (the "Effective Time"); and
(d) All of Assignor's rights in, to and under, and obligations
arising from, all agreements relating to the Leases or Wells, including, but
not limited to, joint operating agreements, unitization agreements, pooling
agreements, farmout agreements, drilling agreements, exploration agreements,
oil or gas product purchase and sale contracts, gas processing or
transportation agreements, leases, permits, rights-of-way, easements, licenses,
options, orders and decisions of State and Federal regulatory authorities
establishing units.
It is Assignor's express intent herein that Assignor's right, title
and interest in and to the Leases shall include any and all overriding royalty
interests in favor of Endowment Energy Co-Investment Partnership which have
been reassigned to Assignor prior to the Effective Time.
<PAGE> 27
Assignor will, at any time and from time to time after the date
hereof, upon Assignee's request, execute, acknowledge and deliver or cause to
be executed and delivered, all further documents or instruments necessary to
effect the transaction embodied in this Agreement, Assignment and Bill of Sale.
Assignor makes no representation or warranty of title to the interests
assigned hereby other than against the claims of third parties claiming the
same, or any part thereof, by, through or under Assignor but through no other
party. The personal property and equipment assigned hereby are sold AS IS AND
WHERE IS, WITH ALL FAULTS, AND IN THEIR PRESENT CONDITION AND STATE OF REPAIR
WITHOUT WARRANTY OF MERCHANTABILITY, CONDITION OR FITNESS FOR PARTICULAR
PURPOSE, AND ANY AND ALL OTHER WARRANTIES, WHETHER EXPRESSED OR IMPLIED, ARE
HEREBY EXPRESSLY DENIED. This conveyance is made with full substitution and
subrogation of Assignee, its successors and assigns, to the rights of Assignor
under, in and to all warranties made by others with respect to the rights,
titles and interests being conveyed hereunder.
To have and to hold the same unto Assignee, its successors and assigns
forever.
EXECUTED to be effective for all purposes as of the Effective Time.
Assignor:
GENESIS GAS & OIL, LLC
By:___________________________________
Jaffer A. Mohajir
Manager
Assignee:
TBI PRODUCTION COMPANY
By:___________________________________
Richard B. Porter
Vice President
<PAGE> 28
ACKNOWLEDGEMENTS
STATE OF KANSAS )
) ss.
COUNTY OF ___________ )
Be it known, that on this ______ day of the month _____________, 1997,
before me, the undersigned authority, personally came and appeared
_____________________, to me personally known and known by me to be the person
whose genuine signature is affixed to the foregoing document, who signed said
document before me and who acknowledged, in my presence, that he signed the
above foregoing document as his own free act and deed and for the uses and
purposes therein set forth and apparent.
In witness whereof, the said appeared has signed these presents and I
have hereunto affixed my hand and seal on the day and date first above written.
My Commission Expires: _____________________________________________
Notary Public in and for the State of Kansas
(Seal)
<PAGE> 29
ACKNOWLEDGEMENTS
STATE OF TEXAS )
) ss.
COUNTY OF MIDLAND )
Be it known, that on this ______ day of the month _____________, 1997,
before me, the undersigned authority, personally came and appeared
_____________________, to me personally known and known by me to be the person
whose genuine signature is affixed to the foregoing document, who signed said
document before me and who acknowledged, in my presence that he signed the
above foregoing document as his own free act and deed and for the uses and
purposes therein set forth and apparent.
In witness whereof, the said appearer has signed these presents and I
have hereunto affixed my hand and seal on the day and date first above written.
My Commission Expires: _____________________________________________
Notary Public in and for the State of Texas
(Seal)
<PAGE> 30
PLEASE RETURN RECORDED INSTRUMENT TO:
TBI Production Company
555 Seventeenth Street, Suite 1900
Denver, Colorado 80202-3918
<PAGE> 31
SCHEDULE 2.4
TO PURCHASE AND SALE AGREEMENT
BETWEEN GENESIS GAS & OIL, LLC
AND TBI PRODUCTION COMPANY
ALLOCATED VALUES
<PAGE> 32
SCHEDULE 3.1
TO PURCHASE AND SALE AGREEMENT
BETWEEN GENESIS GAS & OIL, LLC
AND TBI PRODUCTION COMPANY
TITLE BURDENS
<PAGE> 33
SCHEDULE 3.5
TO PURCHASE AND SALE AGREEMENT
BETWEEN GENESIS GAS & OIL, LLC
AND TBI PRODUCTION COMPANY
CONSENTS AND PREFERENTIAL RIGHTS
<PAGE> 34
SCHEDULE 5.8
TO PURCHASE AND SALE AGREEMENT
BETWEEN GENESIS GAS & OIL, LLC
AND TBI PRODUCTION COMPANY
GAS BALANCING
<PAGE> 35
SCHEDULE 5.11
TO PURCHASE AND SALE AGREEMENT
BETWEEN GENESIS GAS & OIL, LLC
AND TBI PRODUCTION COMPANY
GAS CONTRACTS/PROCEEDS
<PAGE> 36
SCHEDULE 5.14
TO PURCHASE AND SALE AGREEMENT
BETWEEN GENESIS GAS & OIL, LLC
AND TBI PRODUCTION COMPANY
MATERIAL CONTRACTS
<PAGE> 1
EXHIBIT 21.1
TOM BROWN, INC.
SUBSIDIARIES OF REGISTRANT
DECEMBER 31, 1997
<TABLE>
<CAPTION>
JURISDICTION OF PERCENT OF
NAME OF SUBSIDIARY INCORPORATION/ORGANIZATION OWNERSHIP
------------------ -------------------------- ----------
<S> <C> <C>
Retex Gathering Company, Inc................................ Wyoming 100%
Rocno Corporation........................................... Texas 100%
TBI Production Company...................................... Delaware 100%
TBI Oil Company............................................. Delaware 100%
TBI Exploration, Inc........................................ Colorado 100%
Palisade Oil, Inc........................................... Colorado 100%
TBI West Virginia, Inc...................................... Delaware 100%
Wildhorse Energy Partners, L.L.C............................ Delaware 45%
Sauer Drilling Company...................................... Delaware 100%
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
by reference of our report included in this Form 10-K, into Tom Brown, Inc.'s
previously filed Registration Statements on Form S-8 Nos. 33-42991, 33-44225,
33-60191, 33-60842, 33-13157, 33-30069, and 33-42011.
ARTHUR ANDERSEN LLP
March 25, 1998
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS
As independent petroleum engineers, we hereby consent to the incorporation
by reference of our report included in this Form 10-K, into Tom Brown, Inc.'s
previously filed Registration Statements on Form S-8 Nos. 33-42991, 33-44225,
33-60191, 33-60842, 33-13157, 33-30069, and 33-42011.
WILLIAMSON PETROLEUM CONSULTANTS, INC.
March 25, 1998
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS
As independent petroleum engineers, we hereby consent to the incorporation
by reference of our report included in this Form 10-K, into Tom Brown, Inc.'s
previously filed Registration Statements on Form S-8 Nos. 33-42991, 33-44225,
33-60191, 33-60842, 33-13157, 33-30069, and 33-42011.
RYDER SCOTT COMPANY
March 25, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 6,537
<SECURITIES> 0
<RECEIVABLES> 40,949
<ALLOWANCES> 0
<INVENTORY> 365
<CURRENT-ASSETS> 48,122
<PP&E> 556,296
<DEPRECIATION> 160,480
<TOTAL-ASSETS> 450,926
<CURRENT-LIABILITIES> 44,867
<BONDS> 23,000
0
100
<COMMON> 2,921
<OTHER-SE> 373,377
<TOTAL-LIABILITY-AND-EQUITY> 450,926
<SALES> 92,581
<TOTAL-REVENUES> 128,737
<CGS> 53,869
<TOTAL-COSTS> 115,743
<OTHER-EXPENSES> 9,411
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,920
<INCOME-PRETAX> 12,994
<INCOME-TAX> (4,384)
<INCOME-CONTINUING> 6,860
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,860
<EPS-PRIMARY> 0.27
<EPS-DILUTED> 0.26
</TABLE>
