1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 1
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): January 31, 1996
TOM BROWN, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware
----------------------------------------------------------------
(State or other jurisdiction of incorporation)
0-3880 95-1949781
- ------------------------------ ----------------------------
(Commission file No.) (IRS Employer identification
number)
508 West Wall, Suite #500, Midland, Texas 79701
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(Address of principal executive offices) (Zip Code)
(915) 682-9715
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(Registrant's telephone number including area code)
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(Former name or former address, if changed since last report)
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ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of Businesses Acquired:
The audited financial statements for KN Production Company ("KNPC"), a
Delaware corporation, are filed herewith beginning on page F-1 of
this Form 8-K/A Report.
(b) Pro Forma Financial Information:
As described in the Form 8-K Report, dated February 13, 1996,
of Tom Brown, Inc. (the "Registrant"), the Registrant and KN
Energy, Inc. ("KNE") closed joint transactions on January 31, 1996
which resulted in (i) the Registrant's acquisition of all of the issued
and outstanding stock of KNPC, formerly a wholly owned subsidiary of
KNE, and (ii) KNE's acquisition of 1,000,000 shares of the Registrant's
$1.75 Convertible Preferred Stock, Series A (the "Series A Preferred
Stock"), and 918,367 shares of the Registrant's Common Stock. In
addition, Wildhorse Energy Partners, LLC was formed by the Registrant
and KNE for the purpose of providing gas gathering, processing,
marketing, field and storage services.
The transactions were consummated pursuant to (i) an Agreement and
Plan of Reorganization (the "Reorganization Agreement"), dated January
31, 1996, by and among the Registrant and its wholly owned subsidiary,
TBI Acquisition, Inc. ("TBIA"), and KNE and its wholly owned
subsidiary, KNPC, and (ii) a Limited Liability Company Agreement of
Wildhorse Energy Partners, LLC, a Delaware limited liability company
of which the Registrant and KNE are the sole members. The transaction
has been recorded under the purchase method of accounting.
The purchase price of the transaction was negotiated by the Registrant
and KNE and was determined to be $36.25 million, of which $25 million
was paid in the form of 1,000,000 shares of the Company's $1.75
Convertible Preferred Stock, Series A and the remaining $11,250,000
was paid in the form of 918,367 shares of the Registrant's Common
Stock, based on a price per share of $12.25.
Filed herewith, beginning on page F-18, are the unaudited pro forma
condensed consolidated balance sheet as of December 31, 1995 and the
unaudited pro forma condensed consolidated statements of operations for
the twelve months ended December 31, 1995 of the Registrant which
reflect the acquisition of KNPC using the assumptions set forth below
and in the accompanying notes, and such statements are subject to
change.
The unaudited pro forma condensed consolidated balance sheet as of
December 31, 1995 presents the acquisition of KNPC as if it had
occurred at December 31, 1995, while the unaudited condensed
consolidated statements of operations for the twelve months ended
December 31, 1995 present the transaction as if it had occurred at
January 1, 1995.
The unaudited pro forma financial statements should be read in
conjunction with the separate financial statements and notes thereto
of KNPC filed herewith and
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the Registrant's financial statements and notes thereto included in its
previously filed form 10-K Report for its fiscal year ended December
31, 1995. The unaudited pro forma financial statements are not
necessarily indicative of the financial position or results of
operations of the consolidated companies that might have occurred or as
it may be in the future.
(c) Exhibits:
Exhibit No. Description
----------- -----------
10.1 Agreement and Plan of Reorganization, dated January 31,
1996, By and Among Tom Brown, Inc., TBI Acquisition, Inc.,
K N Production Company and K N Energy, Inc. (Incorporated
by reference to Exhibit No. 10.1 in the Registrant's Form
8-K Report dated February 13, 1996 and filed with the
Securities and Exchange Commission on February 15, 1996.)
10.2 Limited Liability Company Agreement, dated January 31,
1996, of Wildhorse Energy Partners, LLC, between Tom
Brown, Inc. and K N Energy, Inc. (Incorporated by reference
to Exhibit No. 10.2 in the Registrant's Form 8-K Report
dated February 13, 1996 and filed with the Securities and
Exchange Commission on February 15, 1996.)
10.3 Certificate of Designations, Powers, Preferences and
Rights of the $1.75 Convertible Preferred Stock, Series A,
$.10 Par Value (Incorporated by reference to Exhibit No.
10.3 in the Registrant's Form 8-K Report dated February
13, 1996 and filed with the Securities and Exchange
Commission on February 15, 1996.)
10.4 Registration Rights Agreement, dated January 31, 1996,
between Tom Brown, Inc. and K N Energy, Inc. (Incorporated
by reference to Exhibit No. 10.4 in the Registrant's Form
8-K Report dated February 13, 1996 and filed with the
Securities and Exchange Commission on February 15, 1996.)
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K N PRODUCTION COMPANY
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1995 AND 1994 AND
FOR THE THREE YEARS IN THE PERIOD
ENDED DECEMBER 31, 1995
TOGETHER WITH REPORT OF INDEPENDENT
PUBLIC ACCOUNTANTS
F-1
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholder of
K N Production Company:
We have audited the accompanying balance sheets of K N PRODUCTION COMPANY (a
Delaware corporation) as of December 31, 1995 and 1994, and the related
statements of operations, changes in stockholder's equity and cash flows for
each of the three years in the period ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of K N Production Company as of
December 31, 1995 and 1994, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Denver, Colorado,
February 29, 1996.
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Page 1 of 2
K N PRODUCTION COMPANY
BALANCE SHEETS
December 31
-------------------------------------
ASSETS 1995 1994
------ --------------- ---------------
CURRENT ASSETS:
Cash and cash equivalents $ -- $ 229,253
Accounts receivable, net of allowance for doubtful
accounts of $44,190 and $23,158, respectively 3,285,090 3,822,250
Income tax receivable 1,138,866 314,707
Inventories 212,330 289,498
Prepaid drilling costs 273,718 1,820,516
Other prepaids and deposits 14,091 756,006
--------------- ---------------
Total current assets 4,924,095 7,232,230
--------------- ---------------
PROPERTY AND EQUIPMENT, at cost:
Gas and oil properties (successful efforts method
of accounting) 42,317,849 43,341,416
Gathering and storage facilities 5,655,428 5,471,943
Less- Accumulated depreciation, depletion
and amortization (14,188,988) (13,858,085)
--------------- ---------------
Net property and equipment 33,784,289 34,955,274
--------------- ---------------
OTHER ASSETS 269,225 337,726
--------------- ---------------
Total assets $ 38,977,609 $ 42,525,230
=============== ===============
The accompanying notes are an integral
part of these balance sheets.
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Page 2 of 2
K N PRODUCTION COMPANY
BALANCE SHEETS
December 31
-------------------------------------
LIABILITIES AND STOCKHOLDER'S EQUITY 1995 1994
------------------------------------ --------------- ---------------
CURRENT LIABILITIES:
Accounts payable - trade $ 4,112,560 $ 5,013,938
Accounts payable - affiliates -- 1,542,646
Gas imbalances -- 571,027
Accrued expenses 596,165 232,256
--------------- ---------------
Total current liabilities 4,708,725 7,359,867
--------------- ---------------
OTHER DEFERRED CREDITS -- 72,180
--------------- ---------------
DEFERRED INCOME TAXES 2,253,845 3,104,115
--------------- ---------------
COMMITMENTS AND CONTINGENCIES (Note 7)
STOCKHOLDER'S EQUITY:
Common stock, $.01 par value, authorized 100,000 shares;
outstanding 100,000 shares 1,000 1,000
Additional paid-in capital 47,408,468 46,922,486
Accumulated deficit (15,394,429) (14,934,418)
--------------- ---------------
Total stockholder's equity 32,015,039 31,989,068
--------------- ---------------
Total liabilities and stockholder's equity $ 38,977,609 $ 42,525,230
=============== ===============
The accompanying notes are an integral
part of these balance sheets.
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K N PRODUCTION COMPANY
STATEMENTS OF OPERATIONS
Years Ended December 31
-------------------------------------------------------
1995 1994 1993
-------------- -------------- --------------
REVENUES:
Gas and oil sales - third party $ 8,599,934 $ 10,186,677 $ 6,216,855
Gas and oil sales - affiliates -- 2,660,645 1,302,303
Storage and transportation fees - affiliates 892,969 1,002,653 942,386
Other 305,565 278,744 209,014
-------------- -------------- --------------
Total revenues 9,798,468 14,128,719 8,670,558
-------------- -------------- --------------
COSTS AND EXPENSES:
Lease operating expenses 2,767,209 2,751,723 1,503,931
Production taxes 766,190 1,198,759 653,555
General and administrative (Note 3) 2,742,203 2,920,421 1,478,999
Depreciation, depletion and
amortization 4,608,032 5,169,512 3,574,237
-------------- -------------- --------------
Total costs and expenses 10,883,634 12,040,415 7,210,722
-------------- -------------- --------------
OPERATING (LOSS) INCOME (1,085,166) 2,088,304 1,459,836
-------------- -------------- --------------
OTHER INCOME AND (DEDUCTIONS):
Interest income and other 17,150 35,902 89,101
Gain on property sales 922,666 234,025 84,517
-------------- -------------- --------------
INCOME (LOSS) BEFORE INCOME TAXES (145,350) 2,358,231 1,633,454
INCOME TAX BENEFIT (EXPENSE) 820,150 (163,917) 323,280
-------------- -------------- --------------
NET INCOME $ 674,800 $ 2,194,314 $ 1,956,734
============== ============== ==============
The accompanying notes are an integral
part of these financial statements.
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K N PRODUCTION COMPANY
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
Additional Total
Common Paid-in Accumulated Stockholder's
Stock Capital Deficit Equity
------ ----------- ------------ -----------
BALANCE, at December 31, 1992 $1,000 $35,346,759 $(16,945,950) $18,401,809
Equity contribution (Note 5) -- 201,966 -- 201,966
Net income -- -- 1,956,734 1,956,734
Dividends -- -- (487,872) (487,872)
------ ----------- ------------ -----------
BALANCE, at December 31, 1993 1,000 35,548,725 (15,477,088) 20,072,637
Equity contribution (Note 5) -- 11,373,761 -- 11,373,761
Net income -- -- 2,194,314 2,194,314
Dividends -- (1,651,644) (1,651,644)
------ ----------- ------------ -----------
BALANCE, at December 31, 1994 1,000 46,922,486 (14,934,418) 31,989,068
Equity contribution (Note 5) -- 485,982 -- 485,982
Net income -- -- 674,800 674,800
Dividends -- -- (1,134,811) (1,134,811)
------ ----------- ------------ -----------
BALANCE, at December 31, 1995 $1,000 $47,408,468 $(15,394,429) $32,015,039
====== =========== ============ ===========
The accompanying notes are an integral part of these financial statements.
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Page 1 of 2
K N PRODUCTION COMPANY
STATEMENTS OF CASH FLOWS
Years Ended December 31
-------------------------------------------------
1995 1994 1993
------------ ------------ ------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) $ (848,288) $ 2,194,314 $ 1,956,734
Adjustments to reconcile net loss to net
cash provided by operating activities-
Depreciation, depletion and
amortization 4,608,032 5,169,512 3,574,237
Gain on sales of assets (922,666) (234,025) (84,517)
Deferred income taxes (850,270) 947,477 80,099
Changes in operating assets and liabilities-
Decrease (increase) in accounts
receivable, income tax receivable (286,999) (2,483,108) (68,247)
Decrease (increase) in inventories 77,168 (126,343) 47,889
Decrease (increase) in prepaid
drilling costs 1,546,798 (1,820,516) --
Decrease (increase) in other
prepaids and deposits 741,915 2,483,754 (3,046,664)
Increase (decrease) in accounts
payable (2,444,024) 5,369,201 (74,935)
Increase (decrease) in accrued
expenses and gas imbalances (207,118) (1,622,939) 1,186,738
Decrease (increase) in other assets 68,501 (37,443) 6,900
Increase (decrease) in other deferred (72,180) 72,180 --
------------ ------------ ------------
Net cash (used in) provided by
operating activities 1,410,869 9,912,064 3,578,234
------------ ------------ ------------
The accompanying notes are an integral
part of these financial statements.
F-7
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Page 2 of 2
K N PRODUCTION COMPANY
STATEMENTS OF CASH FLOWS
Years Ended December 31
-------------------------------------------------
1995 1994 1993
----------- ------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of assets $ 6,482,783 $ 17,797,711 $ 1,327,792
Capital and exploration expenditures (7,474,076) (37,353,347) (4,721,535)
----------- ------------- ------------
Net cash provided by (used in)
investing activities (991,293) (19,555,636) (3,393,743)
----------- ------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Equity contribution 485,982 11,373,761 201,966
Dividends (1,134,811) (1,651,644) (487,872)
----------- ------------- ------------
Net cash provided by (used in)
financing activities (648,829) 9,722,117 (285,906)
----------- ------------- ------------
Net increase (decrease) in cash
and cash equivalents (229,253) 78,545 (101,415)
CASH AND CASH EQUIVALENTS,
beginning of year 229,253 150,708 252,123
----------- ------------- ------------
CASH AND CASH EQUIVALENTS,
end of year $ -- $ 229,253 $ 150,708
=========== ============= ============
CASH PAID DURING THE YEAR FOR:
Income taxes $ -- $ -- $ --
=========== ============= ============
The accompanying notes are an integral
part of these financial statements.
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K N PRODUCTION COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Presentation
The financial statements include the accounts of K N Production Company
("KNPC") and GASCO, Inc. ("GASCO"), which was merged into KNPC on April 1,
1995. The financial statements reflect the combined operations of KNPC and
GASCO (collectively, the "Company") for all periods presented. Both KNPC and
GASCO, prior to its merger with KNPC, have been wholly owned subsidiaries of K
N Energy, Inc. ("K N"). As discussed in Note 8, K N sold its ownership
interest in the Company to Tom Brown, Inc. in January 1995.
The Company is engaged primarily in the acquisition, development and production
of natural gas and crude oil in the Rocky Mountain region. At December 31,
1995, the Company had approximately 225,000 net undeveloped acres under lease
and owned interests in 624 producing wells (243 net), of which it operated 308
(190 net). In addition to oil and gas properties, the Company owns the Wolf
Creek gas storage field and also owns interests in three small gathering
systems.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from these estimates.
Cash Equivalents
The Company records as cash equivalents all highly liquid investments with a
maturity when purchased of three months or less.
Inventories
Inventories consist primarily of pipe and other production equipment.
Inventories are stated at the lower of cost or market.
F-9
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Property and Equipment
The Company accounts for its natural gas and crude oil exploration and
production activities under the successful efforts method of accounting. Costs
of productive wells, development dry holes and productive leases are
capitalized and amortized over the life of remaining proved reserves on a
well-by-well basis using the unit-of-production method. Gas and oil lease
acquisition costs are capitalized when incurred. Unproved properties with
significant acquisition costs are assessed quarterly on a property-by-property
basis and any impairment in value is charged to expense. If the unproved
properties are determined to be productive, the appropriate related costs are
transferred to proved gas and oil properties.
Exploration costs, including geological and geophysical expenses and delay
rentals for gas and oil leases, are charged to expense as incurred.
Exploratory drilling costs are initially capitalized, but charged to expense if
and when the well is determined not to have found proved reserves. As of
December 31, 1995, the Company had no exploratory wells in progress.
Other property and equipment is recorded at cost. Depreciation is computed
using the straight-line method based on estimated useful lives.
Maintenance and repairs are charged to expense; renewals and betterments are
charged to the appropriate equipment accounts. Upon retirement or disposition
of assets, the cost and related accumulated depreciation are removed from the
accounts with the resulting gains or losses, if any, reflected in results of
operations.
Natural Gas Revenues
Revenues from oil and gas sales are recorded on an accrual basis as sales are
made and deliveries occur.
Other Revenue
Other revenue is primarily comprised of royalties associated with coal
production at a mine in the Raton Basin of Colorado. The Company receives a
royalty equal to $0.35 per ton of coal sold. Subsequent to yearend, the mine
was closed which resulted in suspension of the royalty payments.
Income Taxes
The Company provides for income taxes using the asset and liability method
under which deferred income taxes are recognized for the tax consequences of
"temporary differences" by applying enacted statutory tax rates applicable to
future years to differences between the financial statement carrying amounts
and the tax bases of existing assets and liabilities. The effect on deferred
taxes of a change in tax laws or tax rates is recognized in income in the
period such changes are enacted.
F-10
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The Company joins in filing a consolidated income tax return with K N.
Pursuant to an income tax allocation arrangement with K N and its subsidiaries,
the Company receives expense (benefit) for income taxes based on its pro rata
contribution of taxable income (loss) to K N's consolidated taxable income
(loss).
(2) PROPERTY ACQUISITIONS/DISPOSITIONS
On February 1, 1994, the Company acquired gas reserves and production
properties located in western Colorado and in the Moxa Arch region of
southwestern Wyoming for a total purchase price of approximately $30 million.
The acquired properties had total net reserves of approximately 50 Bcf
equivalent of natural gas. In October 1994, the Company sold a 50 percent
undivided interest in substantially all the acquired properties to a third
party with whom it will jointly develop the properties.
(3) TRANSACTIONS WITH RELATED PARTIES
The Company enters into transactions with K N and its subsidiaries. Principle
recurring transactions are as follows:
Corporate Shared Services
K N and its subsidiaries share certain costs associated with its headquarters
location, including facilities costs, legal and human resource expenses, and
senior management time. The Company has incurred approximately $2,742,203,
$2,920,421 and $1,478,999 of related party expenses in connection with the
shared services for the years ended December 31, 1995, 1994 and 1993,
respectively. The Company believes that the methodology used by K N in
allocating related party expenses is reasonable.
Gas and Oil Sales
The Company sells a portion of its production to a gas marketing subsidiary of
K N. All sales to this company are at market rates.
Storage and Transportation Services
The Company has an agreement with an affiliate to lease storage space to the
affiliate at the Wolf Creek storage facility. The agreement stipulates that
the Company receive an annual reservation charge of approximately $9,500 in
addition to monthly activity fees. The monthly activity fees are based upon
specific terms stipulated in the agreement and approximated $70,000 per month
during 1995. The agreement is cancelable upon 30 days notice by either party.
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(4) INCOME TAXES
Components of the income tax benefit (provision) applicable to federal and
state income taxes are as follows:
Twelve Months
Ended December 31
---------------------------------------------------
1995 1994 1993
---------- ---------- ----------
Current:
Federal $ 25,670 $ 794,338 $ 422,737
State (55,790) (10,778) (19,358)
---------- ---------- ----------
Total (30,120) 783,560 403,379
Deferred:
Federal 756,647 (916,898) (118,752)
State 93,623 (30,579) 38,653
---------- ---------- ----------
Total 850,270 (947,477) (80,099)
Total tax benefit (provision) $ 820,150 $ (163,917) $ 323,280
========== ========== ==========
A reconciliation of the Company's income tax expense calculated at the U.S.
federal statutory rate is summarized as follows:
Twelve Months
Ended December 31
---------------------------------------------------
1995 1994 1993
---------- ---------- ----------
Federal income tax (provision)
benefit at statutory rate $ 50,872 $ (825,381) $ (571,709)
State income tax, net of
federal benefit 4,724 (76,642) (53,087)
Nonconventional fuels credit 794,109 757,000 987,915
Other (29,555) (18,894) (39,839)
---------- ---------- ----------
$ 820,150 $ (163,917) $ 323,280
========== ========== ==========
The Section 29 nonconventional fuels credit was enacted by Congress to provide
incentives to explore for and produce natural gas through secondary recovery
for certain defined properties, including tight sands gas and coal bed methane.
The tax credit is based upon production.
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The temporary differences which gave rise to significant portions of the
deferred tax liabilities relate primarily to gas and oil acquisition,
exploration and development costs deducted for tax purposes is excess of book.
The Company has approximately $2,626,134 of AMT credit carryforwards that may
be carried forward indefinitely.
(5) STOCKHOLDER'S EQUITY
The Company is a wholly-owned subsidiary of K N. As such, all equity
transactions are with the parent company. The equity contribution during 1994
related to the Company's acquisition of gas reserves and production properties
as discussed in Note 2. The contributions during 1993 and 1995 were made to
fund capital expenditures and for working capital purposes.
(6) SIGNIFICANT CUSTOMERS
Gas and oil sales to one purchaser, K N Gas Marketing, Inc., accounted for 11%
of oil and gas sales and marketing, gathering and processing revenues for the
year ended December 31, 1995. As 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.
(7) COMMITMENTS AND CONTINGENCIES
The Company's operations are subject to numerous Federal and state government
regulations which may give rise to claims against the Company. In addition,
the Company is a defendant in various lawsuits generally incidental to its
business. The Company does not believe that the ultimate resolution of such
litigation will have a material adverse effect on the Company's financial
position or results of operations. K N has agreed to indemnify the Company
against specific claims incurred as of December 31, 1995.
The Company's revenues are derived principally from uncollateralized sales to
customers in the gas and oil industry. The concentration of credit risk in a
single industry affects the Company's overall exposure to credit risk because
customers may be similarly affected by changes in economic and other
conditions. The Company has not experienced significant credit losses on such
receivables.
The Company is obligated under a noncancelable lease agreement for certain
office space. Future minimum rental payments under this lease are as follows:
Year ending December 31-
1996 $229,140
1997 114,570
--------
$343,710
========
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(8) SUBSEQUENT EVENT
In December 1995, K N announced its intent to merge the Company with Tom Brown,
Inc. The merger resulted in an exchange of 0.9 million shares of Tom Brown
common stock and 1.0 million shares of new convertible preferred stock of Tom
Brown for all of the common shares of KNPC. The transaction was treated as a
tax-free reorganization and closed in January 1995.
(9) SUPPLEMENTAL INFORMATION RELATED TO
GAS AND OIL ACTIVITIES (UNAUDITED)
Capitalized Costs and Costs Incurred
The following tables set forth certain historical costs and operating
information related to the Company's gas and oil producing activities.
December 31
----------------------------------
1995 1994
------------ ------------
Proved gas and oil properties $ 32,541,000 $ 34,387,000
Unproved properties 7,567,000 6,828,000
------------ ------------
Total gas and oil properties 40,108,000 41,215,000
Less- Accumulated depreciation,
depletion and amortization (11,269,000) (11,398,000)
------------ ------------
Net capitalized costs $ 28,839,000 $ 29,817,000
============ ============
Cost incurred-
Proved property acquisition costs $ -- $ 8,810,000
Unproved property acquisition costs 879,000 5,400,000
Exploration costs 932,000 313,000
Development costs 4,621,000 7,732,000
------------ ------------
Total $ 6,432,000 $ 22,255,000
============ ============
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, 1995 and 1994
were principally prepared by independent petroleum consultants. Proved
reserves are estimated quantities of natural gas and crude oil which geological
and engineering data demonstrate with reasonable certainty to be recoverable in
future years from known reservoirs under existing
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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
yearend economic conditions.
2. Estimated future cash flows from proved reserves were determined
based on yearend 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
yearend economic conditions and by the estimated effect of future
income taxes based on the then-enacted tax law.
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, and
anticipated future changes in prices and costs, and a discount
factor more representative of the time value of money and the
risks inherent in reserve estimates.
Quantities of Gas and Oil Reserves (Unaudited)
The following table presents estimates of the Company's net proved and proved
developed natural gas and oil reserves (including natural gas liquids):
Reserve Quantities
(in thousands)
---------------------------
Gas Oil
-------- -------
(Mcf) (Bbls)
Estimated reserves at December 31, 1992 18,795 432
Revisions of previous estimates 4,281 88
Purchase of minerals in place 2,167 --
Extensions and discoveries 1,842 45
Sales of minerals in place (59) (26)
Production (2,947) (126)
-------- -------
Estimated reserves at December 31, 1993 24,079 413
Revisions of previous estimates (1,056) 154
Purchase of minerals in place 22,516 438
Extensions and discoveries 5,889 11
Sales of minerals in place (717) (33)
Production (5,293) (222)
-------- -------
Estimated reserves at December 31, 1994 45,418 761
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Reserve Quantities
(in thousands)
---------------------------
Gas Oil
------- ------
(Mcf) (Bbls)
Revisions of previous estimates (8,136) (41)
Purchase of minerals in place -- --
Extensions and discoveries 555 2
Sales of minerals in place (1,624) (77)
Production (4,854) (126)
------- -----
Estimated reserves at December 31, 1995 31,359 519
======= =====
Proved developed reserves:
December 31, 1993 22,590 377
December 31, 1994 34,245 643
December 31, 1995 27,352 419
======= =====
Standardized measure of discounted future net cash flows relating to proved gas
and oil reserves (unaudited):
December 31
----------------------------------------------
1995 1994 1993
-------- -------- --------
(in thousands)
Future cash flows $ 48,478 $ 83,307 $ 48,954
Future production costs (18,787) (27,324) (18,447)
Future development costs (3,099) (6,695) (625)
-------- -------- --------
Future net cash flows before tax 26,592 49,288 29,882
Future income taxes (2,421) (11,917) (4,525)
-------- -------- --------
Future net cash flows after tax 24,171 37,371 25,357
Annual discount at 10% (9,687) (14,498) (9,717)
-------- -------- --------
Standardized measure of discounted
future net cash flows $ 14,484 $ 22,873 $ 15,640
======== ======== ========
F-16
20
- 9 -
Changes in standard measure of discounted future net cash flows:
Years Ended December 31
---------------------------------------------
1995 1994 1993
-------- -------- --------
(in thousands)
Gas and oil sales, net of production
costs $(5,132) $ (8,021) $ (5,464)
Net changes in prices and
production costs (7,484) 799 (1,133)
Extensions and discoveries, less
related costs 272 3,556 1,440
Change in estimated future
development costs 2,715 (589) (127)
Previously estimated development
cost incurred 789 426 810
Net change in income taxes 4,508 (3,143) 3,287
Purchase of minerals in place -- 13,070 1,108
Sales of minerals in place (1,386) (613) (298)
Accretion of discount 2,899 1,861 1,747
Revision of quantity estimates (4,248) (100) 3,719
Changes in production rates and other (1,322) (13) (657)
-------- -------- --------
Change in standardized measure $ (8,389) $ 7,233 $ 4,432
======== ======== ========
F-17
21
INDEX TO UNAUDITED PROFORMA FINANCIAL STATEMENTS
Page Number
Pro Forma Condensed Consolidated Balance Sheet F-19
as of December 31, 1995
Pro Forma Condensed Consolidated Statement of Operations F-21
for the Twelve Months Ended December 31, 1995
Notes to Pro Forma Condensed Consolidated Financial Statements F-22
for the Balance Sheet as of December 31, 1995 and
the Statement of Operations for the Twelve Months Ended
December 31, 1995.
F-18
22
TOM BROWN, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, 1995
Historical Pro Forma Adjustments:
--------------------------------- ----------------------- Pro Forma
Tom Brown, Inc. KNPC Amount Note Reference Consolidated
--------------- ----------- --------- -------------- ------------
Assets
-----
Current assets:
Cash and cash equivalents $ 4,982,000 $ -- $ (163,000) (3) $ 4,819,000
Accounts receivable 7,470,000 4,424,000 11,894,000
Inventories 246,000 212,000 458,000
Other 190,000 288,000 478,000
------------ ----------- ------------ ------------
Total current assets: 12,888,000 4,924,000 (163,000) 17,649,000
------------ ----------- ------------ ------------
Property and equipment, at cost:
Gas and oil properties, successful
efforts method of accounting 186,624,000 42,318,000 (10,499,000) (1) 218,443,000
Other 12,056,000 5,655,000 545,000 (1) 18,256,000
------------ ----------- ------------ ------------
198,680,000 47,973,000 ( 9,954,000) 236,699,000
Less: Accumulated depreciation,
depletion and amortization 112,695,000 14,189,000 (14,189,000) (1) 112,695,000
------------ ----------- ------------ ------------
Net property and equipment 85,985,000 33,784,000 4,235,000 124,004,000
------------ ----------- ------------ ------------
Senior gas indexed notes 51,093,000 -- 51,093,000
Deferred income taxes, net 13,170,000 -- (2,254,000) 10,916,000
Other assets 1,038,000 270,000 163,000 (3) 1,471,000
------------ ----------- ------------ ------------
$164,174,000 $38,978,000 1,981,000 $205,133,000
============ =========== ============ ============
The accompanying notes are an integral part
of these pro forma financial statements.
F-19
23
TOM BROWN, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, 1995
Historical Pro Forma Adjustments:
--------------------------------- ----------------------- Pro Forma
Tom Brown, Inc. KNPC Amount Note Reference Consolidated
--------------- ----------- --------- -------------- ------------
Liabilities & Stockholders' Equity
- ----------------------------------
Current liabilities:
Accounts payable $ 5,979,000 $ 4,113,000 $ 10,092,000
Accrued expenses 1,536,000 596,000 2,132,000
------------ ----------- ------------
Total current liabilities: 7,515,000 4,709,000 12,224,000
------------ ----------- ------------
Deferred income taxes -- 2,254,000 (2,254,000) --
Commitments and contingencies
Stockholders' equity:
Preferred stock -- -- 100,000 (1) 100,000
Common stock 2,018,000 1,000 90,000 (1) 2,109,000
Additional paid-in capital 224,889,000 47,408,000 (11,349,000) (1) 260,948,000
Accumulated deficit (70,248,000) (15,394,000) 15,394,000 (1) (70,248,000)
------------ ----------- ----------- ------------
Total stockholders' equity 156,659,000 32,015,000 4,235,000 192,909,000
------------ ----------- ----------- ------------
$164,174,000 $38,978,000 $ 1,981,000 $205,133,000
============ =========== =========== ============
The accompanying notes are an integral part
of these pro forma financial statements.
F-20
24
TOM BROWN, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Twelve Months ended December 31, 1995
Historical Pro Forma Adjustments:
--------------------------------- ----------------------- Pro Forma
Tom Brown, Inc. KNPC Amount Note Reference Consolidated
--------------- ----------- --------- -------------- ------------
Revenues:
Gas and oil sales $ 20,385,000 $ 8,600,000 $ $28,985,000
Gain (loss) on sales of gas
and oil properties 4,402,000 923,000 5,325,000
Marketing, gathering,
processing & storage 15,572,000 893,000 16,465,000
Interest income & other 694,000 323,000 1.017,000
------------- ----------- -----------
Total revenues 41,053,000 10,739,000 51,792,000
------------- ----------- -----------
Costs and expenses:
Gas and oil production 4,834,000 1,993,000 6,827,000
Taxes on gas & oil production 2,043,000 766,000 2,809,000
Cost of gas sold 13,146,000 -- 13,146,000
Exploration costs 3,644,000 775,000 4,419,000
Impairments of leasehold costs 582,000 240,000 822,000
General and administrative 4,087,000 2,742,000 (2,042,000) (2) 4,787,000
Option plan compensation 97,000 -- 97,000
Depreciation, depletion and
amortization 9,994,000 4,368,000 508,000 (5) 14,870,000
Writedown of properties 8,368,000 -- 8,368,000
Interest expense 1,369,000 1,369,000
------------- ----------- ------------ -----------
Total costs and expenses 48,164,000 10,884,000 (1,534,000) 57,514,000
------------- ----------- ------------ -----------
Loss before income taxes (7,111,000) (145,000) 1,534,000 (5,722,000)
Income tax benefit (provision):
Recognition of deferred tax
asset 13,170,000 -- 13,170,000
Income tax benefit (expense) (274,000) 820,000 (977,000) (4) (431,000)
------------- ----------- ----------- -----------
Net Income 5,785,000 675,000 557,000 7,017,000
Preferred stock dividends -- -- (1,750,000) (6) (1,750,000)
------------- ----------- ----------- -----------
Earnings on common stock $ 5,785,000 $ 675,000 $(1,193,000) $ 5,267,000
============= =========== =========== ===========
Earnings per common share $ .34 $ .30
============= ===========
Average number of common
shares used in primary
computation 16,851,925 17,770,242
============= ===========
The accompanying notes are an integral part
of these pro forma financial statements.
F-21
25
TOM BROWN, INC.
Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements
for the Balance Sheet as of December 31, 1995 and the Statement of
Operations for the Twelve Months ended December 31, 1995
BASIS OF PRESENTATION
The unaudited pro forma condensed consolidated financial statements are based
on the audited financial statements of Tom Brown, Inc. and Subsidiaries (the
"Company") and K N Production Company for the year ended December 31, 1995,
and upon adjustments and assumptions described below.
PRO FORMA ADJUSTMENTS
The pro forma adjustments reflect the following:
Note (1): Reflects shares issued by the Registrant, allocation of purchase
price and elimination of KNPC's equity.
Note (2): Reflects reduction in general and administration expenses to allow
for consolidation of companies.
Note (3): To record acquisition costs incurred by Registrant for KNPC.
Note (4): To eliminate the income tax benefit allocated to KNPC by K N Energy,
Inc. and record effect of the utilization of the Registrant's net operating
loss carryforward.
Note (5): To record depreciation, depletion and amortization expense for the
write-up of assets resulting from the acquisition.
Note (6): To record payment of preferred dividends.
F-22
26
SIGNATURE
Pursuant to the requirements 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.
Dated: April 15, 1996
TOM BROWN, INC.
By: /s/ R. KIM HARRIS
--------------------------------
R. Kim Harris, Controller and
Principal Financial Officer