Item 3. Legal Proceedings.
The Company is a defendant in certain legal proceedings that have resulted from the ordinary conduct of its business. In the opinion of the Company's management, none of these proceedings will have a material adverse effect on the Company's financial condition or operations.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to the Company's stockholders during the fourth quarter of the fiscal year ended December 31, 1995.
PART II
Item 5.
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.
The Company's common stock trades on The Nasdaq Stock Market under the symbol "TIDE." At March 15, 1996, there were approximately 1,000 stockholders of record. The Company has not declared or paid any dividends on its common stock since the Draco Transaction and does not presently intend to pay cash dividends in the foreseeable future. The Company currently is restricted from paying cash dividends, in excess of 30% of cash flow, on its common stock under its existing bank credit facility. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Financing Arrangements."
The following table sets forth, for the periods indicated, the high and low sales prices of the Company's common stock on The Nasdaq Stock Market:
Item 6.
Item 6. Selected Financial Data
See "Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with the Company's Consolidated Financial Statements and Notes thereto and other financial information included in this Form 10-K.
Recent Developments
On February 25, 1996, the Company entered into the Merger Agreement with HS Resources, whereby the Company is to be merged with and into a subsidiary of HS Resources, with the Company's stockholders receiving $8.75 of cash and .6295 of a share of HS Resources common stock for each share of the Company's common stock ("Common Stock"), subject to adjustments in certain events. Certain stockholders of the Company (holding, in the aggregate, more than 50% of the outstanding shares of Common Stock) have agreed with HS Resources to, among other things, vote shares representing a majority of the outstanding Common Stock in favor of the Merger. See "Items 1 and 2. Business and Properties - Recent Developments - Merger Agreement."
Results of Operations
General
The factors that most significantly affect the Company's operating results are (i) the sales prices of oil and natural gas; (ii) the amount of oil and gas sold; (iii) the amount of operating expenses; and (iv) the interest rates on, and amount of, borrowing. Sales of oil and gas are significantly affected by the Company's ability to complete producing property acquisitions and to maintain or increase production from existing properties through developmental drilling and production enhancement activities.
The comparability of results during the periods presented is impacted by the fact that, during the period from October 1989 through December 1995, the Company completed 58 property acquisitions involving total acquisition and development costs of $140 million that added substantial proved oil and gas reserves and increased production levels. As a result, the Company's equivalent reserves increased 63% in 1993, 22% in 1994, and 40% in 1995, while production and revenues also increased.
Prices received by the Company for sales of oil and natural gas fluctuate significantly from period to period. Relatively modest changes in either oil or gas prices can significantly impact the Company's results of operations and cash flows. The prices of natural gas are influenced by weather conditions and supply imbalances, particularly in the domestic market, and by world-wide oil price levels. Declines in natural gas or oil prices could adversely effect the semi-annual borrowing base determination under the Company's current credit agreement.
In October 1992, the Company began marketing natural gas. Through its wholly-owned subsidiary, Tide West Trading, the Company actively markets its own natural gas production as well as that of third parties. During 1995, the Company marketed, on average, 174.6 MMcf of gas per day. The Company believes that this activity gives it more control over the marketing of its product and, thus, affords the Company a higher sales price than it would otherwise receive if its gas were marketed by a third party. The revenues and the associated expenses of this activity are recognized under the heading "Trading and transportation" in the Company's financial statements. Tide West Trading strives to provide all of the functions of a large marketing company, but with the better service of a smaller company. Its primary
mission is to find the best markets for the Company's gas at no net cost to the Company while generating additional profit by marketing third party supply.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Oil and gas revenues increased from 1994 to 1995 by $7 million, or 24%. This increase was primarily due to a 58% increase in crude oil sales volumes, a 28% increase in natural gas sales volumes, and an increase in the average sales prices received for crude oil of $1.16 per Bbl, or 8%, although the average sales prices received for natural gas decreased by $.22 per Mcf, or 13%. Excluding the effects of the consolidation of Horizon into the Company's financial statements in 1995, crude oil sales volumes increased 40% and natural gas sales volumes increased 13% due to oil and gas property acquisitions and increased drilling activity in 1995. The consolidation of Horizon, in 1995, resulted in an additional 16% increase in oil and gas revenues. Excluding the effects of such consolidation, the increase in crude oil and natural gas sales volumes and oil prices, partially offset by a decrease in natural gas prices, increased oil and gas revenues 8% in 1995, compared to 1994.
Trading and transportation net margins increased by $441,000 in 1995 compared to 1994. The quantity of gas marketed in 1995 increased to 63.7 Bcf, up from 58.0 Bcf in 1994. Net margins per Mcf were slightly lower at 3.2 cents per Mcf in 1995, compared to 4.0 cents per Mcf for the same period in 1994, partially offsetting the increased quantity of gas marketed. Natural gas marketed on the Company's behalf amounted to 19% of the total gas sold by Tide West Trading in 1995, as compared to 16% in 1994.
In order to reduce price fluctuation risk, Tide West Trading hedges its position throughout each trading month. This hedging activity impacts the trading and transportation revenue reported. In 1995, Tide West Trading's hedging activity yielded a gain of $253,000, however it yielded a loss of $272,000 in 1994.
Lease operating expenses increased $2.8 million, or 58%, in 1995 compared to 1994. Such increase was due to property acquisitions, the developmental wells drilled, and the consolidation of Horizon. Such consolidation increased lease operating expenses by $1.5 million, or 31%. Excluding the effects of the consolidation of Horizon, lease operating expenses increased $1.3 million, or 27%, from 1994.
Severance taxes increased $509,000, or 25%, as a result of a 24% increase in oil and gas revenues.
General and administrative expenses, excluding compensation expense - stock options, increased $755,000, or 24%, in 1995 compared to 1994, due primarily to the consolidation of Horizon. Such consolidation of Horizon increased general and administrative expenses $383,000, or 12%.
Depreciation, depletion and amortization increased $916,000, or 9%, primarily as a result of the consolidation of Horizon, partially offset by a decrease due to the revision of reserve estimates and a change in the method of calculating depletion. The consolidation of Horizon increased depreciation, depletion and amortization by $1.2 million, or 11%. Excluding the consolidation of Horizon, depreciation, depletion and amortization decreased $229,000, or 2%.
Interest expense increased by $1.3 million, or 72%, as a result of the increase in the average outstanding advances under the Company's revolving credit facility and an increase in interest rates.
Interest income increased $216,000, or 243%, due to interest earned on short- term investments and due to the consolidation of Horizon. Horizon increased interest income $136,000, or 153%, in 1995.
In 1995, a net gain on commodity transactions was recorded in the amount $1.4 million, before income tax, of which $615,000 has been realized. These commodity transactions do not qualify as hedges. The Company did not have any comparable commodity transactions in 1994. Since 1991, the Company has engaged in limited hedging activities through commodity swaps and futures contracts in order to reduce the effect of the volatility of oil and gas prices. At December 31, 1995, the Company had covered all of its significant hedged oil and gas commodity transactions with offsetting contracts.
Other expenses increased $75,000, or 16%, in 1995 compared to 1994. Other expenses in 1995 consisted primarily of merger expenses in the amount of $355,000 for costs associated with the merger of Killgore Investments, Inc. with and into the Company and the proposed Merger with HS Resources.
Year Ended December 31, 1994 Compared to Year Ended December 31, 1993
The Company's oil and gas revenues increased 24% from 1993 to 1994 primarily because of increased sales of oil and gas volumes. Total revenues increased by $21.7 million in 1994 compared to 1993, which consisted of a $5.7 million increase in oil and gas revenues and a $16.0 million increase in trading and transportation revenues.
Oil and gas production increased 37% in 1994 compared to 1993, on a BOE basis. This increase was due to a 22% increase in crude oil sales volumes and a 40% increase in natural gas sales volumes. The increase in production was primarily related to the acquisition of certain oil and gas properties from Pennzoil Petroleum Company and Pennzoil Exploration and Production Company in December 1993 ("the Pennzoil Properties"), and three acquisitions completed in the third quarter of 1994, partially offset by the contributions of oil and gas properties to Horizon during 1994.
In 1994 as compared to 1993, average sales prices received for crude oil decreased by $.40 per Bbl, or 3%, and average sales prices received for natural gas decreased by $.29 per Mcf, or 15%. The decrease in the price of oil was due to an overall market decline and the acquisition of the Pennzoil Properties which consisted, in part, of oil properties containing lower-priced heavy and sour crude. The decrease in the price of gas was due to an overall market decline.
Lease operating expenses increased $225,000, or 5%, in 1994 compared to 1993. The relatively modest change in lease operating expenses was due to the property acquisitions in the last half of 1993 and in 1994, which have relatively low lease operating expenses, further reduced by the oil and gas property contributions to Horizon and overall improvements in operating efficiencies.
Severance taxes increased $329,000, or 20%, in 1994 as a result of a 24% increase in oil and gas revenues.
General and administrative expenses increased $891,000 or 39%, in 1994 compared to 1993, due primarily to the acquisition of oil and gas properties and the expansion of the Company's developmental drilling and workover activities.
Depreciation, depletion and amortization increased $1.6 million, or 18%, as a result of increased sales volumes stemming from the acquisition of the Pennzoil Properties and other oil and gas properties acquired in the third quarter of 1994, and which was partially offset by high depletion charges on the Company's Austin Chalk wells which were contributed to Horizon in 1994.
Interest expense increased by $969,000, or 109%, in 1994 as a result of the increase in the average outstanding advances under the Company's revolving credit facility and increases in interest rates.
Other expenses increased $321,000, or 228%, in 1994 primarily as a result of $150,000 in expenses associated with a merger agreement with Parker & Parsley Petroleum Company, which agreement was mutually terminated in 1995, and a $200,000 provision for litigation expense.
Recent Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121 ("FAS 121"), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." Effective for fiscal years beginning after December 15, 1995, FAS 121 establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles and goodwill related to such assets. The Company will adopt FAS 121 in 1996. Management believes that the impact of this pronouncement on the Company's consolidated financial statements will not be material.
In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 ("FAS 123"), "Accounting for Stock-Based Compensation." FAS 123 establishes a fair value method and disclosure standards for stock-based employee compensation arrangements, such as stock purchase plans and stock options. As allowed by FAS 123, the Company will continue to follow the provisions of Accounting Principles Board Opinion No. 25 for such stock- based compensation arrangements and will disclose the pro forma effects of applying FAS 123 for 1995 and 1996 in its 1996 financial statements.
Capital Resources and Liquidity
Subject to change in the event the proposed Merger with HS Resources is consummated, the Company intends to continue expanding its reserve base through acquisitions of producing oil and gas properties, developmental drilling and workover programs. Sources of capital for such expansion include internally- generated cash flow from operations and borrowing capacity under the Company's revolving credit facility. At December 31, 1995, the Company had positive working capital of $4.4 million, long-term debt of $40.8 million, and stockholders' equity of $74.5 million. The Company's principal source of cash flow is the production and sale of its crude oil and natural gas reserves, which are depleting assets. Cash flow from oil and gas sales depends upon the quantity of production and the price obtained for such production. An increase in prices permits the Company to finance its operations to a greater extent with internally-generated funds. A decline in prices reduces the cash flow generated by operations, which in turn reduces the funds available for servicing debt, acquiring additional properties and exploring for and developing new reserves. At December 31, 1994, the Company had positive working capital, long-term debt, and stockholders' equity of $3.0 million, $32.3 million, and $70.5 million, respectively.
Net cash provided by operating activities was $11.9 million, $17.7 million and $24.1 million for the years ended December 31, 1993, 1994, and 1995, respectively. The increase in 1995 was primarily due to an increase in operating income.
Capital Expenditures
The Company's ability to finance its oil and gas acquisitions is determined by its cash flow from operations and sources of debt financing. Subject to change in the event the proposed Merger is consummated, the Company presently budgets capital expenditures in 1996 of approximately $10.0 million for oil and gas property acquisitions and approximately $17.0 million for drilling and enhancement activities. The timing of most capital expenditures is discretionary because the Company has no material long-term commitments. Thus, the Company has the flexibility to adjust expenditure levels as conditions warrant. The Company uses internally-generated cash flow to fund capital expenditures associated with the development and enhancement of existing properties. In the event the Company's internally-generated cash flow should be otherwise insufficient to meet its debt service or other obligations, the Company may reduce the level of discretionary capital expenditures in order to meet such obligations. The level of the Company's capital expenditures can vary, depending on energy market conditions, potential return on investment, and other related economic factors. The Company believes that its cash flow and available credit capacity will be sufficient to fund the budgeted capital expenditures and debt service for 1996.
Net cash used in investing activities was $40.0 million, $27.8 million and $26.6 million for the years ended December 31, 1993, 1994, and 1995, respectively. The decrease in net cash used in investing activities in 1995 was primarily due to a $2.3 million increase in the amount of proceeds from the sale of assets offset by a $2.5 million increase in capital expenditures and a $1.3 million decrease in contributions to Horizon. Of the $29.9 million in capital expenditures for 1995, $13.4 million was spent on developmental drilling and enhancement activities, $16.0 million on producing property acquisitions, and $500,000 on other assets.
Financing Arrangements
Certain banks have provided the Company with a revolving credit facility, which is secured by substantially all of the Company's oil and gas assets, and is renewable on July 1 of each year. At December 31, 1995, the outstanding principal balance under the facility was $40.8 million. On a semi-annual basis, the banks redetermine the Company's borrowing base based upon their review of the Company's reserves. In the event of non-renewal, the outstanding advances will be convertible into a three-year term loan. The unused and available portion of the revolving commitment under the Company's bank credit facility was $39.2 million at December 31, 1995 and $43.0 million on March 15, 1996. The unused portion of the Company's revolving credit facility provides liquidity to finance future acquisitions. The Company expects that cash flow from operations which is not utilized for capital expenditures will be used to reduce indebtedness.
At December 31, 1995, the borrowing base under the revolving facility was $80.0 million. Advances under the revolving credit facility bear interest, payable monthly, at a floating rate based on the prime rate or, at the Company's option, at a fixed rate for up to six months based on the Eurodollar market rate ("LIBOR"). The Company's interest rate increments above LIBOR vary based on the level of outstanding advances and the borrowing base at the time. In addition, the Company must pay a quarterly standby
commitment fee of .25% to .375%, depending upon the relationship of outstanding borrowing to the borrowing base.
The Company has a total of $40 million notional amount hedged through interest rate swaps for five years beginning in 1995 and continuing through 1999. The effective interest rates to be paid by the Company on its interest rate swaps are 7.9% for 1995, 8.7% for 1996, and 8.8% for 1997 through 1999.
On December 20, 1993, the Company's wholly-owned subsidiary, Tide West Trading, completed a $5.0 million letter of credit facility, all of which was available on December 31, 1995.
Net cash provided by financing activities was $27.4 million, $10.0 million, and $5.9 million for the years ended December 31, 1993, 1994, and 1995, respectively. The cash provided by financing activities for the year ended December 31, 1993, consisted primarily of $31.9 million in proceeds from the Company's Common Stock offering offset by a $4.4 million reduction in long-term debt, compared with a $10.0 million net increase in long-term debt in 1994, and for 1995, an $8.5 million net increase in long-term debt offset by Common Stock repurchases of $2.7 million.
The Company's existing debt and credit agreements contain covenants which limit the amount of additional indebtedness the Company may incur, restrict acquisitions and sales of oil and gas properties above a certain amount, and restrict dividends to 30% of cash flow.
Item 8.
Item 8. Financial Statements and Supplementary Data.
See "Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K."
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant.
Set forth below is certain information with respect to each director and executive officer of the Company. Each director is elected for a one-year term. Executive officers are elected by the Board of Directors and serve at its discretion.
Name Age Position - ---- --- --------
Philip B. Smith.............. 44 Director, President and Chief Executive Officer
Robert H. Mase............... 42 Director and Vice President-Acquisitions
Douglas J. Flint............. 39 Director and Vice President-Operations
R. Gamble Baldwin............ 73 Director
David R. Albin............... 36 Director
Kenneth A. Hersh............. 33 Director
Robert A. Curry.............. 48 Director
Peggy E. Gwartney............ 37 Chief Financial Officer, Controller, Treasurer and Secretary
The following is a brief description of the business background of each of the directors and executive officers of the Company.
Mr. Philip B. Smith has been President, Chief Executive Officer and a Director of the Company since November 20, 1992. He has been President and a director of Draco Petroleum, a wholly-owned subsidiary of the Company, since April 1991 and of Tide West Trading, formerly Draco Production Company, a wholly-owned subsidiary of the Company, since July 1989. From May 1986 until April 1991, Mr. Smith was a Senior Vice President of Mega Natural Gas Company, a natural gas gathering company and the former parent company of Tide West Trading and its predecessor companies ("Mega"). Prior to that time, he held various technical and management positions at other independent and major oil and gas companies.
Mr. Robert H. Mase has been a Vice President and a Director of the Company since November 20, 1992. He has been a Vice President and a director of Draco Petroleum and a director of Tide West Trading since April 1991. He has been a Vice President of Tide West Trading since June 1990. From March 1990 until June 1990, Mr. Mase was employed by Tide West Trading as manager of acquisitions and land. From July 1981 until March 1990, he was a Vice President and land manager at Oakland Petroleum, an independent oil and gas company.
Mr. Douglas J. Flint has been a Vice President and a Director of the Company since November 20, 1992. He served as Secretary of the Company from November 1992 until September 1994. From February 1986 until November 1992, he was President and a director of Old Tide West. From September 1986 until February 1988, Mr. Flint was President, and from February 1981 until September 1986, he was Vice President, of Square D Drilling & Production, Inc., a former wholly- owned subsidiary of Old Tide West.
Mr. R. Gamble Baldwin has been a Director of the Company since November 20, 1992. Since November 1988, he has been the general partner of G.F.W. Energy, L.P. ("GFW"), the general partner of NGP, an investment fund organized to make equity-related investments in the North American oil and gas industry. Mr. Baldwin is also a member/manager of two limited liability companies which are the general partners of the general partners of Natural Gas Partners II, L.P. (formed in June 1994) ("NGP II") and Natural Gas Partners III, L.P. (formed in May 1995) ("NGP III"), limited partnerships which similarly invest in the North American oil and gas industry, and is active in the management of NGP II and NGP III. From 1974 until November 1988, Mr. Baldwin was a Managing Director of The First Boston Corporation, an investment banking firm, specializing in all aspects of the natural gas business. Mr. Baldwin has been a member of the International Advisory Board of Creditanstalt Bankverein, of Vienna, Austria, since 1984, and a director of Coflexip Stena Offshore, a provider of advanced technology oilfield equipment and service, since 1993.
Mr. David R. Albin has been a Director of the Company since November 20, 1992. Since November 1988, he has been a limited partner of GFW and has been responsible for the management of NGP's portfolio. Mr Albin is also a member/manager of the two limited liability companies which are the general partners of the general partners of NGP II and NGP III and co-manages the portfolios of NGP II and NGP III. From December 1984 until November 1988, Mr. Albin was employed by Bass Investment Limited Partnership, an investment partnership, where he was also responsible for portfolio management.
Mr. Kenneth A. Hersh has been a Director of the Company since November 20, 1992. Since March 1989, he has been a limited partner of GFW and has co-managed NGP's portfolio. Mr. Hersh is also a member/manager of the two limited liability companies which are the general partners of the general partners of NGP II and NGP III and co-manages the portfolios of NGP II and NGP III. During 1988, he was a consultant with McKinsey & Co., a management consulting firm. From August 1985 until August 1987, Mr. Hersh was employed by the investment banking division of Morgan Stanley & Co., where he was a member of that firm's energy group, specializing in oil and gas financing and acquisition transactions. Mr. Hersh currently serves as a director of HS Resources, an independent oil and gas company.
Mr. Robert A. Curry has been a Director of the Company since November 20, 1992. He has been a shareholder and a director of the law firm of Conner & Winters, A Professional Corporation, in Tulsa, Oklahoma since February 1992. From 1975 until February 1992, he was employed by the law firm of Hall, Estill, Hardwick, Gable, Golden & Nelson, P.C., in Tulsa, Oklahoma.
Ms. Peggy E. Gwartney was named Chief Financial Officer of the Company, in conjunction with her positions as Controller, Secretary and Treasurer, in January 1995. She has been Treasurer and Controller of the Company since the closing of the Draco Transaction in November 1992 and Secretary beginning September 1994. She has been Controller of Draco Petroleum and Tide West Trading since April 1991. From May 1981 until April 1991, she was employed by Mega as a senior accountant. Ms. Gwartney is a Certified Public Accountant.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's directors and executive officers, and persons who own more than ten percent of the Company's Common Stock to report their initial ownership of Common Stock and any subsequent changes in that ownership to the Securities and Exchange Commission ("SEC") and to furnish the Company with a copy of each such report. SEC regulations impose specific due dates for such reports, and the Company is required to disclose any failure to file such reports by their due dates during and for fiscal year 1995.
To the Company's knowledge, based solely on review of the copies of such reports furnished to the Company and written representations that no other reports were required, all Section 16(a) filing requirements applicable to its officers, directors and more than ten percent stockholders were complied with during and for fiscal year 1995.
Item 11.
Item 11. Executive Compensation.
The following tables set forth information relating to compensation paid by the Company during the fiscal years ended December 31, 1993, 1994 and 1995, to its chief executive officer and to its other executive officers who earned, in salary and bonuses, more than $100,000 for services rendered during 1995.
Summary Compensation Table
(1) Other annual compensation paid or distributed did not exceed the lesser of $50,000 or 10% of the executive's annual salary and bonus.
(2) Represents the Company's contribution to such officer's account under its 401(k) Plan.
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values
- ------------------- (1) The product of (a) the difference between (i) the per share Option exercise price, and (ii) the per share market price of Common Stock on December 29, 1995 ($13.375); and (b) the number of shares of Common Stock underlying the unexercised in-the-money Options outstanding at December 31, 1995.
Compensation of Directors
Employee directors receive no additional compensation for serving on the Board of Directors or any committee thereof. Non-employee directors receive an annual retainer of $10,000 and are reimbursed for expenses they incur to attend meetings of the Board of Directors and committees thereof. The Company's Certificate of Incorporation and By-laws provide for mandatory indemnification of directors and officers to the fullest extent permitted by Delaware law. The Company also has entered into indemnification agreements with, and carries liability insurance on behalf of, all of its directors and officers.
Compensation Committee Interlocks and Insider Participation
Mr. Smith, President and Chief Executive Officer of the Company, is a member of the Compensation Committee and participates in deliberations concerning executive officer compensation. The other two members of the Compensation Committee, Messrs. Albin and Curry, are outside directors of the Company. No executive officer of the Company served on the Stock Option Committee during 1995 or is currently serving on such Committee.
In January 1993, the Company and NGP entered into a financial advisory services contract whereby NGP provides financial advisory services to the Company for a quarterly fee of $12,500. The Company has also indicated that it will pay NGP a completion bonus of $150,000 upon the completion of a sale of the Company. Messrs. Albin and Hersh are limited partners of GFW, the general partner of NGP, and co-manage NGP's portfolio. For details of these transactions, see "Item 13. Certain Relationships and Related Party Transactions." The law firm of Conner & Winters, A Professional Corporation, of which Mr. Curry is a shareholder and director, has regularly performed legal services as counsel to the Company since November 20, 1992.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information, as of March 15, 1996, regarding ownership of the Company's Common Stock by (a) all persons known by the Company to be beneficial owners of more than five percent of such stock, (b) each director of the Company, (c) each of the executive officers of the Company named in the Summary Compensation Table above, and (d) all executive
officers and directors of the Company as a group. Unless otherwise noted, the persons named below have sole voting and investment power with respect to such shares:
- --------------- (1) Excludes 340,500 shares owned by Douglas J. Flint which have been pledged to NGP in connection with a loan by NGP to Mr. Flint. NGP disclaims beneficial ownership of such shares. NGP's address is 777 Main Street, Suite 2700, Fort Worth, Texas 76102.
(2) The stockholder has sole dispositive power with respect to the indicated shares, but shares voting power with HS Resources (only as to 344,000 shares, for Mr. Smith) pursuant to an irrevocable proxy as to certain matters granted by the stockholder in connection with the proposed Merger of the Company with a subsidiary of HS Resources. See "Items 1 and 2. Business and Properties-Recent Developments." The address of HS Resources is One Maritime Plaza, 15th Floor, San Francisco, California 94111.
(3) Includes (i) 150,000 shares subject to stock options which are currently exercisable at an average exercise price of $7.80 per share, and (ii) 85,000 shares held by Mr. Smith, as trustee of two trusts for benefit of his children, and as to which he has sole dispositive and voting power.
(4) Includes 10,000 shares owned by Mr. Flint that are subject to a currently exercisable purchase option granted to a former executive officer and director of Old Tide West and 157,875 shares subject to stock options which are currently exercisable at an average exercise price of $7.82 per share, and excludes 8,000 shares held by Mr. Flint's wife, as custodian for their children, as to which he disclaims beneficial ownership.
(5) Includes 180,000 shares subject to stock options which are currently exercisable at an average exercise price of $7.67 per share.
(6) Mr. Baldwin is the sole general partner of GFW, the sole general partner of NGP. Therefore, Mr. Baldwin and GFW are deemed to be the beneficial owners of all shares beneficially owned by NGP. GFW's address is 777 Main Street, Suite 2700, Fort Worth, Texas 76102. Mr. Baldwin's address is 115 East Putnam Avenue, Greenwich, Connecticut 06830.
(7) Includes 499,858 shares subject to stock options which are currently exercisable at an average exercise price of $7.79 per share. Excludes 8,000 shares held by Mr. Flint's wife, as custodian for their children, as to which he disclaims beneficial ownership.
Changes in Control
On February 25, 1996, the Company entered into the Merger Agreement with HS Resources, whereby the Company is to be merged with and into a subsidiary of HS Resources, with the Company's stockholders receiving $8.75 of cash and .6295 of a share of HS Resources common stock for each share of the Company's Common Stock, subject to adjustments in certain events. Certain stockholders of the Company (holding, in the aggregate, more than 50% of the outstanding shares of Common Stock) have agreed with HS Resources to, among other things, vote shares representing a majority of the outstanding Common Stock in favor of the Merger. See "Items 1 and 2. Business and Properties - Recent Developments - Merger Agreement" for more details of the proposed Merger.
Item 13.
Item 13. Certain Relationships and Related Party Transactions.
Effective December 1, 1992, the Company acquired (a) from NGP, the limited partner interest in Draco in exchange for 4,550,000 shares of Common Stock (approximately 76% of the Company's then outstanding Common Stock), and (b) from Messrs. Smith and Mase, all of the issued and outstanding stock of Draco Petroleum, the sole general partner of Draco, in exchange for 489,558 and 122,389 shares of Common Stock, respectively. The stock of Draco Petroleum was acquired by Messrs. Smith and Mase in April 1991. Mr. Smith's interest in Draco Petroleum was acquired in exchange for shares of common stock of Mega owned by Mr. Smith. Mr. Mase acquired his interest in Draco Petroleum using $97,500 borrowed from Draco. Such loan was secured by the Draco Petroleum stock purchased by Mr. Mase. On November 20, 1992, the loan was assigned by Draco to the Company as part of a distribution in liquidation of Draco. The loan, which bears interest, payable quarterly, at a rate equal to the base lending rate of the Company's bank, is now secured by 20,000 shares of Common Stock owned by Mr. Mase. The largest amount outstanding under the loan during fiscal year 1995 was $65,250 on January 1, 1995. The outstanding principal balance of Mr. Mase's loan at December 31, 1995, was $50,000. The loan is repayable in 20 equal quarterly installments which commenced on June 1, 1993.
Effective January 1, 1993, the Company and NGP entered into a financial advisory services contract whereby NGP provides financial advisory services to the Company for a quarterly fee of $12,500. In addition, NGP is reimbursed for its out-of-pocket expenses incurred in performing such services. The agreement is renewable annually and can be terminated by NGP or the Company at the end of any fiscal quarter. Under the agreement, NGP assists the Company in managing its public and private financing activities, its public financial reporting obligations, its budget planning processes, and its investor relations program, as well as providing ongoing strategic advice. NGP has not received any other transaction-related compensation for its advisory assistance to the Company. However, at the time the Company's Board of Directors determined and publicly announced that the Company would be sold, the Board of Directors decided to pay NGP a completion bonus of $150,000 upon the completion of the sale of the Company, in recognition of the extra effort required by NGP to prepare the Company for sale.
The law firm of Conner & Winters, A Professional Corporation, has regularly performed legal services as counsel to the Company since November 20, 1992. Robert A. Curry, a Director of the Company, is a shareholder and director of Conner & Winters.
Sandia Energy Corporation ("Sandia"), a drilling contractor which Old Tide West utilized to drill wells operated by Old Tide West, filed for reorganization under Chapter 11 of the United States Bankruptcy Code on March 2, 1992. Sandia is wholly-owned by Donald J. Flint, the brother of Douglas J. Flint, who was then the President and a director of Old Tide West. A second bankruptcy petition with respect to Sandia was filed and approved on October 26, 1994. Under the second bankruptcy plan, the Company elected to receive the amount of its unsecured claim from revenues from Sandia's royalty interest in an oil and gas property. At the time of the second bankruptcy filing, Sandia owed the Company $141,000 in receivables from operating and prepaid drilling costs. The Company expects to receive periodic payments in satisfaction of its claim beginning in 1996.
The Company's By-laws currently provide that, in the event the Company enters into a transaction or loan involving more than $10,000 in consideration or value with or involving any of its officers, directors, affiliates or stockholders in the future, such transaction or loan must be undertaken on terms no less favorable to the Company than those generally available from unaffiliated third parties, and that such transaction or loan must be approved by a majority of the members of the Board of Directors not having any interest in the transaction.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) (1) Financial Statements:
The financial statements are listed in the accompanying Index to Financial Statements and are filed as a part of this Form 10-K.
(2) Financial Statement Schedules:
All schedules are omitted as inapplicable or because the required information is included in the Consolidated Financial Statements or notes thereto.
(3) Exhibits:
The following documents are included as exhibits to this Form 10-K. Those exhibits below incorporated by reference herein are indicated as such by the information supplied in the parenthetical thereafter. If no parenthetical appears after an exhibit, such exhibit is filed herewith.
2.1 Agreement and Plan of Merger dated February 25, 1996, between H.S. Resources, Inc., HSR Acquisition, Inc. and the Company.
3.1 Certificate of Incorporation of the Company (filed as Exhibit 4.1 to the Company's Current Report on Form 8-K dated November 20, 1992 (the "1992 Form 8-K")).
3.2 Amendment to Certificate of Incorporation dated January 29, 1993 (effective February 1, 1993) (filed as Exhibit 3.2 to the Company's Registration Statement on Form S-1, No. 33-57058 (the "S-1 Registration Statement")).
3.3 Restated By-laws of the Company (filed as Exhibit 3.3 to the S-1 Registration Statement).
4.1 Form of stock certificate for the Company's Common Stock, par value $.01 per share (filed as Exhibit 4.1 to the S-1 Registration Statement).
10.1 Second Amended and Restated Credit Agreement dated June 15, 1995, between the Company, as borrower, and Union Bank, Colorado National Bank, Texas Commerce Bank, National Association, and Den norske Bank AS, as lenders, and Union Bank, as agent (filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q dated August 11, 1995 (the "Second Quarter 1995 Form 10-Q")).
10.2 First Amendment to Second Amended and Restated Credit Agreement dated December 21, 1995, between the Company, as borrower, and Union Bank, Colorado National Bank, Texas Commerce Bank, National Association, and Den norske Bank AS, as lenders, and Union Bank, as agent.
10.3 Credit Agreement dated December 23, 1993, between Tide West Trading & Transport Company, as borrower, and Union Bank, Colorado National Bank and Den norske Bank AS, as lenders, and Union Bank, as agent (filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q dated August 12, 1994).
10.4 First Amendment to Credit Agreement dated December 19, 1994, between Tide West Trading & Transport Company, as borrower, and Union Bank, Colorado National Bank and Den norske Bank AS, as lenders, and Union Bank, as agent (filed as Exhibit 10.9 to the Company's Annual Report on Form 10-K dated March 30, 1995 (the "1994 Form 10-K")).
10.5 Second Amendment to Credit Agreement dated February 17, 1995, between Tide West Trading & Transport Company, as borrower, and Union Bank, Colorado National Bank, and Den norske Bank AS, as lenders, and Union Bank, as agent (filed as Exhibit 10.10 to the 1994 Form 10-K).
10.6 Third Amendment to Credit Agreement dated March 17, 1995, among Tide West Trading & Transport Company, as borrower, Union Bank, Den norske Bank AS and Colorado National Bank, as lenders, and Union Bank, as agent (filed as Exhibit 10.3 to the Second Quarter 1995 Form 10-Q).
10.7 Fourth Amendment to Credit Agreement dated April 17, 1995, among Tide West Trading & Transport Company, as borrower, Union Bank, Den norske Bank AS and Colorado National Bank, as lenders, and Union Bank, as agent (filed as Exhibit 10.2 to the Second Quarter 1995 Form 10-Q).
10.8 Limited Partnership Agreement dated December 28, 1993, between the Company and Horizon Natural Resources, Inc. (filed as Exhibit 10.7 to Company's Annual Report on Form 10-K dated March 30, 1994 (the "1993 Form 10-K")).
10.9* Registration Rights Agreement dated November 20, 1992, among the Company, Natural Gas Partners, L.P. ("NGP"), Philip B. Smith and Robert H. Mase (filed as Exhibit 10.2 to the S-1 Registration Statement).
10.10* Shareholders' Agreement dated November 19, 1992, among NGP, Philip B. Smith, Robert H. Mase and Douglas J. Flint (filed as Exhibit 28 to the 1992 Form 8-K).
10.11* Promissory Note dated May 31, 1991, between Draco Gas Partners, L.P. ("Draco"), as lender, and Robert H. Mase, as borrower, and Assignment thereof by Draco to the Company, dated November 20, 1992 (filed as Exhibit 10.6 to the S-1 Registration Statement).
10.12* Security Agreement dated November 20, 1992, between the Company, as secured party, and Robert H. Mase (filed as Exhibit 10.7 to the S-1 Registration Statement).
10.13 Financial Advisory Services Contract dated January 1, 1993, between the Company and NGP (filed as Exhibit 10.8 to the S-1 Registration Statement).
10.14 First Amendment to Financial Advisory Services Contract dated January 1, 1994, between the Company and NGP (filed as Exhibit 10.13 to the 1993 Form 10-K).
10.15* Form of Indemnification Agreement dated as of November 20, 1992, between the Company and each of its officers and directors (filed as Exhibit 10.9 to the S-1 Registration Statement).
10.16* The Company's 1991 Stock Option Plan and Amendment No. 1 thereto (filed as Exhibit 10.10 to the S-1 Registration Statement).
10.17* Amendment No. 2 to the Company's 1991 Stock Option Plan (filed as Exhibit 4(e) to the Company's Registration Statement on Form S-8, No. 33-73020).
10.18* Amendment No. 3 to the Company's 1991 Stock Option Plan (filed as Exhibit 10.17 to the 1993 Form 10-K).
10.19* Form of Stock Option Agreement under the Tide West Oil Company 1991 Stock Option Plan (filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q dated November 11, 1994).
10.20 Form of Warrant Agreement between the Company and American Securities Transfer, Incorporated, dated June 21, 1991 (filed as Exhibit 10.11 to the S-1 Registration Statement).
10.21 First Supplement and Amendment to Warrant Agreement between the Company and The First National Bank of Boston dated March 14, 1994 (filed as Exhibit 10.20 to the 1993 Form 10-K).
10.22 Form of Purchase Warrant dated June 21, 1991, issued to Paulson Investment Company, Inc. and affiliates (filed as Exhibit 10.12 to the S-1 Registration Statement).
21. Subsidiaries of the Company.
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of Netherland, Sewell & Associates, Inc.
27. Financial Data Schedule.
----------- * Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the fourth quarter of the fiscal year ended December 31, 1995.
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.
TIDE WEST OIL COMPANY
Date: March 25, 1996 By: /s/ Philip B. Smith --------------------------- Philip B. Smith President
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:
Signature Title Date
/s/ Philip B. Smith Director and President March 25, 1996 - -------------------------- (Principal Executive Officer) Philip B. Smith
/s/ Robert H. Mase Director and Vice President March 25, 1996 - -------------------------- Robert H. Mase
/s/ Douglas J. Flint Director and Vice President March 25, 1996 - --------------------------- Douglas J. Flint
/s/ Peggy E. Gwartney Chief Financial Officer, March 25, 1996 - --------------------------- Controller and Treasurer Peggy E. Gwartney (Principal Financial Officer and Principal Accounting Officer)
/s/ R. Gamble Baldwin Director March 25, 1996 - --------------------------- R. Gamble Baldwin
/s/ David R. Albin Director March 25, 1996 - --------------------------- David R. Albin
/s/ Kenneth A. Hersh Director March 25, 1996 - --------------------------- Kenneth A. Hersh
/s/ Robert A. Curry Director March 25, 1996 - --------------------------- Robert A. Curry
TIDE WEST OIL COMPANY
Page ---- Independent Auditors' Report.........................................
Consolidated Balance Sheets as of December 31, 1994 and 1995.........
Consolidated Statements of Income for the years ended December 31, 1993, 1994, and 1995....................................
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1993, 1994, and 1995....................................
Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994, and 1995....................................
Notes to Consolidated Financial Statements........................... -
Independent Auditors' Report
To the Stockholders of Tide West Oil Company
We have audited the accompanying consolidated balance sheets of Tide West Oil Company and subsidiaries (the "Company") as of December 31, 1994 and 1995, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 1994 and 1995, 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.
As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for income taxes effective January 1, 1993 to conform with Statement of Financial Accounting Standards No. 109.
Deloitte & Touche LLP Tulsa, Oklahoma February 26, 1996
TIDE WEST OIL COMPANY
Consolidated Balance Sheets
See accompanying notes to consolidated financial statements.
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Consolidated Statements of Income
See accompanying notes to consolidated financial statements.
TIDE WEST OIL COMPANY
Consolidated Statements of Stockholders' Equity Years ended December 31, 1993, 1994 and 1995
See accompanying notes to consolidated financial statements.
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Consolidated Statements of Cash Flows
See accompanying notes to consolidated financial statements.
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Notes to Consolidated Financial Statements Years ended December 31, 1993, 1994 and 1995
1. Organization, Business Combinations, and Stockholders' Equity
Organization Tide West Oil Company (the "Company") is an independent oil and gas company focused on the acquisition and enhancement of producing oil and gas properties. The Company's principal operations are conducted in the Anadarko Basin, Arkoma Basin, the Southern Oklahoma Region, and the Texas/New Mexico Region. The Company also has a natural gas marketing subsidiary.
Prices received by the Company for sales of oil and natural gas fluctuate significantly from period to period. Relatively modest changes in either oil or gas prices can significantly impact the Company's results of operations and cash flow. The prices of natural gas are influenced by weather conditions and supply imbalances, particularly in the domestic market, and by world-wide oil price levels. Declines in natural gas or oil prices could adversely affect the semi- annual borrowing base determination under the Company's current credit agreement.
Business Combinations On April 10, 1995, Killgore Investments, Inc. ("Killgore") was merged with and into the Company, and 149,538 shares of the Company's common stock were issued in exchange for all of the outstanding common stock of Killgore. The merger was accounted for as a pooling of interests. Financial statements for prior periods were not restated because the effect of this business combination was not material.
Stockholders' Equity On January 28, 1993, the Company completed a 1-for-10 reverse common stock split. All common stock and per share amounts in the accompanying consolidated financial statements have been restated to reflect this reverse split.
In March 1993, the Company completed a stock offering of 3.45 million shares of common stock which yielded net proceeds of $31.9 million.
During 1995, the Company purchased 266,000 shares of its common stock for $2.7 million. The shares were retired at December 31, 1995.
2. Summary of Significant Accounting Policies
Principles of Consolidation The financial statements include the accounts of the Company's majority-owned subsidiaries, Tide West Trading & Transport Company ("Tide West Trading"), Draco Petroleum, Inc., and, for 1995, Horizon Gas Partners, L.P. ("Horizon"), after elimination of all material inter-company transactions and balances.
Management Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents Cash and cash equivalents include cash and interest bearing time deposits with original maturities of three months or less.
Commodity Transactions From time to time, the Company hedges the price of a portion of its future oil and gas production with commodity price swap contracts and futures contracts. Gains and losses on contracts which effectively hedge the sales price of future production are deferred and included in income
TIDE WEST OIL COMPANY
in the period that was hedged. Other commodity contracts that do not qualify as hedges are recorded at market value and gains or losses are recognized currently. Margin deposits on futures are recorded as other current assets. At December 31, 1995, the Company had covered all of its significant commodity transactions with offsetting contracts.
Interest Rate Swaps Interest rate swaps are entered into primarily as a hedge against interest rate fluctuations on variable rate debt. The amounts to be paid or received on swaps are included in interest expense as payments are made or received.
Marketing Natural gas is sold primarily on the spot market to a variety of purchasers, including intrastate and interstate pipelines, their marketing affiliates and other independent marketing companies. Based on actual pipeline deliveries and receipts, pipeline imbalance positions occur in the normal course of business. These positions are reflected as natural gas inventories or liabilities depending on the net position. The revenues and the associated expenses of Tide West Trading are presented under the heading "trading and transportation."
Gas Imbalances Gas imbalances are accounted for under the sales method whereby revenues are recognized based on actual production sold. The proved reserves are adjusted for any significant volume imbalances existing on the property for purposes of determining depletion and any required valuation allowances. At December 31, 1995, the Company's gas balancing position was approximately 840,000 Mcf overproduced.
Property and Equipment The Company follows the successful efforts method of accounting for oil and gas producing activities. Under this method, property acquisition costs, costs of productive exploratory wells and all development costs (including lease acquisition, tangible, and intangible costs) are capitalized. These costs are amortized on a physical unit-of-production basis at the field level using proved oil and gas reserves estimates. All costs associated with unsuccessful exploratory wells, geological and geophysical costs, and delay rentals are expensed as incurred.
Valuation allowances are provided if the net capitalized costs of oil and gas properties at the field level exceed their estimated realizable values based on the undiscounted future net revenues. Unproved oil and gas properties are periodically assessed for impairment of value at the field level and, if necessary, a loss is recognized by providing an allowance.
Other property and equipment is recorded at cost and depreciated on the straight-line method based on the estimated useful lives of the assets ranging from three to eight years.
During the third quarter of 1995, the Company changed from the property-by- property basis to the field basis of applying the unit-of-production method to calculate depreciation, depletion and amortization ("DD&A") on producing oil and gas property. The field basis provides a better matching of expenses with revenues over the productive life of the properties, and, therefore, the Company believes the new method is preferable to the property-by-property basis. The effect of the accounting change was not material and prior interim periods were not restated. There was no material cumulative effect related to this change in computing DD&A at January 1, 1995.
DD&A per equivalent barrel of production from the Company's oil and gas properties for the years ended December 31, 1993, 1994 and 1995 was $4.50, $3.86 and $3.17, respectively.
Investments Effective January 1, 1995, the Company began consolidating Horizon into its financial statements. Horizon was accounted for under the equity method during 1994 (its first year of operations). The Company's remaining unconsolidated investment, at December 31, 1995, consists of a
TIDE WEST OIL COMPANY
17.9 percent limited partnership interest in an oil and gas partnership accounted for under the cost method.
Income Taxes The Company adopted Statement of Financial Accounting Standards ("FAS 109"), Accounting for Income Taxes on a prospective basis effective January 1, 1993. Prior to January 1, 1993, the Company accounted for income taxes under the provisions of Accounting Principles Board Opinion No. 11.
Under FAS 109, the Company accounts for income taxes on an asset and liability method which requires the recognition of deferred tax liabilities and assets for the tax effects of (a) temporary differences between tax bases and financial reporting bases of assets and liabilities, (b) operating loss carryforwards and (c) tax credit carryforwards.
Supplemental Disclosures of Cash Flow Information During the years ended December 31, 1993, 1994 and 1995, cash payments for interest totaled $880,000, $1.8 million, and $3.4 million, respectively, of which $230,000 was capitalized for the year ended December 31, 1995. No interest was capitalized during 1993 or 1994. Cash payments for income taxes totaled $2.2 million, $1.8 million, and $38,000 for the years ended December 31, 1993, 1994 and 1995, respectively. The Company received an income tax refund in the amount of $1.6 million in 1995.
Effective January 1, 1995, the Company began consolidating the accounts and operations of Horizon in the consolidated financial statements. On April 10, 1995, Killgore was merged with and into the Company, and 149,538 shares of the Company's common stock were issued in exchange for all the outstanding common stock of Killgore.
The following table presents the balance sheet accounts that were combined in the Company's consolidated balance sheet at the dates indicated:
Earnings Per Common Share Earnings per common share for the periods presented have been computed using the weighted average number of common shares outstanding. Outstanding stock options and warrants are included in the weighted average shares outstanding for all periods in which their effect on earnings per share is dilutive.
Reclassifications Certain reclassifications were made to the 1993 and 1994 financial statements to conform to the presentation used in 1995.
TIDE WEST OIL COMPANY
3. Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107 "Disclosures About Fair Value of Financial Instruments," requires disclosure of the fair value of certain financial instruments. The carrying value of short-term investments, accounts receivable, short-term borrowing, accounts payable and accrued liabilities approximates fair value. The carrying value of long-term debt is also considered to approximate fair value based on its current interest rate and terms. The estimated fair value amounts of the Company's off-balance sheet financial instruments have been determined by the Company, using appropriate market information and valuation methodologies. Considerable judgment is required to develop the estimates of fair value, thus, the estimates provided herein are not necessarily indicative of the amounts that could be realized in a current market exchange. At December 31, 1995, the Company had interest rate swaps which, if terminated on that date, would result in a loss of approximately $2.0 million.
4. Property and Equipment
Property and equipment consists of the following:
Costs incurred in oil and gas property acquisitions and development activities are as follows:
The Company did not incur any exploration costs during the three years ended December 31, 1995.
TIDE WEST OIL COMPANY
5. Long-Term Debt
Long-term debt consists of the following:
The revolving credit facility is secured by substantially all of the Company's oil and gas assets.
In June and December of each year, the borrowing base, as defined under the revolving credit facility, is redetermined by the banks based upon their review of the Company's oil and gas reserves. The amount of the revolving commitment and borrowing base was $80.0 million at December 31, 1995. The Company must pay a quarterly standby commitment fee of 0.25% to 0.375%, depending upon the relationship of borrowings to the borrowing base. The revolving credit facility is renewable on July 1 of each year. In the event the facility is not renewed, the balance outstanding, not to exceed the borrowing base, will be converted to a three-year term note. Advances under the revolving credit facility bear interest, payable monthly, at a floating rate based on the prime rate or, at the Company's option, at a fixed rate for up to six months based on the Eurodollar market rate ("LIBOR"). The Company's interest rate increments above LIBOR vary based on the level of outstanding advances and the borrowing base at the time of the fixed rate election.
On December 20, 1993, the Company's wholly-owned subsidiary, Tide West Trading, obtained a $5.0 million letter of credit facility. No amounts were outstanding under this facility at December 31, 1994 or 1995.
The Company fixed the interest rate on $40 million notional amount of debt through interest rate swaps for five years beginning in 1995 and continuing through 1999. The effective interest rates to be paid by the Company on its interest rate swaps were 7.9% for 1995, and are 8.7% for 1996, and 8.8% for 1997 through 1999.
The Company's credit agreement contains covenants which limit the amount of additional indebtedness the Company may incur, restrict acquisitions and sales of oil and gas properties above a certain amount, and restrict dividends to 30% of cash flow. The Company was in compliance with all such covenants at December 31, 1995.
TIDE WEST OIL COMPANY
6. Income Taxes
The Company's income tax expense consists of:
Deferred tax liabilities and assets at December 31, 1994 and 1995 are composed of the following:
The effect of adopting FAS 109 was to decrease net income by $946,000 ($0.10 per share) in 1993, not including the cumulative effect of $300,000.
The Company's income tax expense, for the years ended December 31, 1993, 1994 and 1995, differs from the amount computed by applying the statutory federal income tax rate for the following reasons:
The Company had net operating loss carryforwards at December 31, 1995, totaling approximately $3.4 million for federal income tax purposes. The tax loss carryforwards will be available to offset future federal income tax that would be otherwise payable. These carryforwards expire during the years 2000 through 2006. Substantially all of these carryforwards relate to operations prior to December 1, 1992. The Company's ability to use the carryforwards to offset future income is subject to certain restrictions resulting from the change in stock ownership which occurred in November 1992. These net operating loss carryforwards may be further limited as a result of the proposed merger as described in Note 15.
TIDE WEST OIL COMPANY
7. Stock Purchase Warrants
Effective June 28, 1991, the Company completed an offering to the public of common stock. The Company sold 1,400,000 units at $4.25 per unit, each unit consisting of two shares of common stock (or two-tenths of a share after adjustment for the one-for-ten reverse stock split) and two warrants, with each warrant exercisable to purchase one share of common stock (or one-tenth of a share on a post-split basis). Each warrant represents the right to purchase one- tenth of a share of common stock for $3.00. The warrants expire on June 21, 1996. In addition, the Company issued warrants to the underwriter. These warrants are exercisable at anytime during the four-year period commencing June 21, 1992, to purchase up to 140,000 units for $5.10 per unit, each unit consisting of two-tenths of a share of common stock and two stock purchase warrants, each exercisable to purchase one-tenth of a share of common stock for $3.00. Substantially all of the above-noted warrants were outstanding at December 31, 1995. Upon the exercise of any of these warrants after June 21, 1992, the Company has agreed to pay broker-dealers responsible for the exercise of warrants a fee of up to, but not in excess of, five percent of the aggregate exercise price of such warrants, if certain conditions are met.
8. Stock Option Plan
Effective May 31, 1991, the Company established the Tide West Oil Company 1991 Stock Option Plan (as amended, the "Plan"). The Plan provides for the granting of stock options ("Options"), including incentive stock options ("ISO Options"), with or without stock appreciation rights ("SARs"), and nonincentive stock options ("NSO Options"), with or without SARs, to employees and consultants of the Company, including employees who also serve as directors of the Company. The Plan will terminate on May 31, 2001. The total amount of common stock authorized and reserved for issuance under the Plan is 1,000,000 shares.
Options granted under the Plan are exercisable in such amounts, at such intervals and upon such terms as the option grant provides. The option price of the common stock may not be less than 85% (100% for ISO Options) of the fair market value of the shares on the date of grant of the option. However, if a participant owns more than 10% of the total combined voting power of all classes of capital stock of the Company, the exercise price of ISO Options may not be less than 110% of the fair market value of the common stock on the date of the grant, and such ISO Options expire five years after the date of grant.
Information with respect to options under the Plan follows:
TIDE WEST OIL COMPANY
At December 31, 1995, 754,589 shares were exercisable.
NSO Options were granted on December 11, 1992, September 16, 1993, November 16, 1993, January 19, 1995, and August 30, 1995, and vest over a three-year period at the rate of one-third per year. The difference between the exercise price of the December 11, 1992 options and the market value at date of grant ($1.125 per share) is being recognized as compensation expense ratably over the vesting period. The Options granted on December 11, 1992, vest over a four-year period at the rate of one-fourth per year. The options granted on September 16, 1993, November 16, 1993, January 19, 1995, and August 30, 1995, vest over a three-year period at a rate of one-third per year. All of the NSO and ISO Options expire on May 31, 2001.
At December 31, 1995, 62,160 shares were available for future grants under the Plan.
9. Commitments and Contingencies
The Company is a defendant in certain legal proceedings during the normal course of business. Management believes the disposition of these matters will not have a material adverse effect on the consolidated financial position or results of operations of the Company.
The Company leases office space under an operating lease expiring in October 1997. Rent expense was $81,705, $115,224 and $173,000 in 1993, 1994 and 1995, respectively. Minimum annual rental commitments at December 31, 1995, are $162,000 in 1996, and $152,000 in 1997, for an aggregate commitment of $314,000.
10. Significant Customers and Credit Risk
There were no purchasers in 1993 or 1995 representing more than 10% of total revenues. There was one natural gas purchaser in 1994 which represented 11% of the Company's total revenues. Financial instruments which potentially subject the Company to credit risk are primarily accounts receivable. Historically, the Company has not experienced significant losses related to receivables from individual purchasers or groups of purchasers.
11. Related Party Transactions
In 1994, the Company contributed certain minor oil and gas properties and the Company's interest in two limited partnerships, with a net book value and estimated fair market value totaling $9.7 million, to Horizon in return for a 95% limited partnership interest.
On July 6, 1994, the Company acquired from Merit Energy Partners II, L.P. ("Merit") certain oil and gas properties for $8.2 million. Natural Gas Partners, L.P., the Company's largest stockholder and who has three representatives on the Company's Board of Directors, was the majority limited partner of Merit.
12. Accounting Standards to be Adopted
In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121 ("FAS 121"), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." Effective for fiscal years beginning after December 15, 1995, FAS 121 establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles and goodwill related to such assets. The Company will adopt FAS 121 in 1996. Management believes that the effect of this pronouncement on the Company's consolidated financial statements will not be material.
TIDE WEST OIL COMPANY
In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 ("FAS 123"), "Accounting for Stock- Based Compensation." FAS 123 establishes a fair value method and disclosure standards for stock-based employee compensation arrangements, such as stock purchase plans and stock options. As allowed by FAS 123, the Company will continue to follow the provisions of Accounting Principles Board Opinion No. 25 for such stock-based compensation arrangements, and disclose the pro forma effects of applying FAS 123 for 1995 and 1996 in its 1996 financial statements.
13. Business Segments
The Company's operations include oil and gas exploration and production and gas marketing. Intersegment sales are generally made at prevailing market prices. The following table sets forth information with respect to the industry segments of the Company:
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14. Quarterly Financial Data (Unaudited)
The following is a summary of the unaudited quarterly financial information for the years ended December 31, 1994 and 1995:
15. Subsequent Event
On February 25, 1996, the Company entered into an agreement with HS Resources, Inc., a Delaware corporation ("HS Resources"), whereby the Company is to be merged with and into a subsidiary of HS Resources (the "Merger"). In the Merger, each share of the Company's common stock will be converted into .6295 of a share of HS Resources common stock and the right to receive a cash payment of $8.75 less 3% of the amount by which the average per share closing sales price of HS Resources common stock for the 10 trading days preceding the closing of the Merger exceeds $10.50, subject to adjustments in certain events. The Merger is subject to approval by the stockholders of the Company, and the issuance of HS Resources common stock pursuant to the Merger is subject to approval of the stockholders of HS Resources. Certain stockholders of the Company (holding, in the aggregate, more than 50% of the outstanding shares of common stock of the Company) have agreed with HS Resources to vote their shares representing a majority of the outstanding common stock in favor of the Merger.
At the time the Company's Board of Directors (the "Board") determined and publicly announced that the Company would be sold, the Board decided, and it was announced to the employees of the Company, that the Company would pay to each employee who is still employed by the Company at the closing date a completion bonus, payable immediately prior to the closing date (whether or not the employee is employed by the surviving corporation), in order to provide such employees with an incentive to remain in the employ of the Company and to help prepare the Company for sale. The amounts of such bonuses are, in the case of certain employees, measured in part by the market price of HS Resources common stock. The Board also decided to pay to Natural Gas Partners, L.P. ("NGP") (which acts as financial advisor to the Company) a fixed completion bonus in recognition of the extra effort required of NGP to prepare the Company for sale. The amount of all completion bonuses to be paid at closing, treating February 26, 1996 (the date of the public announcement of the execution of the Merger agreement), as the closing date, would be approximately $2.8 million.
TIDE WEST OIL COMPANY
16. Supplemental Information about Oil and Gas Producing Activities (Unaudited)
The following information summarizes the Company's net proved reserves of oil and gas and the present values thereof for the years ended December 31, 1993, 1994 and 1995. The information presented for 1993 and 1994 is based upon estimates prepared by Netherland, Sewell & Associates, Inc., which was engaged to perform an evaluation of approximately 80% of the present value of estimated future net cash flows before income tax (discounted at 10%), with the balance being estimated by the Company for those years. All of the reserve estimates for 1995 were prepared by the Company's engineers. The information was prepared in accordance with Statement of Financial Accounting Standards No. 69.
Prices of crude oil, condensate, and gas were those prices in effect at the respective dates. Estimated future production costs, which include lease operating costs and severance taxes (estimated assuming existing economic conditions will continue over the lives of the individual leases, with no adjustment for inflation), have been deducted in arriving at the estimated future net revenues. The present value amounts should not necessarily be equated with fair market value of the Company's oil and gas reserves. All reserves are located in the United States.
The reliability of any reserve estimate is a function of the quality of available information and of engineering interpretation and judgment. These reserves should be accepted with the understanding that subsequent drilling activities or additional information might require their revision.
TIDE WEST OIL COMPANY
The following schedules present certain data pertaining to the Company's proved reserves at December 31, 1993, 1994 and 1995:
Estimated Quantities of Proved Reserves:
Standardized Measure of Estimated Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves:
Estimated discounted future net cash flows before income taxes were $157.8 million at December 31, 1993, $132.6 million at December 31, 1994 (which includes the Company's proportionate share of equity method investee), and $231.7 million at December 31, 1995.
Changes in the Standardized Measure of Estimated Discounted Future Net Cash Flows from Proved Oil and Gas Reserves:
INDEX TO EXHIBITS
The following documents are included as exhibits to this Form 10-K. Those exhibits below incorporated by reference herein are indicated as such by the information supplied in the parenthetical thereafter. If no parenthetical appears after an exhibit, such exhibit is filed herewith.
Sequentially Exhibit Numbered Number Description Page
2.1 Agreement and Plan of Merger dated February 25, 1996, between H.S. Resources, Inc., HSR Acquisition, Inc. and the Company.
3.1 Certificate of Incorporation of the Company (filed as Exhibit 4.1 to the Company's Current Report on Form 8-K dated November 20, 1992 (the "1992 Form 8-K")).
3.2 Amendment to Certificate of Incorporation dated January 29, 1993 (effective February 1, 1993) (filed as Exhibit 3.2 to the Company's Registration Statement on Form S-1, No. 33-57058 (the "S-1 Registration Statement")).
3.3 Restated By-laws of the Company (filed as Exhibit 3.3 to the S-1 Registration Statement).
4.1 Form of stock certificate for the Company's Common Stock, par value $.01 per share (filed as Exhibit 4.1 to the S-1 Registration Statement).
10.1 Second Amended and Restated Credit Agreement dated June 15, 1995, between the Company, as borrower, and Union Bank, Colorado National Bank, Texas Commerce Bank, National Association, and Den norske Bank AS, as lenders, and Union Bank, as agent (filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q dated August 11, 1995 (the "Second Quarter 1995 Form 10-Q")).
10.2 First Amendment to Second Amended and Restated Credit Agreement dated December 21, 1995, between the Company, as borrower, and Union Bank, Colorado National Bank, Texas Commerce Bank, National Association, and Den norske Bank AS, as lenders, and Union Bank, as agent.
10.3 Credit Agreement dated December 23, 1993, between Tide West Trading & Transport Company, as borrower, and Union Bank, Colorado National Bank and Den norske Bank AS, as lenders, and Union Bank, as agent (filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q dated August 12, 1994).
10.4 First Amendment to Credit Agreement dated December 19, 1994, between Tide West Trading & Transport Company, as borrower, and Union Bank, Colorado National Bank and Den norske Bank AS, as lenders, and Union Bank, as agent (filed as Exhibit 10.9 to the Company's Annual Report on Form 10-K dated March 30, 1995 (the "1994 Form 10-K")).
10.5 Second Amendment to Credit Agreement dated February 17, 1995, between Tide West Trading & Transport Company, as borrower, and
Union Bank, Colorado National Bank, and Den norske Bank AS, as lenders, and Union Bank, as agent (filed as Exhibit 10.10 to the 1994 Form 10-K).
10.6 Third Amendment to Credit Agreement dated March 17, 1995, among Tide West Trading & Transport Company, as borrower, Union Bank, Den norske Bank AS and Colorado National Bank, as lenders, and Union Bank, as agent (filed as Exhibit 10.3 to the Second Quarter 1995 Form 10-Q).
10.7 Fourth Amendment to Credit Agreement dated April 17, 1995, among Tide West Trading & Transport Company, as borrower, Union Bank, Den norske Bank AS and Colorado National Bank, as lenders, and Union Bank, as agent (filed as Exhibit 10.2 to the Second Quarter 1995 Form 10-Q).
10.8 Limited Partnership Agreement dated December 28, 1993, between the Company and Horizon Natural Resources, Inc. (filed as Exhibit 10.7 to Company's Annual Report on Form 10-K dated March 30, 1994 (the "1993 Form 10-K")).
10.9* Registration Rights Agreement dated November 20, 1992, among the Company, Natural Gas Partners, L.P. ("NGP"), Philip B. Smith and Robert H. Mase (filed as Exhibit 10.2 to the S-1 Registration Statement).
10.10* Shareholders' Agreement dated November 19, 1992, among NGP, Philip B. Smith, Robert H. Mase and Douglas J. Flint (filed as Exhibit 28 to the 1992 Form 8-K).
10.11* Promissory Note dated May 31, 1991, between Draco Gas Partners, L.P. ("Draco"), as lender, and Robert H. Mase, as borrower, and Assignment thereof by Draco to the Company, dated November 20, 1992 (filed as Exhibit 10.6 to the S-1 Registration Statement).
10.12* Security Agreement dated November 20, 1992, between the Company, as secured party, and Robert H. Mase (filed as Exhibit 10.7 to the S-1 Registration Statement).
10.13 Financial Advisory Services Contract dated January 1, 1993, between the Company and NGP (filed as Exhibit 10.8 to the S-1 Registration Statement).
10.14 First Amendment to Financial Advisory Services Contract dated January 1, 1994, between the Company and NGP (filed as Exhibit 10.13 to the 1993 Form 10-K).
10.15* Form of Indemnification Agreement dated as of November 20, 1992, between the Company and each of its officers and directors (filed as Exhibit 10.9 to the S-1 Registration Statement).
10.16* The Company's 1991 Stock Option Plan and Amendment No. 1 thereto (filed as Exhibit 10.10 to the S-1 Registration Statement).
10.17* Amendment No. 2 to the Company's 1991 Stock Option Plan (filed as Exhibit 4(e) to the Company's Registration Statement on Form
S-8, No. 33-73020).
10.18* Amendment No. 3 to the Company's 1991 Stock Option Plan (filed as Exhibit 10.17 to the 1993 Form 10-K).
10.19* Form of Stock Option Agreement under the Tide West Oil Company 1991 Stock Option Plan (filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q dated November 11, 1994).
10.20 Form of Warrant Agreement between the Company and American Securities Transfer, Incorporated, dated June 21, 1991 (filed as Exhibit 10.11 to the S-1 Registration Statement).
10.21 First Supplement and Amendment to Warrant Agreement between the Company and The First National Bank of Boston dated March 14, 1994 (filed as Exhibit 10.20 to the 1993 Form 10-K).
10.22 Form of Purchase Warrant dated June 21, 1991, issued to Paulson Investment Company, Inc. and affiliates (filed as Exhibit 10.12 to the S-1 Registration Statement).
21. Subsidiaries of the Company.
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of Netherland, Sewell & Associates, Inc.
27.1 Financial Data Schedule.
____________________ * Management contract or compensatory plan or arrangement.