<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-3880
TOM BROWN, INC.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 95-1949781
------------------------------ ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P. O. Box 2608
500 Empire Plaza Bldg.
Midland, Texas 79701
-------------------------------------- --------
(Address of principal executive offices) (Zip Code)
915-682-9715
------------
(Registrant's telephone number, including area code)
NOT APPLICABLE
--------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
------ ------
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of November 8, 1996.
Class of Common Stock Outstanding at November 8, 1996
--------------------- -------------------------------
$.10 par value 21,164,544
<PAGE> 2
TOM BROWN, INC. AND SUBSIDIARIES
QUARTERLY REPORT FORM 10-Q
INDEX
Page No.
Part I. Financial Information (Unaudited):
Consolidated Balance Sheets,
September 30, 1996 and December 31, 1995 4
Consolidated Statements of Operations,
Three Months and Nine Months ended
September 30, 1996 and 1995 6
Consolidated Statements of Cash Flows,
Nine Months ended September 30, 1996 and 1995 7
Notes to Consolidated Financial Statements 9
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 13
Part II. Other Information:
Item 6. Exhibits and Reports on Form 8-K 19
Signature 20
2
<PAGE> 3
TOM BROWN, INC.
P. O. Box 2608
500 Empire Plaza Bldg.
Midland, Texas 79701
----------------------
QUARTERLY REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
FORM 10-Q
-----------------------
PART I OF TWO PARTS
FINANCIAL INFORMATION
3
<PAGE> 4
TOM BROWN, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 1996 and December 31, 1995
<TABLE>
<CAPTION>
September 30, December 31,
Assets 1996 1995
------ ---- ----
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 10,929,000 $ 4,982,000
Accounts receivable, net of allowance
for doubtful accounts of $58,000 at
September 30, 1996 and December 31, 1995 9,543,000 7,408,000
Accounts receivable -
Wind River-Pavillion, Ltd. 18,000 62,000
Inventories 390,000 246,000
Other 304,000 190,000
----------- -----------
Total current assets 21,184,000 12,888,000
----------- -----------
Property and equipment, at cost:
Oil and gas properties, based on the
successful efforts accounting method 226,436,000 186,624,000
Other equipment 23,685,000 12,056,000
----------- -----------
250,121,000 198,680,000
Less: Accumulated depreciation
and depletion 123,872,000 112,695,000
----------- -----------
Net property and equipment 126,249,000 85,985,000
----------- -----------
Senior gas indexed notes 51,093,000 51,093,000
Deferred income taxes, net 8,903,000 13,170,000
Other assets 1,464,000 1,038,000
----------- -----------
$208,893,000 $164,174,000
=========== ===========
</TABLE>
(continued)
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
TOM BROWN, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 1996 and December 31, 1995
<TABLE>
<CAPTION>
September 30, December 31,
Liabilities and Stockholders' Equity 1996 1995
------------------------------------ ---- ----
(Unaudited)
<S> <C> <C>
Current liabilities:
Accounts payable $ 11,950,000 $ 5,979,000
Accrued expenses 1,688,000 1,536,000
----------- -----------
Total current liabilities 13,638,000 7,515,000
----------- -----------
Commitments and contingencies
Stockholders' equity:
Convertible preferred stock,
at $.10 par value.
Authorized 2,500,000 shares;
1,000,000 shares outstanding. 100,000 -
Common stock, at $.10 par value.
Authorized 40,000,000 shares;
Outstanding 21,164,544 and
20,180,902 shares, respectively. 2,116,000 2,018,000
Additional paid-in capital 261,283,000 224,889,000
Accumulated deficit (68,244,000) (70,248,000)
----------- -----------
Total stockholders' equity 195,255,000 156,659,000
----------- -----------
$208,893,000 $164,174,000
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
TOM BROWN, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
Three and Nine Months ended September 30, 1996 and 1995
<TABLE>
<CAPTION>
Three Months ended Nine Months ended
September 30, September 30,
------------------------------- -----------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Gas and oil sales $ 8,040,000 $ 4,920,000 $24,797,000 $15,041,000
Marketing, gathering
and processing 6,340,000 2,792,000 16,629,000 10,772,000
Gain on sales of
properties 239,000 4,234,000 267,000 4,322,000
Interest income and
other 154,000 136,000 356,000 537,000
----------- ----------- ----------- -----------
Total revenues 14,773,000 12,082,000 42,049,000 30,672,000
----------- ----------- ----------- -----------
Costs and expenses:
Gas and oil production 1,610,000 1,256,000 4,697,000 3,536,000
Taxes on gas and oil
production 670,000 467,000 1,844,000 1,515,000
Cost of gas sold 5,693,000 2,224,000 13,179,000 9,082,000
Exploration costs 827,000 1,062,000 1,753,000 3,010,000
Impairments of
leasehold costs 49,000 140,000 116,000 484,000
General and
administrative 1,409,000 968,000 4,166,000 2,994,000
Depreciation, depletion
and amortization 3,672,000 2,669,000 11,369,000 7,375,000
Writedown of properties - - - 8,368,000
Interest expense and other 1,000 951,000 18,000 978,000
----------- ----------- ----------- -----------
Total costs
and expenses 13,931,000 9,737,000 37,142,000 37,342,000
----------- ----------- ----------- -----------
Income (loss) before
income taxes 842,000 2,345,000 4,907,000 (6,670,000)
Income tax provision:
Recognition of
deferred tax asset - - - 13,967,000
Income tax expense 282,000 845,000 1,668,000 994,000
----------- ----------- ----------- -----------
Net income 560,000 1,500,000 3,239,000 6,303,000
----------- ----------- ----------- -----------
Preferred stock dividend 438,000 - 1,235,000 -
----------- ----------- ----------- -----------
Net income available to
common shareholders $ 122,000 $ 1,500,000 $ 2,004,000 $ 6,303,000
=========== =========== =========== ===========
Weighted average number of
common shares outstanding 21,133,951 16,153,277 21,123,078 16,131,345
=========== =========== =========== ===========
Net income per common share $ .01 $ .09 $ .09 $ .39
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE> 7
TOM BROWN, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
Nine Months ended September 30, 1996 and 1995
Nine Months ended
September 30,
-------------------------
1996 1995
---- ----
Cash flows from operating activities:
Net income $ 2,004,000 $ 6,303,000
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation, depletion and amortization 11,369,000 7,375,000
Gain on sales of assets (267,000) (4,322,000)
Option plan compensation 21,000 78,000
Exploration costs 1,753,000 3,010,000
Impairments of leasehold costs 116,000 484,000
Writedown of properties - 8,368,000
Deferred income taxes 1,353,000 (13,170,000)
Changes in operating assets and
liabilities:
Decrease in accounts
receivable 2,333,000 1,065,000
Decrease in inventories 68,000 647,000
Decrease (increase) in other
current assets 174,000 (93,000)
Increase (decrease) in accounts
payable and accrued expenses 1,414,000 (724,000)
Increase in other non-current assets (156,000) (130,000)
----------- -----------
Net cash provided by operating activities $20,182,000 $ 8,891,000
----------- -----------
(continued)
See accompanying notes to consolidated financial statements.
7
<PAGE> 8
TOM BROWN, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
Nine Months ended September 30, 1996 and 1995
Nine Months ended
September 30,
-------------------------
1996 1995
Cash flows from investing activities:
Proceeds from sales of assets $ 3,118,000 $ 9,118,000
Capital and exploration expenditures (17,674,000) (23,652,000)
Investment in senior gas indexed notes - (51,093,000)
----------- -----------
Net cash used in investing activities (14,556,000) (65,627,000)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of long-term
debt - 54,600,000
Repayments of long-term debt - (8,600,000)
Proceeds from exercise of stock options 321,000 260,000
----------- -----------
Net cash provided by financing activities 321,000 46,260,000
----------- -----------
Net increase (decrease) in cash and cash
equivalents 5,947,000 (10,476,000)
----------- -----------
Cash and cash equivalents at beginning
of period 4,982,000 19,147,000
----------- -----------
Cash and cash equivalents at end of period $10,929,000 $ 8,671,000
=========== ===========
Cash paid during the period for:
Interest $ - $ 752,000
Taxes 315,000 48,000
See accompanying notes to consolidated financial statements.
8
<PAGE> 9
TOM BROWN, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three and Nine Months ended September 30, 1996 and 1995
(Unaudited)
(1) During interim periods, Tom Brown, Inc. follows the accounting policies set
forth in its Annual Report to Stockholders and its Report on Form 10-K filed
with the Securities and Exchange Commission. Users of financial information
produced for interim periods are encouraged to refer to the footnotes contained
in the Annual Report to Stockholders when reviewing interim financial results.
In the opinion of management, the accompanying interim financial
statements contain all material adjustments, consisting only of normal recurring
adjustments necessary for a fair presentation. Certain reclassifications have
been made to amounts reported in previous periods to conform to the 1996
presentation.
(2) Potential Purchase of Presidio Oil Company
On May 31, 1995, the Company announced that it had written to Presidio
Oil Company ("Presidio") in order to propose a business combination between the
two companies. On June 28, 1995, the Company purchased approximately $56 million
principal amount of the outstanding $100 million principal amount of GINs of
Presidio for approximately $51 million, including accrued interest. Presidio has
been unable to meet the interest payments on the GINs and is therefore in
default under terms of the GINs. The purchase of the GINs was funded by a $51
million demand note that was repaid in November 1995 using proceeds from a
common stock offering.
On August 6, 1996, the Company announced that it had executed a
definitive agreement with Presidio for the acquisition of Presidio for $183
million (consisting of approximately $101 million of cash and 5 million shares
(approximately 2.677 million shares after deducting the portion representing the
Company's previous investment in the Presidio Gas Indexed Notes) of the
Company's Common Stock valued at $16.50 per share), plus the assumption of
certain liabilities. The transaction would be consummated through a Chapter 11
bankruptcy proceeding filed by Presidio on August 5, 1996. The Company's
obligation to consummate the transaction is conditioned upon, among other
things, the receipt of the bankruptcy court confirmation order approving the
transaction by November 15, 1996.
Although management believes its investment in the GINs is a strategic
part of its efforts to acquire Presidio, there can be no assurances as to when,
if ever, such acquisition will be consummated. A failure to consummate the
acquisition of Presidio could result in the Company not recovering its initial
investment in the GINs. In addition, the value of the Company's investment in
the GINs may be adversely affected by the results of operations and financial
condition of Presidio, which is dependent in large part on the prices Presidio
realizes for its gas and oil production, as well as the ultimate outcome of
Presidio's efforts to restructure its outstanding indebtedness or to be acquired
by another party and the timing thereof. There is not currently an active
trading market for the GINs, and the Company may experience difficulty in
selling the GINs if it desires to do so in the future.
9
<PAGE> 10
TOM BROWN, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(3) Acquisition of KN Production Company ("KNPC")
On January 31, 1996, the Company and KN Energy, Inc. ("KNE") closed
joint transactions which resulted in (i) the Company'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 Company's $1.75
Convertible Preferred Stock, Series A (the "Series A Preferred Stock"), and
918,367 shares of the Company's Common Stock. The Series A Preferred Stock
carries a 7% dividend payable quarterly. In addition, Wildhorse Energy Partners,
LLC ("Wildhorse") was formed by the Company and KNE for the purpose of providing
gas gathering, processing, marketing, field and storage services.
The transaction, accounted for as a purchase, was valued at $36.25
million, of which $25 million was paid in the form of 1,000,000 shares of the
Company's Series A Preferred Stock and the remaining $11.25 million was paid in
the form of 918,367 shares of the Company's Common Stock, based on a price per
share of $12.25. The addition of KNPC added approximately 34.5 Bcfe of proved
gas equivalent reserves, 243,000 net undeveloped acres and a natural gas storage
facility.
Wildhorse was created to provide gathering, processing, marketing,
storage and field services to Rocky Mountain gas and oil producers and others.
Wildhorse is jointly owned by the Company (45 percent) and KNE (55 percent) and
is operated by KNE under the direction of an operating team with equal
representation from KNE and the Company. The Company accounts for its share of
Wildhorse using the proportionate consolidation method of accounting.
The Company has dedicated significant amounts of its Rocky Mountain gas
production to Wildhorse for gathering, processing and marketing. KNE contributed
substantial gas marketing contracts and a natural gas pipeline in western
Colorado.
The following table presents the unaudited pro forma revenues, net
income and net income per share for the nine months ended September 30, 1996 and
1995, assuming that the KNPC transaction occurred January 1, 1995.
Nine Months ended
September 30,
--------------------------
1996 1995
---- ----
Revenues $ 42,049 $ 38,890
====== ======
Net income $ 3,239 $ 6,961
------ ------
Preferred stock dividend 1,313 1,313
------ ------
Net income available to common
shareholders $ 1,926 $ 5,648
====== ======
Net income per common share $ .09 $ .33
====== ======
10
<PAGE> 11
TOM BROWN, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(4) Supplemental Cash Flow Information
Cash paid for income taxes for the nine months ended September 30, 1996
was $315,000.
Non-cash and investing activities for 1996 included the issuance of
1,000,000 shares of the Company's $1.75 Convertible Preferred Stock, Series A
(the "Series A Preferred Stock"), and 918,367 shares of the Company's Common
Stock for a combined value of $36.25 million.
(5) Income Taxes
Financial Accounting Standard No. 109, "Accounting for Income Taxes"
(the "Statement") was adopted by the Company effective as of January 1, 1993.
The Statement requires a balance sheet approach to the calculation of deferred
income taxes. The Company has significant net operating loss carryforwards and,
therefore, calculated a net deferred tax asset upon adoption of the Statement.
However, due to the Company's history of net operating losses until 1995, a
valuation allowance was recorded equal to the amount of the net deferred asset.
Based on 1993 and 1994 additions to the Company's gas and oil reserves
and the resulting increases in anticipated future income, the Company expects to
realize a major portion of the future benefit of its net operating loss
carryforwards prior to their expiration. Accordingly, that portion of the
valuation allowance was reversed in the first quarter of 1995. A valuation
allowance of approximately $9.9 million has been retained against the Company's
net deferred tax assets at September 30, 1996 based on management's estimate of
the recoverability of future tax benefits.
Temporary differences and carryforwards which gave rise to significant
portions of deferred tax assets (liabilities) are as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
<S> <C> <C>
Net operating loss carryforwards.................... $ 20,400,000 $ 23,070,000
Gas and oil acquisition, exploration and development
costs deducted for tax purposes in excess of book.. 10,336,000 (8,074,000)
Investment tax credit carryforwards................. 4,813,000 4,813,000
Option plan compensation............................ 1,514,000 1,507,000
Other............................................... 2,435,000 2,435,000
---------- ----------
Net deferred tax asset............................ 18,826,000 23,751,000
Valuation allowance................................. (9,923,000) (10,581,000)
---------- ----------
Recognized net deferred tax asset................. $ 8,903,000 $ 13,170,000
========== ==========
</TABLE>
The valuation allowance listed above relates primarily to net operating
loss and investment tax credit carryforwards. The Company evaluated all
appropriate factors to determine the proper valuation allowance for these
carryforwards, including any limitations concerning their use, the year the
carryforwards expire and the levels of taxable income necessary for utilization.
In this regard, full valuations were provided for investment tax credit
carryforwards. Based on its recent operating results and its expected levels of
future earnings, the Company believes it will, more
11
<PAGE> 12
TOM BROWN, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
likely than not, generate sufficient taxable income to realize the benefit
attributable to the net operating loss carryforwards for which valuation
allowances were not provided.
12
<PAGE> 13
TOM BROWN, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations
The Company recorded net income for the three and nine months ended
September 30, 1996 of $122,000 and $2,004,000, respectively, compared to
$1,500,000 and $6,303,000 for the three and nine months ended September 30,
1995. Included in the previous period's net income was a gain on the sale of the
Company's Arkoma Basin properties of approximately $4.3 million.
The factors which most significantly affect the Company's results of
operations are (1) the sales prices of natural gas and crude oil, (2) the level
of total sales volumes, (3) the level and success of exploration and development
activity, and (4) acquisitions.
On January 31, 1996, the Company and KN Energy, Inc. ("KNE") closed
joint transactions which resulted in (i) the Company'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 Company's $1.75
Convertible Preferred Stock, Series A (the "Series A Preferred Stock"), and
918,367 shares of the Company's Common Stock. In addition, Wildhorse Energy
Partners, LLC ("Wildhorse") was formed by the Company and KNE for the purpose of
providing gas gathering, processing, marketing, field and storage services.
The transaction, accounted for as a purchase, was valued at $36.25
million, of which $25 million was paid in the form of 1,000,000 shares of the
Company's Series A Preferred Stock and the remaining $11.25 million was paid in
the form of 918,367 shares of the Company's Common Stock, based on a price per
share of $12.25.
Selected Operating Data
<TABLE>
<CAPTION>
Three Months Nine Months
ended ended
September 30, September 30,
--------------------- --------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues (in thousands):
Natural gas sales................. $ 5,572 $ 3,315 $17,478 $10,001
Crude oil sales................... 2,468 1,605 7,319 5,040
Marketing, gathering and
processing...................... 6,340 2,792 16,629 10,772
Gain on sales of
properties...................... 239 4,234 267 4,322
Other............................. 154 136 356 537
------ ------ ------ ------
Total revenues.............. $14,773 $12,082 $42,049 $30,672
====== ====== ====== ======
Net income (in thousands)............ $ 122 $ 1,500 $ 2,004 $ 6,303
====== ====== ====== ======
Natural gas production (MMcf)........ 3,837 2,540 12,058 7,870
Crude oil production (MBbls)......... 117 100 375 300
Average natural gas sales
price ($/Mcf)..................... $ 1.45 $ 1.31 $ 1.45 $ 1.27
Average crude oil sales
price ($/Bbl)..................... $ 21.09 $ 16.05 $ 19.52 $ 16.80
</TABLE>
13
<PAGE> 14
TOM BROWN, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Revenues
During the three month period ended September 30, 1996, revenues from
natural gas and oil production increased $3.1 million to $8.0 million compared
to the same period in 1995. An increase in natural gas sales volumes of 51%
increased revenues by approximately $1.9 million. An increase in average natural
gas prices received by the Company from $1.31 per Mcf to $1.45 per Mcf increased
revenues by approximately $0.3 million. An increase in oil sales volumes of 17%
increased revenues by approximately $0.4 million for the three months ended
September 30, 1996. An increase in the average crude oil sales price from $16.05
per Bbl to $21.09 per Bbl increased revenues by approximately $0.5 million.
During the nine month period ended September 30, 1996, revenues from
natural gas and oil production increased $9.8 million to $24.8 million compared
to the same period in 1995. An increase in natural gas sales volumes of 53%
increased revenues by approximately $6.1 million. An increase in average natural
gas prices received by the Company from $1.27 per Mcf to $1.45 per Mcf increased
revenues by approximately $1.4 million. An increase in oil sales volumes of 25%
increased revenues by approximately $1.5 million for the nine month period ended
September 30, 1996. An increase in the average crude oil sales price from $16.80
per Bbl to $19.52 per Bbl increased revenues by approximately $0.8 million for
the nine months ended September 30, 1996.
Revenues from natural gas and oil production from the KNPC acquisition for
the first nine months of 1996 accounted for $4.4 million of the $9.8 million
increase.
Marketing, gathering and processing revenues increased $3.5 million and
$5.9 million, respectively, for the three and nine month periods ended September
30, 1996 as a result of the increased activity in the Company's natural gas
marketing operations through Wildhorse, its newly formed joint venture with KNE.
Costs and Expenses
Costs and expenses for the three months ended September 30, 1996 increased
approximately 43% to $13.9 million as compared to the same period in 1995 due
primarily to the properties acquired in the KNPC acquisition in January 1996 and
due to lower margins on gas purchased and sold resulting in higher cost of
sales. Gas and oil production expense increased $0.4 million and taxes on gas
and oil production increased $0.2 million as a result of the addition of the
KNPC properties. General and administrative expenses increased $0.4 million due
to additional costs incurred with the addition of KNPC. Depreciation, depletion
and amortization expense increased $1.0 million due to the addition of the KNPC
properties and additional Val Verde Basin wells. Interest expense and other
decreased due to the pay-off of the Company's long-term debt in November 1995.
Costs and expenses for the nine months ended September 30, 1996 remained
constant as compared to the corresponding period in 1995 although a writedown of
properties of $8.4 million resulting from the early adoption of Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-lived Assets...", was recorded in the first quarter of 1995. Gas and oil
production expense increased 33%,
14
<PAGE> 15
TOM BROWN, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
taxes on gas and oil production increased 22%, and general and administrative
expenses increased 39% due primarily to the KNPC acquisition. Cost of gas sold
increased 45% due to lower margins on gas purchased during the third quarter of
1996. Exploration costs decreased $1.3 million due to fewer exploratory dry
holes in 1996 than 1995, and impairments of leasehold decreased $0.4 million due
to fewer leasehold expirations in 1996 compared to 1995. Depreciation, depletion
and amortization expense increased by $4.0 million due to the KNPC acquisition
and increased sales in the Company's Val Verde Basin. Interest expense and other
was eliminated with the pay-off of the Company's long-term debt in November
1995.
The Company recognized in the first quarter of 1995 a net deferred tax
asset in the amount of $13,967,000 and corresponding credit to deferred income
tax expense. Deferred tax assets (related primarily to the Company's net
operating loss and investment tax credit carryforwards) were initially recorded
in 1993, but these tax assets had been reserved entirely by a valuation
allowance up until 1995. Based on recent additions to the Company's gas and oil
reserves, the resulting increases in anticipated future income and the absence
of significant option plan compensation charges to future income, the Company
expects to realize a major portion of the future benefit of its net operating
loss carryforwards prior to their expiration. Accordingly, that portion of the
valuation allowance was reversed in the first quarter of 1995. A valuation
allowance of approximately $10.0 million will be retained against the Company's
deferred tax assets, primarily because the Company's investment tax credit
carryforwards are still not expected to be realized in future periods. The
deferred tax assets and related valuation allowance will be monitored for
potential adjustments as future events so indicate, although management does not
expect such adjustments to be significant in the near term.
The Company recorded an income tax provision in the amount of $1,668,000
and $994,000 for the nine months ended September 30, 1996 and 1995,
respectively. Of such amounts $1,353,000 and $797,000 represent deferred income
taxes.
Capital Resources and Liquidity
The Company continues to operate under the strategy of maintaining a
strong balance sheet, adding value by increasing the Company's reserve base and
presence in significant natural gas areas and further developing the ability to
control and market the Company's production.
In May 1995, the Company announced that it had written to Presidio Oil
Company ("Presidio") in order to propose a business combination between the two
companies. In June 1995, the Company announced that it had purchased $56 million
principal amount of the $100 million principal amount outstanding of the Senior
Gas Indexed Notes ("GINs") of Presidio. The purchase closed on June 28, 1995 and
was funded through a bank loan.
In November 1995, the Company was notified by Presidio that the Company
had been selected as the party with which it would pursue negotiations for the
potential sale of substantially all of Presidio's assets. The Company's offer
for Presidio amounted
15
<PAGE> 16
TOM BROWN, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
to $180 million, subject to certain adjustments, of which the cash portion would
be an amount sufficient to repay the outstanding bank debt and senior secured
indebtedness. The remainder is to be paid in Common Stock.
On August 6, 1996, the Company announced that it had executed a definitive
agreement with Presidio for the acquisition of Presidio for $183 million
(consisting of approximately $101 million of cash and 5 million shares
(approximately 2.677 million shares after deducting the portion representing the
Company's previous investment in the Presidio GINs) of the Company's Common
Stock valued at $16.50 per share), plus the assumption of certain liabilities.
The transaction would be consummated through a Chapter 11 bankruptcy proceeding
which was filed by Presidio on August 5, 1996. The Company's obligation to
consummate the transaction is conditioned upon, among other things, the receipt
of the bankruptcy court confirmation order approving the transaction by November
15, 1996.
The Company maintains a $125 million Credit Facility under a Credit
Agreement originally entered into in September 1995. The Company recently
increased its facility from $65 million to allow for the cash consideration
portion of its proposed Presidio purchase. The Credit Facility matures in
September 1998. Borrowings under the Credit Facility are unsecured and bear
interest, at the election of the Company, at a rate equal to (i) the greater of
the agent bank's prime rate or the federal funds effective rate plus 0.50%, or
(ii) the agent bank's eurodollar rate plus a margin ranging from 0.75% to 1.00%.
Interest on amounts outstanding under the Credit Facility is due on the last day
of each month in the case of loans bearing interest at the prime rate or federal
funds rate and, in the case of loans bearing interest at the eurodollar rate,
interest payments are due on the last day of each applicable interest period of
one, two or three month periods, as selected by the Company at the time of
borrowing or, in the case of six month periods if selected by the Company,
interest payments are due on the last day of each three month period.
In December 1995, the Company and KNE jointly announced the execution of a
letter of intent providing for the merger of KNE's wholly-owned gas and oil
subsidiary, KNPC, into the Company and the formation of a new gas services
company, Wildhorse. On January 31, 1996, this transaction was completed with the
Company issuing 1.0 million shares of Series A Preferred Stock and 0.9 million
shares of Common Stock.
The addition of the KNPC reserves added approximately 34.5 Bcfe of proved
gas equivalent reserves.
Wildhorse was created to provide gathering, processing, marketing, storage
and field services to Rocky Mountain gas and oil producers and others. It will
also pursue the construction or acquisition of gathering, processing and storage
areas of the Rocky Mountain region. Wildhorse is jointly owned by the Company
(45 percent) and KNE (55 percent) and is operated by KNE under the direction of
an operating team with equal representation from KNE and the Company.
The Company has dedicated significant amounts of its Rocky Mountain gas
production to Wildhorse for gathering, processing and marketing. KNE contributed
gas marketing contracts and storage assets in western Colorado.
16
<PAGE> 17
TOM BROWN, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The level of capital expenditures by the Company will vary in future
periods depending on energy market conditions and other related economic
factors. The Company has no material long-term commitments, and consequently, is
able to adjust the level of its expenditures as circumstances warrant. Exclusive
of the purchase price paid by the Company for KNPC, the Company's capital
expenditures for the three and nine month periods ended September 30, 1996 were
approximately $7.7 million and $15.6 million as compared to $7.3 million and
$22.2 million, respectively, in the same periods in 1995.
The Company has historically funded capital expenditures and working
capital requirements with internally generated cash and borrowings. During the
nine months ended September 30, 1996, net cash provided by operating activities
was $20.2 million as compared to $8.9 million for the same period of 1995.
The Company continues to pursue opportunities which will add value by
increasing its reserve base and presence in significant natural gas areas and
further developing the Company's ability to control and market production of
natural gas. The Common Stock offering in November 1995, the purchase of KNPC
and the elimination of all debt served to strengthen the Company's balance
sheet. As the Company continues to evaluate potential acquisitions and the
development of its existing properties, it will benefit from its financing
flexibility and the leverage potential of the Company's overall capital
structure.
17
<PAGE> 18
TOM BROWN, INC.
P. O. Box 2608
500 Empire Plaza Bldg.
Midland, Texas 79701
--------------------------
QUARTERLY REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
FORM 10-Q
--------------------------
PART II OF TWO PARTS
OTHER INFORMATION
18
<PAGE> 19
TOM BROWN, INC. AND SUBSIDIARIES
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits Description
Exhibit No. 11 Computation of Per Share Earnings
Exhibit No. 27 Financial Data Schedule
(b) Reports on Form 8-K
None.
19
<PAGE> 20
TOM BROWN, INC. AND SUBSIDIARIES
OTHER INFORMATION
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.
TOM BROWN, INC.
(Registrant)
November 8, 1996 /s/ Kim Harris
- ---------------- -----------------
Date Kim Harris
Controller
(Mr. Harris is the Chief Financial Officer
and is duly authorized to sign on behalf
of the Registrant)
20
<PAGE> 21
EXHIBIT INDEX
Exhibits Description
Exhibit No. 11 Computation of Per Share Earnings
Exhibit No. 27 Financial Data Schedule
<PAGE> 1
EXHIBIT NO. 11
COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Three Months ended Nine Months ended
September 30, September 30,
------------------------------ ------------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Primary
Weighted average common
shares outstanding 21,133,951 15,558,485 21,123,078 15,540,002
Net effect of dilutive
stock options,
treasury stock method 664,267 594,791 612,961 591,343
---------- ---------- ---------- ----------
Total common
shares 21,798,218 16,153,277 21,736,039 16,131,345
========== ========== ========== ==========
Net income to common
shareholders $ 122,000 $ 1,500,000 $ 2,004,000 $ 6,303,000
========== ========== ========== ==========
Primary earnings per
common share $ .01 $ .09 $ .09 $ .39
========== ========== ========== ==========
Fully Diluted
Weighted average common
shares outstanding 21,133,951 15,558,485 21,123,078 15,540,002
Net effect of dilutive
stock options,
treasury stock method 784,845 594,791 790,423 591,343
Effect of convertible
preferred stock 1,666,000 - 1,666,000 -
---------- ---------- ---------- ----------
Total common
shares 23,584,796 16,153,277 23,579,501 16,131,345
========== ========== ========== ==========
Net income to common
shareholders $ 560,000 $ 1,500,000 $ 3,239,000 $ 6,303,000
========== ========== ========== ==========
Fully diluted earnings
per common share $ .02 $ .09 $ .14 $ .39
========== ========== ========== ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1996
<CASH> 10,929
<SECURITIES> 0
<RECEIVABLES> 9,561
<ALLOWANCES> 58
<INVENTORY> 390
<CURRENT-ASSETS> 21,184
<PP&E> 250,121
<DEPRECIATION> 123,872
<TOTAL-ASSETS> 208,893
<CURRENT-LIABILITIES> 13,638
<BONDS> 0
0
100
<COMMON> 2,116
<OTHER-SE> 193,039
<TOTAL-LIABILITY-AND-EQUITY> 208,893
<SALES> 24,797
<TOTAL-REVENUES> 42,049
<CGS> 19,720
<TOTAL-COSTS> 37,142
<OTHER-EXPENSES> 4,282
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18
<INCOME-PRETAX> 4,907
<INCOME-TAX> 1,668
<INCOME-CONTINUING> 2,004
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,004
<EPS-PRIMARY> .09
<EPS-DILUTED> 0
</TABLE>
