<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, 1997
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 10, 1997.
CLASS OF COMMON STOCK OUTSTANDING AT NOVEMBER 10, 1997
--------------------- --------------------------------
$.10 PAR VALUE 29,210,354
<PAGE> 2
TOM BROWN, INC. AND SUBSIDIARIES
QUARTERLY REPORT FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I. Financial Information (Unaudited):
Consolidated Balance Sheets,
September 30, 1997 and December 31, 1996 4
Consolidated Statements of Operations,
Three Months and Nine Months ended
September 30, 1997 and 1996 6
Consolidated Statements of Cash Flows,
Nine Months ended September 30, 1997 and 1996 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 17
Signature 18
</TABLE>
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, 1997 and December 31, 1996
<TABLE>
<CAPTION>
September 30, December 31,
Assets 1997 1996
------------ ------------
(Unaudited)
(in thousands)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,372 $ 20,504
Accounts receivable 30,362 33,080
Inventories 1,465 1,374
Other 710 889
------------ ------------
Total current assets 38,909 55,847
------------ ------------
Property and equipment, at cost:
Oil and gas properties, based on the
successful efforts accounting method 451,997 436,879
Other equipment 42,682 35,216
------------ ------------
494,679 472,095
Less: Accumulated depreciation
and depletion 150,361 124,834
------------ ------------
Net property and equipment 344,318 347,261
------------ ------------
Deferred income taxes, net 235 2,865
Other assets, net 554 401
------------ ------------
$ 384,016 $ 406,374
============ ============
</TABLE>
(continued)
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
TOM BROWN, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 1997 and December 31, 1996
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------ ------------
(Unaudited)
(in thousands)
<S> <C> <C>
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 21,557 $ 25,033
Accrued expenses 6,000 10,562
------------ ------------
Total current liabilities 27,557 35,595
------------ ------------
Commitments and contingencies
Bank debt 96,000 119,000
------------ ------------
Other non-current liabilities 6,319 5,643
------------ ------------
Stockholders' equity:
Common stock, at $.10 par value
Authorized 40,000,000 shares;
Outstanding 24,168,304 and
23,898,431 shares, respectively 2,417 2,390
Convertible preferred stock,
at $.10 par value. Authorized 2,500,000 shares;
1,000,000 shares outstanding 100 100
Additional paid-in capital 309,679 307,631
Accumulated deficit (58,056) (63,985)
------------ ------------
Total stockholders' equity 254,140 246,136
------------ ------------
$ 384,016 $ 406,374
============ ============
</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, 1997 and 1996
<TABLE>
<CAPTION>
Three Months ended Nine Months ended
September 30, September 30,
---------------------------- ----------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Revenues:
Gas and oil sales $ 18,833 $ 8,040 $ 66,660 $ 24,797
Marketing, gathering
and processing 8,642 6,340 23,146 16,629
Interest income and other 184 393 1,091 623
------------ ------------ ------------ ------------
Total revenues 27,659 14,773 90,897 42,049
------------ ------------ ------------ ------------
Costs and expenses:
Gas and oil production 3,850 1,610 12,046 4,697
Taxes on gas and oil
production 1,455 670 5,144 1,844
Cost of gas sold 7,428 5,693 19,312 13,179
Exploration costs 2,237 827 4,885 1,753
Impairments of
leasehold costs 180 49 540 116
General and
administrative 2,175 1,409 7,236 4,166
Depreciation, depletion
and amortization 8,728 3,672 26,079 11,369
Interest expense and other 1,423 1 5,090 18
------------ ------------ ------------ ------------
Total costs and expenses 27,476 13,931 80,332 37,142
------------ ------------ ------------ ------------
Income before income taxes 183 842 10,565 4,907
Income tax expense (83) (282) (3,323) (1,668)
------------ ------------ ------------ ------------
Net income 100 560 7,242 3,239
------------ ------------ ------------ ------------
Preferred stock dividend (438) (438) (1,313) (1,235)
------------ ------------ ------------ ------------
Net income (loss) available to
common shareholders $ (338) $ 122 $ 5,929 $ 2,004
============ ============ ============ ============
Weighted average number of
common shares outstanding 25,270 21,134 25,149 21,123
============ ============ ============ ============
Net income (loss) per common share $ (.01) $ .01 $ .24 $ .09
============ ============ ============ ============
</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, 1997 and 1996
<TABLE>
<CAPTION>
Nine Months ended
September 30,
----------------------------
1997 1996
------------ ------------
(in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 5,929 $ 2,004
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation, depletion and amortization 26,079 11,369
Gain on sales of assets (10) (267)
Option plan compensation -- 21
Exploration costs 4,885 1,753
Impairments of leasehold costs 540 116
Deferred income taxes 2,630 1,353
Changes in operating assets and
liabilities:
Decrease in accounts
receivable 2,718 2,333
Decrease in inventories (91) 68
Decrease (increase) in other
current assets 179 174
Increase (decrease) in accounts
payable and accrued expenses (5,354) 1,414
Increase in other non-current accounts 523 (156)
------------ ------------
Net cash provided by operating activities $ 38,028 $ 20,182
------------ ------------
</TABLE>
(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, 1997 and 1996
<TABLE>
<CAPTION>
Nine Months ended
September 30,
----------------------------
1997 1996
------------ ------------
(in thousands)
<S> <C> <C>
Cash flows from investing activities:
Proceeds from sales of assets $ 12,613 $ 3,118
Capital and exploration expenditures (41,164) (17,674)
Changes in accounts payable and accrued
expenses for oil and gas expenditures (2,137) --
------------ ------------
Net cash used in investing activities (30,688) (14,556)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of long-term
debt 6,000 --
Repayments of long-term debt (29,000) --
Proceeds from exercise of stock options 1,528 321
------------ ------------
Net cash provided by financing activities (21,472) 321
------------ ------------
Net increase (decrease) in cash and cash
equivalents (14,132) 5,947
------------ ------------
Cash and cash equivalents at beginning
of period 20,504 4,982
------------ ------------
Cash and cash equivalents at end of period $ 6,372 $ 10,929
============ ============
Cash paid during the period for:
Interest $ 4,945 $ --
Taxes 270 315
</TABLE>
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, 1997 AND 1996
(Unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
During interim periods, Tom Brown, Inc. follows the accounting policies
set forth in its Annual Report to Stockholders and its Report on Form 10-K filed
with the Securities and Exchange Commission. Users of financial information
produced for interim periods are encouraged to refer to the footnotes contained
in the Annual Report to Stockholders when reviewing interim financial results.
In the opinion of management, the accompanying interim financial
statements contain all material adjustments, consisting only of normal recurring
adjustments necessary for a fair presentation.
(2) RECENT EVENT
On October 21, 1997, the Company closed the acquisition of Genesis Gas
and Oil, L.L.C. ("Genesis") acquiring all of the assets of Genesis for $35
million. The Genesis assets consist of interests in oil and gas properties
located primarily in the Piceance Basin of western Colorado. The Company's
working interest has doubled from 23% to 46% in 238 producing wells and from 34%
to 68% in 500 potential development locations. The Genesis properties provide
current net production to Genesis of approximately 6 Mmcf of gas and 150 Bbl of
oil per day and have net proved reserves of approximately 30 Bcfe of gas at
September 30, 1997. The Company has plans to drill eight additional wells on
these properties by year-end. This acquisition will increase the Company's
acreage position in the Piceance Basin from approximately 54,000 to 86,000 net
developed acres and from approximately 100,000 to 148,000 net undeveloped acres.
The Company financed this acquisition through a $15 million borrowing under its
existing credit facility and the remainder from proceeds from its October stock
offering. See Note 5.
(3) ACQUISITION
Acquisition of Presidio Oil Company
On December 23, 1996, the Company completed the acquisition of Presidio
Oil Company and its subsidiaries (collectively, "Presidio"), following the
issuance by the U.S. Bankruptcy Court, District of Delaware, on December 10,
1996, of an Order confirming Presidio's reorganization under Chapter 11 of the
U.S. Bankruptcy Code. The purchase price was approximately $206.6 million
consisting of approximately $105 million in cash, 2.71 million shares of the
Company's Common Stock valued at $17.125 per share and the assumption of certain
liabilities. Such amount does not include 2.64 million shares of the Company's
Common Stock which were not issued due to the Company's ownership of $56.15
million principal amount of Presidio's Senior Gas Indexed Notes. The Presidio
acquisition has been accounted for using the purchase method. The cash portion
of the Presidio acquisition was funded by borrowings under the Company's loan
agreement with its bank lender. The assets acquired consisted primarily of
proved oil and gas properties and undeveloped acreage located in Wyoming, North
Dakota, Oklahoma and Louisiana. The Wyoming properties are concentrated in the
Green River and Powder River Basins of Wyoming.
9
<PAGE> 10
TOM BROWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Pro Forma Information
The following table presents the unaudited revenues, net income and net
income per share of the Company for the nine months ended September 30, 1997 and
1996 assuming that the Presidio acquisition occurred on January 1, 1996.
<TABLE>
<CAPTION>
Nine Months ended September 30,
-------------------------------
1997 1996
---------- ----------
(Historical) (Pro forma)
(in thousands, except for per share amounts)
<S> <C> <C>
Revenues $ 90,897 $ 68,810
========== ==========
Net income 7,242 4,717
========== ==========
Net income available to common
shareholders 5,929 3,482
========== ==========
Net income per common share $ .24 $ .15
========== ==========
</TABLE>
10
<PAGE> 11
TOM BROWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
(4) BANK DEBT
In September 1995, the Company entered into a bank credit agreement. The
credit agreement provided for a $65 million revolving credit facility (the
"credit facility") maturing in September 1998. Borrowings under the credit
facility are unsecured and bear interest, at the election of the Company, at a
rate equal to (i) the greater of the agent bank's prime rate or the federal
funds effective rate plus 1/2 of 1% or (ii) the agent bank's Eurodollar rate
plus a margin ranging from .75% to 1.00%. Interest on amounts outstanding under
the credit facility is due on the last day of each month in the case of loans
bearing interest at the prime rate or federal funds rate and, in the case of
loans bearing interest at the Eurodollar rate, interest payments are due on the
last day of each applicable interest period of one, two, three or six months, as
selected by the Company at the time of borrowing.
In connection with the Presidio acquisition, on December 23, 1996, the
Company and its lenders entered into a credit agreement providing for a $125
million revolving credit facility, maturing December 1999. Pursuant to this
agreement, the Company repaid the existing indebtedness under the prior facility
with borrowings under the new credit agreement. The terms and conditions of the
new credit facility are substantially the same as the credit facility. At
September 30, 1997 the outstanding balance was $96 million at an interest rate
of approximately 6.7%.
Financial covenants of the credit facility require the Company to
maintain a minimum consolidated tangible net worth of not less than $226 million
as of September 30, 1997. The Company is also required to maintain a ratio of
(i) earnings before interest expense, state and federal taxes and depreciation,
depletion and amortization to (ii) consolidated fixed charges, as defined in the
credit agreement, of not less than 2.5:1. Additionally, the Company is required
to maintain a ratio of consolidated debt to consolidated total capitalization of
less than 0.45:1 and a current ratio of not less than 1.1:1. The Company was in
compliance with all financial covenants at September 30, 1997.
(5) STOCK OFFERING
In October, the Company completed a public offering of 5,035,800 shares
at $25.50. Net proceeds to the Company were $121.7 million, of which a major
portion was used to pay down the outstanding indebtedness under its credit
agreement to $20 million. The Company used $20 million of the proceeds along
with bank borrowings of $15 million to acquire the assets of Genesis. The
Company intends to use the remaining net proceeds to fund the company's planned
exploration and development activities and possible acquisitions, as well as
other general corporate purposes.
11
<PAGE> 12
TOM BROWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
(6) INCOME TAXES
The Company has not paid Federal income taxes since March 31, 1982, due
to its net operating loss carryforward, but is required to pay alternative
minimum tax ("AMT"). This tax can be partially offset by an AMT net operating
loss carryforward.
Temporary differences and carryforwards that gave rise to significant
portions of deferred tax assets (liabilities) are as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------ ------------
(in thousands)
<S> <C> <C>
Net operating loss carryforwards ...................... $ 18,121 $ 18,689
Gas and oil acquisition, exploration and development
costs deducted for tax purposes in excess of book ... (14,380) (14,520)
Investment tax credit carryforwards ................... 2,463 2,463
Option plan compensation .............................. 1,559 1,559
Other ................................................. 2,673 2,309
------------ ------------
Net deferred tax asset .............................. 10,436 10,500
Valuation allowance ................................... (10,201) (7,635)
------------ ------------
Recognized net deferred tax asset ................... $ 235 $ 2,865
============ ============
</TABLE>
A valuation allowance of approximately $10.2 million and $7.6 million at
September 30, 1997 and December 31, 1996, respectively, has been provided
against the Company's net deferred tax assets based on management's estimate of
the recoverability of future tax benefits. The valuation allowance relates
primarily to the ability to use net operating loss and investment tax credit
carryforwards. The Company evaluated all appropriate factors to determine the
proper valuation allowance for these carryforwards, including any limitations
concerning their use, and the levels of taxable income necessary for
utilization. In this regard, full valuation allowances were provided for
investment tax credit carryforwards. Based on its recent operating results and
its expected levels of future earnings, the Company believes it will, more
likely than not, generate sufficient taxable income to realize the benefit
attributable to the net operating loss carryforwards for which valuation
allowances were not provided. The deferred tax assets and related valuation
allowance will be adjusted as future events so warrant.
At September 30, 1997, the Company had investment tax credit
carryforwards of approximately $2.5 million and net operating loss carryforwards
of approximately $51.8 million. The table above includes certain changes made to
prior estimates for the net operating loss carryforwards and the valuation
allowance to true up the numbers to the actual federal income tax return filed.
The Company currently has no liability for deferred Federal income taxes because
of these net operating loss and investment tax credit carryforwards. Realization
of the benefits of these carryforwards is dependent upon the Company's ability
to generate taxable earnings in future periods. In addition, the availability of
these carryforwards is subject to various limitations. The remainder of the
carryforwards will expire between 1997 and 2004. Additionally, the Company has
approximately $4.5 million of statutory depletion carryforwards and $0.9 million
of AMT credit carryforwards that may be carried forward until utilized.
12
<PAGE> 13
TOM BROWN, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The Company's results of operations have been materially affected by the
substantial increase in the Company's size as a result of the Presidio
acquisition, making comparisons of individual line items between 1997 and 1996
difficult.
Selected Operating Data
<TABLE>
<CAPTION>
Three Months Nine Months
ended ended
September 30, September 30,
----------------------- -----------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues (in thousands):
Natural gas sales ........................... $ 14,315 $ 5,572 $ 50,013 $ 17,478
Crude oil sales ............................. 4,518 2,468 16,647 7,319
Marketing, gathering and processing ......... 8,642 6,340 23,146 16,629
Other ....................................... 184 393 1,091 623
---------- ---------- ---------- ----------
Total revenues ........................ $ 27,659 $ 14,773 $ 90,897 $ 42,049
========== ========== ========== ==========
Net income (loss) (in thousands) ................. $ (338) $ 122 $ 5,929 $ 2,004
========== ========== ========== ==========
Natural gas production (MMcf) .................... 7,881 3,837 23,435 12,058
Crude oil production (MBbls) ..................... 267 117 906 375
Average natural gas sales price ($/Mcf) .......... $ 1.82 $ 1.45 $ 2.13 $ 1.45
Average crude oil sales price ($/Bbl) ............ $ 16.92 $ 21.09 $ 18.37 $ 19.52
</TABLE>
Revenues
During the three month period ended September 30, 1997, revenues from
natural gas and oil production increased $10.8 million to $18.8 million compared
to the same period in 1996. Such increase in gas and oil revenues was the result
of an increase in (i) natural gas sales volumes of 105% which increased revenues
by approximately $7.4 million, (ii) average natural gas sales prices received by
the Company from $1.45 per Mcf to $1.82 per Mcf which increased revenues by
approximately $1.4 million, (iii) oil sales volumes of 128% which increased
revenues by approximately $2.5 million. Average crude oil sales prices decreased
from $21.09 to $16.92 per barrel which decreased revenues $.5 million. The
increase in gas and oil production levels was primarily due to the Presidio
Acquisition and to a lesser extent, successful drilling results primarily in the
Val Verde Basin of west Texas.
During the nine month period ended September 30, 1997, revenues from
natural gas and oil production increased $41.9 million to $66.7 million compared
to the same period in 1996. Such increase in gas and oil revenues was the result
of an increase in (i) natural gas sales volumes of 94% increased revenues by
approximately $24.2 million, (ii) average natural gas prices received by the
Company from $1.45 per Mcf to $2.13 per Mcf increased revenues by approximately
$8.2 million, (iii) oil sales volumes of 142% increased revenues by
approximately $9.8 million for the nine month period ended September 30, 1997. A
decrease in the average crude oil sales price from $19.52 per Bbl. to $18.37 per
Bbl. decreased revenues by approximately $.4 million.
TOM BROWN, INC. AND SUBSIDIARIES
13
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Marketing, gathering and processing revenues increased $2.3 million and
$6.5 million, respectively, for the three and nine month periods ended September
30, 1997 as a result of increased activity in the Company's natural gas
marketing operations through Wildhorse, a joint venture with KN Energy, Inc.,
and due to gathering revenues from a November 1996 purchase of gathering
facilities, also through Wildhorse.
Costs and Expenses
Costs and expenses for the three months ended September 30, 1997 increased
approximately 97% to $27.5 million as compared to the same period in 1996.
Natural gas and oil production expense increased $2.2 million as a result of
increased production in the Val Verde Basin and the addition of the Presidio
properties. The Presidio properties historically have had a higher operating
cost than those properties operated by the Company. Taxes on gas and oil
production increased $.8 million due to increased sales volumes in the Val Verde
Basin and from the Presidio properties. Cost of gas sold increased by $1.8
million as a result of increased activity through the marketing, gathering and
processing revenues. Exploration costs increased $1.4 million due to exploration
dry hole costs and increased seismic costs in the third quarter of 1997.
Impairments of leasehold costs increased $.1 million. General and administrative
expenses increased $.8 million due to additional costs incurred with the
addition of Presidio. Depreciation, depletion and amortization increased $5.0
million due to the addition of the Presidio properties and additional Val Verde
Basin wells. Interest expense increased by $1.4 million as a result from
interest associated with the debt outstanding due to the purchase of Presidio.
Costs and expenses for the nine months ended September 30, 1997
increased approximately 116% to $80.3 million as compared to the same period in
1996. Natural gas and oil production expense increased $7.3 million as a result
of increased production in the Val Verde Basin and the addition of the Presidio
properties. The Presidio properties historically have had a higher operating
cost than those properties operated by the Company. Taxes on gas and oil
production increased $3.3 million due to increased sales volumes in the Val
Verde Basin and from the Presidio properties. Cost of gas sold increased by $6.1
million as a result of increased activity through the marketing, gathering and
processing revenues. Exploration costs increased $3.1 million due to exploration
dry hole costs and increased seismic costs in the first three-quarters of 1997.
Impairments of leasehold costs increased $.4 million. General and administrative
expenses increased $3.1 million due to additional costs incurred with the
addition of Presidio. Depreciation, depletion and amortization increased $14.7
million due to the addition of the Presidio properties and additional Val Verde
Basin wells. Interest expense increased by $5.1 million as a result of interest
associated with the debt outstanding due to the purchase of Presidio.
A valuation allowance of approximately $10.2 million and $7.6 million
at September 30, 1997 and December 31, 1996, respectively, has been provided
against the Company's net deferred tax assets based on management's estimate of
the recoverability of future tax benefits. The valuation allowance relates
primarily to the ability to use net operating loss and investment tax credit
carryforwards. The Company evaluated all appropriate factors to determine the
proper valuation allowance for these carryforwards, including any limitations
concerning their use, and the levels of taxable income necessary for
utilization. In this regard, full valuation allowances were provided for
investment tax credit carryforwards. Based on its recent operating results and
its expected levels of future earnings, the Company believes it will, more
likely than not, generate sufficient taxable income to realize the benefit
attributable to the net operating loss carryforwards for which valuation
allowances were not provided. The deferred tax assets and related valuation
allowance will be adjusted as future events so warrant.
14
<PAGE> 15
TOM BROWN, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAPITAL RESOURCES AND LIQUIDITY
Growth and Acquisitions
In 1996 the Company substantially increased in size primarily due to the KNPC
and Presidio acquisitions. The Company continues to pursue opportunities which
will add value by increasing its reserve base and presence in the significant
natural gas areas, and further developing the Company's ability to control and
market the production of natural gas. As the Company continues to evaluate
potential acquisitions and property development opportunities, it will benefit
from its financial flexibility and the leverage potential of the Company's
overall capital structure.
In October 1997, the Company closed the acquisition of Genesis Gas and Oil,
LLC. ("Genesis"). This acquisition increased the Company's position in the
Piceance Basin and further solidified the Company's overall presence in the
Rocky Mountains. In the Piceance Basin, the Company has identified approximately
500 development drilling opportunities to pursue in the years to come.
Production from this area is further complemented by Wildhorse Energy Partners,
the Company's gas gathering, processing and marketing venture with KN Energy.
Capital Expenditures
The Company's capital expenditures for the three and nine month periods
ended September 30, 1997 were approximately $10.9 million and $33.9 million as
compared to $7.7 and $15.6 million in the same period in 1996, exclusive of the
purchase price paid by the Company for KNPC.
The Company has significantly increased its drilling activity in 1997. The
closing of the acquisitions of KNPC and Presidio have given the Company
additional opportunities to develop new reserves. In 1997, the Company plans to
drill in excess of 100 wells. At September 30, 1997, the Company had 72 wells in
various stages of drilling, completion and production. In addition to the $35
million paid for Genesis in October, the Company anticipates spending
approximately $15 million in capital expenditures in the fourth quarter of 1997.
The Company has historically funded capital expenditures and working
capital requirements with internally generated cash and borrowings. During the
nine months ended September 30, 1997, net cash provided by operating activities
was $38.0 million as compared to $20.2 million for the same period of 1996.
Recent Accounting Pronouncements
In March 1997, the Financial Accounting Standards Board ("FASB") issued
FASB Statement 128, Earnings per Share, which is effective for financial
statements for both interim and annual periods ending after December 15, 1997.
This Statement requires all entities who have issued common stock or potential
common stock (e.g. options, convertible securities, etc.) to calculate basic EPS
which replaces primary EPS, and diluted EPS which replaces fully diluted EPS.
Basic EPS for the nine month period ended September 30, 1997 was $.25. Diluted
EPS for the nine month period ended September 30, 1997 was $.27.
15
<PAGE> 16
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
16
<PAGE> 17
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.
17
<PAGE> 18
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 10, 1997 /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)
18
<PAGE> 19
INDEX TO EXHIBIT
<TABLE>
<CAPTION>
Exhibits Description
-------- -----------
<S> <C>
Exhibit No. 11 Computation of Per Share Earnings
Exhibit No. 27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT NO. 11
COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Three Months ended Nine Months ended
September 30, September 30,
-------------------- -------------------
1997 1996 1997 1996
-------- -------- -------- --------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Primary
Weighted average common
shares outstanding 24,153 21,134 24,032 21,123
Net effect of dilutive
stock options, treasury
stock method 1,117 664 1,117 613
-------- -------- -------- --------
Total common
shares 25,270 21,798 25,149 21,736
======== ======== ======== ========
Net income (loss) to common
shareholders $ (338) $ 122 $ 5,929 $ 2,004
======== ======== ======== ========
Primary earnings per
common share $ (.01) $ .01 $ .24 $ .09
======== ======== ======== ========
Fully Diluted
Weighted average common
shares outstanding 24,153 21,134 24,032 21,123
Net effect of dilutive
stock options, treasury
stock method 1,117 785 1,117 791
Effect of convertible
preferred stock 1,666 1,666 1,666 1,666
-------- -------- -------- --------
Total common
shares 26,936 23,585 26,815 23,580
======== ======== ======== ========
Net income to common
shareholders $ 100 $ 560 $ 7,242 $ 3,239
======== ======== ======== ========
Fully diluted earnings
per common share $ .00 $ .02 $ .27 $ .14
======== ======== ======== ========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 6,372
<SECURITIES> 0
<RECEIVABLES> 30,362
<ALLOWANCES> 286
<INVENTORY> 1,465
<CURRENT-ASSETS> 38,909
<PP&E> 494,697
<DEPRECIATION> 150,361
<TOTAL-ASSETS> 384,016
<CURRENT-LIABILITIES> 27,557
<BONDS> 0
0
100
<COMMON> 2,417
<OTHER-SE> 251,623
<TOTAL-LIABILITY-AND-EQUITY> 384,016
<SALES> 66,660
<TOTAL-REVENUES> 90,897
<CGS> 19,312
<TOTAL-COSTS> 80,332
<OTHER-EXPENSES> 7,236
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,090
<INCOME-PRETAX> 10,565
<INCOME-TAX> 7,242
<INCOME-CONTINUING> 5,929
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,929
<EPS-PRIMARY> .24
<EPS-DILUTED> 0
</TABLE>
