<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 JUNE 30, 1998
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 August 10, 1998.
CLASS OF COMMON STOCK OUTSTANDING AT AUGUST 10, 1998
- --------------------- ------------------------------
$.10 PAR VALUE 29,259,989
<PAGE> 2
TOM BROWN, INC. AND SUBSIDIARIES
QUARTERLY REPORT FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page No.
<S> <C>
Part I. Financial Information:
Consolidated Balance Sheets,
June 30, 1998 (Unaudited) and December 31, 1997 4
Consolidated Statements of Operations (Unaudited),
Three and Six Months ended
June 30, 1998 and 1997 6
Consolidated Statements of Cash Flows (Unaudited),
Six Months ended June 30, 1998 and 1997 7
Notes to Consolidated Financial Statements
Three and Six Months ended
June 30, 1998 and 1997 9
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 12
Part II. Other Information:
Item 4. Submission of Matters to a Vote of
Security Holders 18
Item 6. Exhibits and Reports on Form 8-K 19
Signature 20
</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
ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
-------- --------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 5,576 $ 6,537
Accounts receivable 26,824 40,949
Inventories 687 365
Other 338 271
-------- --------
Total current assets 33,425 48,122
-------- --------
PROPERTY AND EQUIPMENT, AT COST:
Oil and gas properties, based on the
successful efforts accounting method 532,088 500,561
Other equipment 69,311 55,735
-------- --------
601,399 556,296
Less: Accumulated depreciation,
depletion, and amortization 181,802 160,480
-------- --------
Net property and equipment 419,597 395,816
-------- --------
OTHER ASSETS:
Deferred income taxes, net 4,169 2,606
Other assets, net 8,018 4,382
-------- --------
Total other assets 12,187 6,988
-------- --------
$465,209 $450,926
======== ========
</TABLE>
(continued)
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
TOM BROWN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
--------- ---------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 21,674 $ 32,367
Accrued expenses 6,497 7,332
Note payable, current -- 5,168
--------- ---------
Total current liabilities 28,171 44,867
--------- ---------
BANK DEBT 60,500 23,000
--------- ---------
OTHER NON-CURRENT LIABILITIES 3,790 6,661
--------- ---------
STOCKHOLDERS' EQUITY:
Convertible preferred stock,
at $.10 par value. Authorized
2,500,000 shares; 1,000,000 shares
outstanding 100 100
Common stock, at $.10 par value
Authorized 40,000,000 shares;
Outstanding 29,259,489 and
29,210,354 shares, respectively 2,926 2,921
Additional paid-in capital 431,080 430,502
Accumulated deficit (61,358) (57,125)
--------- ---------
Total stockholders' equity 372,748 376,398
--------- ---------
$ 465,209 $ 450,926
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
TOM BROWN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months ended Six Months ended
June 30, June 30,
---------------------- ----------------------
1998 1997 1998 1997
-------- -------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Gas and oil sales $ 21,538 $ 19,281 $ 41,712 $ 47,827
Marketing, gathering and processing 10,634 7,186 21,646 14,504
Drilling 642 -- 1,836 --
Interest income and other 269 421 430 907
-------- -------- -------- --------
Total revenues 33,083 26,888 65,624 63,238
-------- -------- -------- --------
Costs and expenses:
Gas and oil production 3,728 3,969 8,078 8,196
Taxes on gas and oil production 2,419 1,599 4,265 3,689
Cost of gas sold 10,073 5,688 20,432 11,884
Cost of drilling 507 -- 1,483 --
Exploration costs 2,640 1,527 4,976 2,648
Impairments of leasehold costs 750 180 1,715 360
General and administrative 2,879 2,664 6,584 5,061
Depreciation, depletion
and amortization 10,882 8,655 20,698 17,351
Interest expense and other 998 1,705 1,781 3,667
-------- -------- -------- --------
Total costs and expenses 34,876 25,987 70,012 52,856
-------- -------- -------- --------
Income (loss) before income taxes (1,793) 901 (4,388) 10,382
Income tax benefit (provision) 29 (212) 1,030 (3,240)
-------- -------- -------- --------
Net income (loss) (1,764) 689 (3,358) 7,142
-------- -------- -------- --------
Preferred stock dividend (437) (437) (875) (875)
-------- -------- -------- --------
Net income (loss) attributable to
common stock $ (2,201) $ 252 $ (4,233) $ 6,267
======== ======== ======== ========
Weighted average number of
common shares outstanding:
Basic 29,259 23,998 29,243 23,970
======== ======== ======== ========
Diluted 30,740 25,159 30,684 25,132
======== ======== ======== ========
Net income (loss) per common share
Basic $ (.08) $ .01 $ (.14) $ .26
======== ======== ======== ========
Diluted (.07) .01 (.14) .25
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE> 7
TOM BROWN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months ended
June 30,
------------------------
1998 1997
-------- --------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (3,358) $ 7,142
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation, depletion and amortization 20,698 17,351
Gain on sales of assets (2) (10)
Exploration costs 4,976 2,648
Impairments of leasehold costs 1,715 360
Deferred income taxes (1,563) 2,796
Changes in operating assets and
liabilities:
Decrease in accounts receivable 14,125 8,714
Increase in inventories (322) (113)
Decrease (increase) in other current assets (67) 207
Decrease in accounts payable and accrued expenses (8,812) (9,113)
Increase (decrease) in other non-current accounts (6,507) 184
-------- --------
Net cash provided by operating activities $ 20,883 $ 30,166
-------- --------
</TABLE>
(continued)
See accompanying notes to consolidated financial statements.
7
<PAGE> 8
TOM BROWN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months ended
June 30,
------------------------
1998 1997
-------- --------
(Unaudited)
<S> <C> <C>
Cash flows from investing activities:
Capital and exploration expenditures $(53,572) $(23,013)
Changes in accounts payable and
accrued expenses for oil and gas
expenditures (2,716) (972)
Proceeds from sales of assets 2,404 12,613
-------- --------
Net cash used in investing activities (53,884) (11,372)
-------- --------
Cash flows from financing activities:
Repayments of long-term debt (53,500) (29,000)
Repayments of note payable, current (5,168) --
Borrowings of long-term debt 91,000 --
Preferred stock dividends (875) (875)
Proceeds from exercise of stock options 583 1,235
-------- --------
Net cash provided by financing activities 32,040 (28,640)
-------- --------
Net decrease in cash and cash
equivalents (961) (9,846)
-------- --------
Cash and cash equivalents at beginning
of period 6,537 20,504
-------- --------
Cash and cash equivalents at end of period $ 5,576 $ 10,658
======== ========
Cash paid during the period for:
Interest $ 1,427 $ 2,941
Taxes 533 397
</TABLE>
See accompanying notes to consolidated financial statements.
8
<PAGE> 9
TOM BROWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(Unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The condensed consolidated financial statements included herein have
been prepared by Tom Brown, Inc. (the "Company") and are unaudited, except for
the balance sheet at December 31, 1997 which has been prepared from the audited
financial statements at that date. The financial statements reflect necessary
adjustments, all of which were of a recurring nature, and are in the opinion of
management, necessary for a fair presentation. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been omitted pursuant to the
rules and regulations of the Securities and Exchange Commission. The Company
believes that the disclosures presented are adequate to allow the information
presented not to be misleading. 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.
(2) ACQUISITIONS AND DIVESTITURES
Acquisition of Sauer Drilling Company
In January 1998, the Company completed the acquisition of W. E. Sauer
Companies L.L.C. of Casper, Wyoming for approximately $8.1 million. The assets
purchased include five drilling rigs, tubular goods, a yard and related assets.
The Company operates the assets under the name Sauer Drilling Company and will
continue to serve the drilling needs of operators in the central Rocky Mountain
region in addition to drilling for the Company.
Acquisition of Gathering and Processing Assets by Wildhorse
In December 1997, KN Energy, Inc. ("KNE") completed the acquisition of
all of the assets of Interenergy Corporation, ("Interenergy"). The assets
consist of gas gathering and processing facilities located in Wyoming, Montana,
North Dakota and South Dakota, as well as a marketing division. KNE retained the
marketing assets and Wildhorse Energy Partners, L.L.C. ("Wildhorse") acquired
the gathering and processing assets valued at $23.4 million. Wildhorse is owned
fifty-five percent (55%) by KNE and forty-five percent (45%) by the Company. The
Company's share of this purchase was approximately $10.5 million. These assets
consist of over 300 miles of pipeline and a processing plant. The Company will
benefit from the acquisition as it develops its acreage in the Big Horn Basin.
Acquisition of the Assets of Genesis Gas and Oil, L.L.C.
In October 1997, the Company completed the acquisition of the assets of
Genesis Gas and Oil, L.L.C. ("Genesis"). The Genesis assets are located
primarily in the Piceance Basin of western Colorado and the Green River Basin of
Wyoming and are principally operated by the Company. The properties provide
current net production of approximately 6 million cubic feet of gas and 150
barrels of oil per day. The acquisition increases the Company's acreage position
in the Piceance Basin from approximately 54,000 to 86,000 net developed and
100,000 to 148,000 net undeveloped acres. The Company's working interest has
doubled from 23% to 46% in 238 producing wells and from 34% to 68% in 500
potential development locations. The purchase price for these assets was
approximately $35.5 million.
9
<PAGE> 10
TOM BROWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
(3) DEBT
In December 1996, the Company entered into a bank credit agreement. The
credit agreement provided for a $125 million revolving credit facility (the
"Credit Facility") maturing in December 1999. This Credit Facility was repaid
and cancelled on April 17, 1998.
Also on April 17, 1998, the Company entered into a new $75 million
revolving credit facility (the "New Credit Facility") which matures in April
2001. Borrowings under the New 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 .625% to 1.00%. Interest
on amounts outstanding under the Credit Facility is due on the last day of each
month in the case of loans bearing interest at the prime rate or federal funds
rate and, in the case of loans bearing interest at the Eurodollar rate, interest
payments are due on the last day of each applicable interest period of one, two,
three or six months, as selected by the Company at the time of borrowing. At
June 30, 1998, the outstanding balance was $60.5 million at an average interest
rate of 7.02%.
Financial covenants of the Credit Facility require the Company to
maintain a minimum consolidated tangible net worth of not less than $350
million. 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. The Company was in compliance with all financial covenants at
June 30, 1998.
Standby letters of credit of approximately $2,188,000 have been issued
under two agreements. One agreement expires in April 1999 and the letter of
credit being maintained is security for performance on a long-term contract
entered into by Presidio. The second letter of credit is held as security by a
surety company for two oil and gas performance bonds issued to agencies of the
U.S. Government. The bonds will remain in place until released by the government
agencies.
10
<PAGE> 11
TOM BROWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
(4) INCOME TAXES
The Company has not paid Federal income taxes due to its net operating
loss carryforward, but is required to pay alternative minimum tax ("AMT"). This
tax can be partially offset by an AMT net operating loss carryforward.
Temporary differences and carryforwards which gave rise to significant
portions of deferred tax assets (liabilities) are as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
-------- --------
(in thousands)
<S> <C> <C>
Net operating loss carryforwards $ 16,793 $ 17,072
Gas and oil acquisition, exploration and development
costs deducted for tax purposes in excess of book (13,883) (16,819)
Investment tax credit carryforwards 857 857
Option plan compensation 1,559 1,559
Other 6,235 5,492
-------- --------
Net deferred tax asset 11,561 8,161
Valuation allowance (7,392) (5,555)
-------- --------
Recognized net deferred tax asset $ 4,169 $ 2,606
======== ========
</TABLE>
A valuation allowance of approximately $7.4 million at June 30, 1998
and $5.6 million at December 31, 1997, has been provided against the Company's
net deferred tax assets based on management's estimate of the recoverability of
future tax benefits. The valuation allowance relates primarily to the 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, the
year the carryforwards expire 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 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.
At June 30, 1998, the Company had investment tax credit carryforwards of
approximately $.9 million and net operating loss carryforwards of approximately
$48.0 million. 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 1998 and
2004. Additionally, the Company has approximately $2.0 million of statutory
depletion carryforwards and $4.1 million of AMT credit carryforwards that may be
carried forward until utilized.
11
<PAGE> 12
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
Revenues
During the three-month period ended June 30, 1998, revenues from natural
gas production increased $4.7 million to $18.4 million compared to the same
period in 1997. Such increase in gas revenues was the result of an increase in
(i) natural gas sales volumes of 18% which increased revenues by approximately
$2.8 million and (ii) average natural gas sales prices received by the Company
from $1.74 per Mcf to $1.98 per Mcf which increased revenues by approximately
$1.9 million. During the same three month period, revenues from oil production
decreased $2.5 million to $3.2 million compared to 1997. Such decrease in oil
revenues was the result of a decrease in (i) oil sales volumes of 16% which
decreased revenues by approximately $.6 million and (ii) average crude oil
sales prices from $17.68 to $11.78 per barrel which decreased revenues $1.9
million.
During the six month period ended June 30, 1998, revenues from natural gas
and oil production decreased $6.1 million to $41.7 million compared to the same
period in 1997. Such decrease in gas and oil revenues was the result of a
decrease in (i) average natural gas sales price received by the Company from
$2.30 per Mcf to $2.00 per Mcf which decreased revenues by approximately $4.7
million, (ii) oil sales volumes of 17% which decreased revenues by
approximately $1.3 million and (iii) average crude oil sales prices from $18.98
to $12.34 per barrel which decreased revenues $4.2 million. An increase in
natural gas sales volumes of 13% increased revenues by approximately $4.1
million.
Marketing, gathering and processing revenues increased $3.4 million and
$7.1 million, respectively, for the three and six month periods ended June 30,
1998 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 December 1997 purchase of gas gathering and
processing facilities, also through Wildhorse. The gross margin from these
activities decreased, however, during these periods, due to reduced marketing
price spreads and lower natural gas liquids prices.
Drilling revenue is the result of the purchase of Sauer Drilling Company
in January, 1998. Drilling revenues compared to cost of drilling netted a gross
margin for the three and six months ended June 30, 1998 approximately $0.1
million and $0.4 million, respectively.
12
<PAGE> 13
Selected Operating Data
<TABLE>
<CAPTION>
Three Months ended Six Months ended
June 30, June 30,
---------------------- ----------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues (in thousands):
Natural gas sales $ 18,357 $ 13,624 $ 35,174 $ 35,698
Crude oil sales 3,181 5,657 6,538 12,129
Marketing, gathering and processing 10,634 7,186 21,646 14,504
Drilling 642 -- 1,836 --
Other 269 421 430 907
-------- -------- -------- --------
Total revenues $ 33,083 $ 26,888 $ 65,624 $ 63,238
======== ======== ======== ========
Net income (loss) attributable to common
stock, (in thousands) $ (2,201) $ 252 $ (4,233) $ 6,267
======== ======== ======== ========
Natural gas production (MMcf) 9,285 7,845 17,588 15,554
Crude oil production (MBbls) 270 320 530 639
Average natural gas sales price ($/Mcf) $ 1.98 $ 1.74 $ 2.00 $ 2.30
Average crude oil sales price ($/Bbl) $ 11.78 $ 17.68 $ 12.34 $ 18.98
</TABLE>
Costs and Expenses
Costs and expenses for the three months ended June 30, 1998 increased
approximately 34% to $34.9 million as compared to the same period in 1997.
Lifting costs increased $.6 million due to higher prices received and increased
gas volumes sold during the second quarter of 1998 as compared to the same
period in 1997. Cost of gas sold increased $4.4 million as a result of the
addition of the December 1997 purchase of gas gathering and processing
facilities and the increased cost of transportation due to the narrowing margin
received between pipelines. Exploration costs increased $1.1 million due to
increased exploratory activity in the second quarter of 1998. Impairments of
leasehold costs increased by $.6 million as a result of additional accruals for
future impairments. General and administrative expenses increased $.2 million
due to increases in salaries, professional fees and insurance. Depreciation,
depletion and amortization increased $2.2 million due to the additional oil and
gas volumes produced in the second quarter, as well as the addition of
depreciation expense from Sauer Drilling.
Costs and expenses for the six months ended June 30, 1998, increased 32% to
70.0 million as compared to the same period in 1997. Lifting cost increased $.5
million as a result of increased gas production in the first six months of 1998.
Cost of gas sold increased $8.5 million as a result of the addition of the
December 1997 purchase of gas gathering and processing facilities and the
increased cost of transportation due to the narrowing margin received between
pipelines. Exploration costs increased $2.3 million due to increased exploratory
activity in the first six months of 1998. Impairments of leasehold costs
increased $1.4 million as a result of additional accruals for future
impairments. General and administrative expenses increased $1.5 million due to
increases in salaries, professional fees and insurance. Depreciation, depletion
and amortization increased $3.3 million as a result of increased production and
increased capital costs and also due to the addition of Sauer Drilling. Interest
expense and other decreased $1.9 million due to the higher level of debt for the
six months ended June 30, 1997 compared to the first six months of 1998.
13
<PAGE> 14
A valuation allowance of approximately $7.4 million at June 30, 1998 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, the year the carryforwards
expire 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 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.
CAPITAL RESOURCES AND LIQUIDITY
Growth and Acquisitions
Most of the growth of the Company has resulted from recent acquisitions
and, to a lesser extent, from the Company's successful development drilling. The
Company continues to pursue opportunities which will add value by increasing its
reserve base and presence in significant natural gas areas, and further
developing the Company's ability to control and market the production of natural
gas. As the Company continues to evaluate potential acquisitions and property
development opportunities, it will benefit from its financing flexibility and
the leverage potential of the Company's overall capital structure.
Capital Expenditures
The Company's capital and exploration expenditures for the three and six
month periods ended June 30, 1998 were approximately $15.8 million and $53.6
million as compared to $12.4 and $23.0 million in the same period in 1997.
The Company has historically funded capital expenditures and working
capital requirements with internally generated cash and borrowings. During the
six months ended June 30, 1998, net cash provided by operating activities was
$20.9 million as compared to $30.2 million for the same period of 1997.
Bank Credit Facility
In April 1998, the Company repaid and cancelled its $125 million revolving
credit facility and entered into a new $75 million credit facility that matures
in April 2001. The new credit facility has a current borrowing base of $75
million. The amount of the borrowing base is determined by reference to the
collateral value of the Company's net proved reserves. At June 30, 1998, the
aggregate outstanding balance under the new Credit Facility was $60.5 million,
bearing interest at approximately 7.02% per annum, and the Company was in
compliance with the covenants contained in the new Credit Facility. Borrowings
under the new Credit Facility are unsecured and bear interest, at the election
of the Company, at (i) the greater of the agent bank's prime rate or the federal
funds effective rate, plus 0.50% or (ii) the agent bank's Eurodollar rate, plus
a margin ranging from 0.625% to 1.00%. The new Credit Facility contains certain
financial covenants which require the Company to maintain a minimum consolidated
tangible net worth as well as certain financial ratios. See Note 3 to Notes to
Consolidated Financial Statements of the Company included elsewhere herein.
14
<PAGE> 15
Markets and Prices
Wildhorse, which was created to provide gathering, processing,
marketing, storage and field services to Rocky Mountain gas and oil producers,
will continue to pursue the construction or acquisition of gathering, processing
and storage areas of the Rocky Mountain region. During the six months ended June
30,1998, Wildhorse invested approximately $7.8 million for gas gathering and
processing assets. The Company (45 percent) and KNE (55 percent) jointly own
Wildhorse. Wildhorse is operated by KNE under the direction of an operating team
with equal representation from KNE and the Company.
The Company has dedicated significant amounts of its Rocky Mountain gas
production to Wildhorse for gathering, processing and marketing. KNE contributed
gas marketing contracts and storage assets in western Colorado.
The Company's revenues and associated cash flows are significantly
impacted by changes in gas and oil prices. All of the Company's gas and oil
production is currently market sensitive as no amounts of the Company's future
gas and oil production have been sold at contractually specified prices. During
the first six months of 1998, the average prices received for gas and oil by the
Company were $2.00 per Mcf and $12.34 per barrel, respectively, as compared to
$2.30 Mcf and $18.98 per barrel for the same period in 1997.
Year 2000
The Company utilizes software and technologies throughout its operations
that will be affected by the date change in the year 2000 (Year 2000 Issue). An
assessment of the systems that will be affected by the Year 2000 Issue is
underway. The Company does not believe the costs related to the Year 2000 Issue
will materially impact its results of operations. However, there can be no
guarantee that the systems of other companies, on which the Company's systems
rely, will be timely converted or that a failure to convert by another company
or a conversion that is incompatible with the Company's systems would not have a
material adverse effect on the Company. The Company is communicating with
software vendors, business partners, and others with which it conducts business
to provide assurances that their systems will be year 2000 compliant.
FORWARD-LOOKING STATEMENTS AND RISK
Certain statements in this report, including statements of the future
plans, objectives, and expected performance of the Company, are forward-looking
statements that are dependent on certain events, risks and uncertainties that
may be outside the Company's control which could cause actual results to differ
materially from those anticipated. Some of these include, but are not limited
to, economic and competitive conditions, inflation rates, legislative and
regulatory changes, financial market conditions, political and economic
uncertainties, future business decisions, and other uncertainties, all of which
are difficult to predict.
There are numerous uncertainties inherent in estimating quantities of
proven oil and gas reserves and in projecting future rates of production and
timing of development expenditures. The total amount or timing of actual future
production may vary significantly from reserves and production estimates. The
drilling of exploratory wells can involve significant risks including those
related to timing, success rates and cost overruns. Lease and rig availability,
complex geology and other factors can affect these risks. Future oil and gas
prices also could affect results of operations and cash flows.
15
<PAGE> 16
Recent Accounting Pronouncements
In the first quarter of 1998, the Company adopted SFAS No. 130
"Reporting Comprehensive Income", which requires the display of comprehensive
income and its components in the financial statements. Comprehensive income
represents all changes in equity of an entity during the reporting period,
including net income and charges directly to equity which are excluded from net
income. For the six months ended June 30, 1998 and 1997, there is no difference
between the Company's "traditional" and "comprehensive" net income.
In June 1997, the FASB also issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information" which establishes standards
for the way public enterprises are to report information about operating
segments in annual financial statements and requires the reporting of selected
information about operating segments in interim financial reports issued to
shareholders. SFAS No. 131 also establishes standards for related disclosures
about products and services, geographic areas, and major customers. SFAS No. 131
is effective for the Company for its fiscal year ending December 31, 1998, at
which time the Company will adopt the provision. This statement is not
anticipated to have a material impact on the Company's financial disclosures.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." The
Statement establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. The Statement requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Statement 133 is effective for fiscal years
beginning after June 15, 1999 and cannot be applied retroactively. Statement 133
must be applied to derivative instruments that were issued, acquired, or
substantially modified after December 31, 1997. The Company is evaluating
Statement 133 and has not yet quantified the impact adopting the Statement will
have on its financial statements. However, the Company has not engaged in
activities or entered into arrangements normally associated with derivative
instruments.
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use". The SOP provides
guidance with respect to accounting for the various types of costs incurred for
computer software developed or obtained for the Company's use. The Company is
required to and will adopt SOP 91-1 by the first quarter of fiscal 1999 and
believes that adoption will not have a significant effect on its consolidated
financial statements.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities", which requires costs of start-up activities to be expensed
as incurred. The statement is effective for financial statement beginning after
December 15, 1998. The Company expects to expense currently capitalized costs
related to start-up activities as a cumulative effect of a change in accounting
principle when the statement is adopted in January 1999. The adoption of this
standard is not expected to have a significant effect on the Company's financial
position or results of operations.
16
<PAGE> 17
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
17
<PAGE> 18
TOM BROWN, INC. AND SUBSIDIARIES
OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company's annual meeting of stockholders was held on May 21, 1998. At
the meeting, the following persons were elected to serve as Directors of the
Company until the 1998 annual meeting of stockholders and until their respective
successors are duly qualified and elected: (1) Thomas C. Brown, (2) Donald L.
Evans, (3) William R. Granberry, (4) Henry Groppe, (5) Edward W. LeBaron, Jr.
(6) James B. Wallace, (7) Robert H. Whilden, Jr., (8) David M. Carmichael and
(9) Clyde McKenzie.
Set forth below is a tabulation of votes with respect to each nominee for
Director:
<TABLE>
<CAPTION>
Votes Votes Broker
Cast For Withheld Non-votes
-------- ------- ---------
<S> <C> <C> <C>
Thomas C. Brown 25,206,523 89,293 -0-
Donald L. Evans 25,206,624 89,192 -0-
William R. Granberry 25,206,624 89,192 -0-
Henry Groppe 25,206,624 89,192 -0-
Edward W. LeBaron, Jr. 25,206,584 89,232 -0-
James B. Wallace 25,206,549 89,267 -0-
Robert H. Whilden, Jr. 25,206,578 89,238 -0-
</TABLE>
In addition to the above directors elected by the holders of the Common
Stock, the sole holder of the Company's 1,000,000 shares of outstanding
Preferred Stock also designated David M. Carmichael and Clyde McKenzie as
directors.
18
<PAGE> 19
Item 6. Exhibits and Reports on Form 8-K and Form 8-K/A
<TABLE>
<CAPTION>
(a) Exhibit No. Description
<S> <C>
10.1 Severance Agreement dated as of July 1, 1998 together
with a schedule identifying officers of the Registrant
who are parties thereto and the multiple of earnings
payable to each officer upon termination resulting from
certain change in control events.
10.2 The Registrant's Severance Plan dated as of July 1,
1998.
10.3 First Amendment to Employment Agreement dated as of July
1, 1998 between the Registrant and Donald L. Evans.
27 Financial Data Schedule
</TABLE>
(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)
August 10, 1998 /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
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
10.1 Severance Agreement dated as of July 1, 1998 together with a
schedule identifying officers of the Registrant who are parties
thereto and the multiple of earnings payable to each officer upon
termination resulting from certain change in control events.
10.2 The Registrant's Severance Plan dated as of July 1, 1998.
10.3 First Amendment to Employment Agreement dated as of July 1, 1998
between the Registrant and Donald L. Evans.
27 Financial Data Schedule
</TABLE>
<PAGE> 1
SEVERANCE AGREEMENT
This SEVERANCE AGREEMENT (the "Agreement"), dated as of July 1, 1998
is between TOM BROWN, INC., a Delaware corporation (the "Company"), and
________________________ ("Executive").
WHEREAS, the Board of Directors of the Company (the "Board")
recognizes the possibility of a proposed or threatened transaction or
transactions, the aggregate effect of which may be a Change in Control or an
Asset Acquisition (both as defined in Section 2(c) hereof) (each of which is
referred to below as a "Transaction");
WHEREAS, the Board has determined that, pending the consideration of
such a Transaction, it is imperative that the Company and the Board be able to
rely upon Executive to continue in Executive's position, and that the Company
be able to receive and rely upon Executive's advice, if requested, as to the
best interests of the Company and its shareholders without concern that
Executive might be distracted by the personal uncertainties and risks created
by such proposed Transaction; and
WHEREAS, the Board has authorized the Company to enter into a
severance agreement in the form hereof with Executive.
NOW, THEREFORE, to assure the Company that it will have the continued
dedication of Executive and the availability of Executive's advice and counsel
notwithstanding the possibility, threat or occurrence of any Transaction, and
to induce Executive to remain in the employ of the Company, and for other good
and valuable consideration, the Company and Executive agree as follows:
1. SERVICES DURING CERTAIN EVENTS.
(a) Executive agrees that Executive will not voluntarily
leave the employ of the Company, and will render the services
contemplated in the recitals to this Agreement, during the pendency of
any Transaction and until such Transaction has been consummated or the
discussions relating to any such Transaction are terminated.
(b) In the event an Asset Acquisition with a Person other
than the Company is proposed or a Person begins a tender or exchange
offer or takes other steps to effect a Change in Control, Executive
agrees that Executive will not voluntarily leave the employ of the
Company, and will render the services contemplated in the recitals to
this Agreement, until such Asset Acquisition is effected or terminated
or such Person has abandoned or terminated its efforts to effect a
Change in Control or until a Change in Control has occurred.
2. TERMINATION FOLLOWING CERTAIN EVENTS. Except as provided
in Section 4 hereof, the Company will provide or cause to be provided to
Executive the rights and benefits described in Section 3 hereof in the event
that Executive's employment by the
<PAGE> 2
Company is terminated within two (2) years following an Asset Acquisition or a
Change in Control (or, if prior to an Asset Acquisition or a Change in Control,
the Executive's employment by the Company is terminated and if it is reasonably
demonstrated by the Executive that such termination of employment was at the
request of a third party who has taken steps reasonably calculated to effect an
Asset Acquisition or a Change in Control or otherwise arose in connection with
or anticipation of an Asset Acquisition or a Change in Control) and such
termination is instituted:
(a) by the Company for reasons other than:
(i) (as defined in Section 4(a) hereof),
(ii) Executive's death or disability, or
(iii) Executive's retirement on or after
reaching age 65 ("Normal Retirement Date"), or
(b) by Executive following the occurrence of any of the
following events without Executive's written consent (but in no event
upon termination for cause, as defined in Section 4(a) hereof, by the
Company):
(i) the assignment of Executive to any duties or
responsibilities that are materially inconsistent with
Executive's position and status with the Company,
(ii) the reduction of Executive's Earnings (as
defined in Section 3(a)) (including any deferred portion
thereof),
(iii) a diminution in (A) Executive's eligibility
to participate in bonus, stock option, incentive award and
other compensation plans or (B) employee benefits (including
but not limited to medical, dental, life insurance, long term
disability and supplemental employee retirement plans) and
perquisites applicable to Executive, or
(iv) a change in the location of Executive's
principal place of employment by the Company from the location
where Executive was principally employed,
each such event determined as compared to Executive's terms and
conditions of employment immediately prior to such Asset Acquisition
or Change in Control or anticipatory period preceding such Asset
Acquisition or Change in Control, if applicable.
(c) Certain Definitions. For purposes of this Agreement:
<PAGE> 3
(i) an "Asset Acquisition" shall be deemed to
have occurred if any Person, a group or groups of related or
unrelated Persons acquires more than fifty percent (50%) in
value of the oil and gas properties of the Company pursuant to
one or more transactions with the Company during the term of
this Agreement.
(ii) a "Change in Control" shall be deemed to have
occurred if (A) any Person is or becomes the Beneficial Owner
(as defined in Section 2(c) hereof) of securities of the
Company representing twenty percent (20%) or more of the
Voting Power (as defined in Section 2(c) hereof), (B) there
shall occur a change in the composition of a majority of the
Board within any period of four (4) consecutive years which
change shall not have been approved by a majority of the Board
as constituted immediately prior to such change in
composition, (C) at any meeting of the shareholders of the
Company called for the purpose of electing directors, more
than one of the persons nominated by the Board for election as
directors shall fail to be elected, or (D) the consummation of
a merger, consolidation, sale of substantially all of the
assets of the Company or other reorganization of the Company,
other than a reincorporation, in which the Company does not
survive.
(iii) (A) "Person" shall have the meaning set forth
in Sections 3(a)(9) and 13(d)(3) of the Securities Exchange
Act of 1934, as in effect on May 1, 1995, (B) "Beneficial
Owner" shall have the meaning set forth in Rules 13d-3 and
13d-5 under the Securities Exchange Act of 1934, as in effect
on May 1, 1998, and (C) "Voting Power" shall mean the voting
power of the outstanding securities of the Company having the
right under ordinary circumstances to vote at an election of
the Board.
3. RIGHTS AND BENEFITS UPON TERMINATION. Subject to the
conditions set forth in Section 4 hereof, in the event Executive is entitled
pursuant to Section 2 hereof to receive the rights and benefits described in
this Section 3 as a result of the termination of Executive's employment
("Termination"), the Company agrees to provide or cause to be provided to
Executive the following rights and benefits:
(a) Cash Payment. Executive shall be entitled to receive
not later than five (5) days following the date of Termination a
lump-sum payment in cash in an amount equal to a multiple of
____________ (____) times the Executive's Earnings (as such term is
defined below). For purposes of this Agreement, "Earnings" shall mean
the total of (i) the base salary paid to Executive during the twelve
month period preceding the date of Termination; and (ii) the amount of
any bonus or bonuses paid to Executive during the twelve month period
preceding the date of Termination; but no less than the base salary
and bonuses paid to Executive during the twelve month period preceding
the Asset Acquisition or Change in Control or anticipatory period
preceding such Asset Acquisition or Change in Control, if applicable.
-3-
<PAGE> 4
(b) Insurance and Other Similar Benefits. To the extent
Executive is eligible thereunder, Executive shall continue to be
covered by the life insurance, medical and dental plans, and accident
and disability plans of the Company or any successor plan or program
in effect at Termination for employees in the same class or category
as Executive, subject to the terms of such plans and to Executive's
making any required contributions thereto, for a period of
_________________ (___) years after the date of Termination, exclusive
of and in addition to all benefits required by the Consolidated
Omnibus Budget Reconciliation Act of 1985 ("COBRA"), (or until
Executive's Normal Retirement Date, whichever is sooner); provided,
however, that if during such period Executive should enter into the
employ of another company or firm which provides such benefits
(similar in scope to those currently provided by the Company) to its
executives in general, the Company's obligations to provide such
benefits shall cease. In the event Executive is ineligible to
continue to be so covered under the terms of any such benefit plan or
program, or, in the event Executive is eligible but the benefits
applicable to Executive are not substantially equivalent to the
benefits applicable to Executive immediately prior to Termination, for
the aforementioned period, the Company shall provide to Executive
through other sources such benefits, including such additional
benefits, as may be necessary to make the benefits applicable to
Executive substantially equivalent (on an after-tax basis) to those in
effect before Termination. Nothing contained in this paragraph shall
be deemed to require or cause termination or restriction of any of
Executive's coverages under any such benefit plan or program of the
Company or any of its subsidiaries or any successor plan or program
thereto to which Executive is entitled under the terms of such plan or
program, whether at the end of the aforementioned period or at any
other time.
(c) Other Benefit Plans. The specific arrangements
referred to in this Section 3 are not intended to require or to
exclude Executive's continued participation in other benefit plans in
which Executive currently participates or which are available to
executive personnel generally in the class or category of Executive or
to preclude other compensation or benefits as may be authorized by the
Board from time to time.
(d) Duty to Mitigate. Executive's entitlement to
benefits hereunder shall not be governed by any duty to mitigate by
seeking further employment nor offset by any compensation which
Executive may receive from future employment.
4. CONDITIONS TO THE OBLIGATIONS OF THE COMPANY. The Company
shall have no obligation to provide or cause to be provided to Executive the
rights and benefits described in Section 3 hereof if any of the following
events shall occur:
(a) the Company shall terminate Executive's employment by
reason of Executive's (i) conviction of a felony or a misdemeanor
involving moral
-4-
<PAGE> 5
turpitude, (ii) failure to perform his duties or responsibilities in a
manner satisfactory to the Company, (iii) engagement in conduct which
is injurious (monetarily or otherwise) to the Company or any of its
affiliates (including, without limitation, misuse of the Company's or
an affiliate's funds or other property), (iv) engagement in business
activities which are in conflict with the business interests of the
Company, (v) insubordination or (vi) engagement in conduct which is in
violation of the Company's safety rules or standards or which
otherwise causes injury to another employee or any other person
(termination for "cause"); or
(b) Executive shall not, promptly after Termination and
upon receiving a written request to do so, resign as a director or
officer of the Company and each subsidiary and affiliate of the
Company of which Executive is then serving as a director or officer;
or
(c) Executive shall fail to release the Company, its
affiliates and their officers, directors, employees and agents from
any and all claims and causes of action, in a written form acceptable
to the Company and signed by the Executive.
5. CONFIDENTIALITY AND CONSULTANCY.
(a) Confidentiality. Executive agrees that at all times
following Termination, Executive will not, without the prior written
consent of the Company, disclose to any person, firm or corporation
any confidential information of the Company or its subsidiaries which
is now known to Executive or which hereafter may become known to
Executive as a result of his employment or association with the
Company and which could be helpful to a competitor, unless such
disclosure is required under the terms of a valid and effective
subpoena or order issued by a court or governmental body; provided,
however, that the foregoing shall not apply to confidential
information which becomes publicly disseminated by means other than a
breach of this Agreement.
(b) Consultation. Executive agrees that, for a period of
one (1) year following the date of Termination, Executive will use
reasonable efforts to be available to the Company for consultation
with the Board and senior officers of the Company; provided, however,
that Executive shall not be required to perform consulting services
(i) for more than three (3) days in any month or (ii) for more than
ten (10) hours in any month. It is expressly agreed that Executive's
consulting services will be required at such time and such places as
will result in the least inconvenience to Executive, taking into
consideration Executive's other business commitments during such
period which may obligate Executive to honor such other commitments
prior to Executive's rendering services hereunder. It is further
agreed that Executive's consulting services shall be rendered by
personal consultation at Executive's principal residence or office,
wherever maintained, or by correspondence through mail, telephone or
electronic mail or other similar modes of communication at times,
including weekends and evenings, most
-5-
<PAGE> 6
convenient to Executive. The Company and Executive agree that if,
during such period, Executive should enter into the full-time employ
of another company or firm, Executive shall not be required to consult
at times that will conflict with Executive's responsibilities with
respect to such employment.
(c) Remedies for Breach. It is recognized that damages
in the event of breach of this Section 5 by Executive would be
difficult, if not impossible, to ascertain, and it is therefore agreed
that the Company, in addition to and without limiting any other remedy
or right it may have, shall have the right to an injunction or other
equitable relief in any court of competent jurisdiction enjoining any
such breach, and Executive hereby waives any and all defenses
Executive may have on the ground of lack of jurisdiction or competence
of the court to grant such an injunction or other equitable relief.
The existence of this right shall not preclude the Company from
pursuing any other rights and remedies at law or in equity which the
Company may have.
6. REDUCTION IN PAYMENTS. Notwithstanding the provisions of
Section 3(a) hereof, in no event shall any payment to be made under Section
3(a) exceed $1.00 less than three times the Executive's "base amount" within
the meaning of Section 280 G of the Internal Revenue Code of 1986, as amended
(the "Code"). If any portion of the payments or benefits to be made available
to Executive pursuant to Section 3 would be considered an "excess parachute
payment" within the meaning of Section 280G of the Code, the amount of cash
otherwise payable to Executive pursuant to Section 3(a) hereof shall be reduced
to the extent (but only to the extent) necessary to cause no portion of the
payments or benefits made available to the Executive pursuant to Section 3
hereof to be considered an "excess parachute payment" within the meaning of
Section 280G of the Code. Arthur Andersen LLP or such other accounting firm
that may be agreed upon by the Company and the Executive (the "Accounting
Firm") shall determine the Executive's "base amount" and the amount of any
"excess parachute payments" for purposes of this Section 6. All determinations
made by the Accounting Firm shall be made within 60 days of Termination and
shall be binding on the Company and the Executive. All fees and expenses of
the Accounting Firm shall be borne solely by the Company.
7. TERM OF AGREEMENT. This Agreement shall remain in full force
and effect through December 31, 2003, and, beginning each January 1st
thereafter, this Agreement shall be automatically extended for additional one
(1) year periods, unless by September 30th of any year the Company gives notice
that this Agreement will not be so extended. Notwithstanding the foregoing,
the term of this Agreement is automatically extended for a minimum of
twenty-four (24) months following an Asset Acquisition or a Change in Control.
8. MISCELLANEOUS.
(a) Assignment. No right, benefit or interest hereunder
shall be subject to assignment, anticipation, alienation, sale,
encumbrance, charge, pledge, hypothecation or set-off in respect of
any claim, debt or obligation, or to
-6-
<PAGE> 7
execution, attachment, levy or similar process; provided, however,
that Executive may assign any right, benefit or interest hereunder if
such assignment is permitted under the terms of any plan or policy of
insurance or annuity contract governing such right, benefit or
interest.
(b) Construction of Agreement. Except as expressly
provided herein, nothing in this Agreement shall be construed to amend
any provision of any plan or policy of the Company. This Agreement is
not, and nothing herein shall be deemed to create, a commitment of
continued employment of Executive by the Company. The benefits
provided under this Agreement shall be in addition to any other
compensation agreement or arrangement that the Company may have with
Executive.
(c) Amendment. This Agreement may not be amended,
modified or cancelled except by written agreement of the parties.
(d) Waiver. No provision of this Agreement may be waived
except by a writing signed by the party to be bound thereby.
(e) Severability. In the event that any provision or
portion of this Agreement shall be determined to be invalid or
unenforceable for any reason, the remaining provisions of this
Agreement shall remain in full force and effect to the fullest extent
permitted by law.
(f) Successors.
(i) The Company will require any successor,
whether direct or indirect, by purchase, merger, consolidation
or otherwise, to all or substantially all of the business
and/or assets of the Company to expressly assume and agree to
perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no
such succession had taken place.
(ii) This Agreement shall inure to the benefit of,
and be enforceable by, Executive's personal or legal
representatives, executors, administrators, successors, heirs,
distributees, devisees and legates. If the Executive dies
prior to the receipt of all benefits payable hereunder with
respect to events occurring prior to death, all such benefits
shall be paid pursuant to the last beneficiary designation
executed by the Executive and filed with the Company. If no
beneficiary form has been filed with respect to this
Agreement, all such benefits shall be paid to the Executive's
estate.
(g) Taxes. Any payment or delivery required under this
Agreement shall be subject to all requirements of the law with regard
to withholding of taxes, filing, making of reports and the like, and
the Company shall use its best efforts to satisfy promptly all such
requirements.
-7-
<PAGE> 8
(h) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, WITHOUT
GIVING EFFECT TO ITS CONFLICTS OF LAWS PRINCIPLES.
(i) Not Contract of Employment. Subject to the
provisions of Sections 1 (a) and (b), and Section 3, of this
Agreement, the entering into of this Agreement shall not be deemed to
be a contract of employment between the Company and the Executive, or
to be consideration for the employment of the Executive, and thus
nothing herein contained shall be deemed to give the Executive the
right to be retained in the employ of the Company or to restrict the
right of the Company to discharge the Executive at any time.
(j) Gender. Wherever in this instrument words are used
in the masculine or neuter gender, they shall be read and construed as
in the masculine, feminine or neuter gender wherever they would so
apply, and vice versa. Wherever words appear in the singular or
plural, they shall be read and construed as in the plural or singular,
respectively, wherever they would so apply.
(k) Headings. The headings of the Sections herein are
included solely for reference convenience, and shall not in any way
affect the meaning or interpretation of the Agreement.
(l) Entire Agreement. This Agreement sets forth the
entire agreement and understanding of the parties hereto with respect
to the matters covered hereby.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
TOM BROWN, INC.
By:_________________________________
EXECUTIVE
By:_________________________________
-8-
<PAGE> 9
Severance Agreements
Officer Multiple
------- --------
Donald L. Evans 2.5
William R. Granberry 2
Peter R. Scherer 2
Thomas W. Dyk 2
Bruce R. DeBoer 2
Clifford C. Drescher 2
Richard B. Porter 2
R. Kim Harris 2
B. Jack Reed 2
William H. Munn, II 2
<PAGE> 1
TOM BROWN, INC.
SEVERANCE PLAN
THIS SEVERANCE PLAN (the "Plan") dated as of July 1, 1998 is hereby
adopted pursuant to the authorization of the Board of Directors of Tom Brown,
Inc., a Delaware corporation, for the benefit of its eligible employees under
the following circumstances:
I.
DEFINITIONS AND CONSTRUCTION
1.1 Definitions. Where the following words and phrases appear in
the Plan, they shall have the respective meanings set forth below, unless
their context clearly indicates to the contrary.
(a) "Asset Acquisition" shall be deemed to have occurred
if any Person, a group or groups of related or unrelated Persons acquires more
than fifty percent (50%) in value of the oil and gas properties of the Company
pursuant to one or more transactions with the Company during the term of this
Agreement.
(b) "Base Pay" shall mean the annualized base rate of
compensation paid by the Company to a Covered Employee (including amounts which
the Covered Employee could have received in cash had he not elected to
contribute to an employee benefit plan maintained by the Company), excluding
overtime pay, commissions, bonuses, employee benefits, added premiums,
differentials, and all forms of incentive compensation. Base Pay shall be
determined effective as of the date of the Covered Employee's Involuntary
Termination. A "Week's Base Pay" shall mean Base Pay divided by fifty- two.
(c) "Beneficial Owner" shall have the meaning set forth
in Rules 13d-3 and 13d-5 under the Securities Exchange Act of 1934, as in
effect on May 1, 1998.
(d) "Board" shall mean the Board of Directors of the
Company.
(e) "Change in Control" shall be deemed to have occurred
if (1) any Person is or becomes the Beneficial Owner of securities of the
Company representing twenty percent (20%) or more of the Voting Power, (2)
there shall occur a change in the composition of a majority of the Board within
any period of four (4) consecutive years which change shall not have been
approved by a majority of the Board as constituted immediately prior to such
change in composition, (3) at any meeting of the shareholders of the Company
called for the purpose of electing directors, more than one of the persons
nominated by the Board for election as directors shall fail to be elected, or
(4) the consummation of a merger, consolidation, sale of substantially all of
the assets of the
<PAGE> 2
Company or other reorganization of the Company, other than a reincorporation,
in which the Company does not survive.
(f) "Committee" shall mean the Compensation Committee of
the Board.
(g) "Company" shall mean Tom Brown, Inc. and any
affiliated entity which is a "Participating Company" hereunder.
(h) "Covered Employee" shall mean any individual who, on
or after the Effective Date, is a regular, full-time employee of the Company
(not including consultants or temporary, casual or part time employees) other
than an employee who is otherwise covered by a pre-existing severance plan or
is a party to a written agreement with the Company which separately provides
for severance payments or benefits upon such individual's termination of
employment with the Company.
(i) "Effective Date" shall mean July 1, 1998.
(j) "Involuntary Termination" shall mean the termination,
on or within two years after the Effective Date, of a Covered Employee's
employment with the Company as a result of or in connection with an Asset
Acquisition or a Change in Control; provided, however, the term "Involuntary
Termination" shall not include:
(1) a resignation by the Covered Employee;
(2) a Termination for Cause or a termination
other than as a result of or in connection with an Asset Acquisition
or a Change in Control;
(3) a termination as a result of the Covered
Employee's death;
(4) any termination as the result of the Covered
Employee's disability under circumstances entitling him to benefits
under the Company's long-term disability plan;
(5) any termination which the Company expects to
be of short duration and pursuant to which the Covered Employee is
subject to recall within a reasonable period of time (as determined by
the Committee); or
(6) any termination occurring as a result of or
in connection with an Asset Acquisition or a Change in Control
pursuant to which the Covered Employee is employed with an affiliate
of the Company or an acquiring or merging company.
(k) "Person" shall have the meaning set forth in Sections
3(a)(9) and 13(d)(3) of the Securities Exchange Act of 1934, as in effect on
May 1, 1998.
-2-
<PAGE> 3
(l) "Severance Amount" shall mean an amount equal to two
and one-half (2 1/2) Week's Base Pay for each of such Covered Employee's Years
of Service, but in no event shall such amount be less than twelve Week's Base
Pay.
(m) "Termination for Cause" shall mean any termination of
a Covered Employee's employment with the Company by reason of the Covered
Employee's (1) conviction of a felony or a misdemeanor involving moral
turpitude, (2) failure to perform his duties or responsibilities in a manner
satisfactory to the Company, (3) engagement in conduct which is injurious
(monetarily or otherwise) to the Company or any of its affiliates (including,
without limitation, misuse of the Company's or an affiliate's funds or other
property), (4) engagement in business activities which are in conflict with
the business interests of the Company, (5) insubordination or (6) engagement in
conduct which is in violation of the Company's safety rules or standards or
which otherwise causes injury to another employee or any other person.
(n) "Voting Power" shall mean the voting power of the
outstanding securities of the Company having the right under ordinary
circumstances to vote at an election of the Board.
(o) "Year of Service" shall mean, with respect to a
particular Covered Employee, each year of such Covered Employee's continuous
employment by the Company from his most recent date of hire to the date his
employment is subject to an Involuntary Termination (a partial year shall be
deemed to be a full year for purposes of this definition). If a Covered
Employee's employment is terminated and he is then reemployed under the
circumstances described in Section 1.1(j)(5), then such Covered Employee shall
be deemed to be continuously employed by the Company during the entire period
of such layoff.
1.2 Number and Gender. Wherever appropriate herein, word
used in the singular shall be considered to include the plural and the plural
to include the singular. The masculine gender, where appearing in this Plan,
shall be deemed to include the feminine gender.
1.3 Headings. The headings of Articles and Sections herein are
included solely for convenience and if there is any conflict between such
headings and the text of the Plan, the text shall control.
II.
SEVERANCE BENEFITS
2.1 Severance Benefits. Subject to the provisions of Section
2.2 hereof, if a Covered Employee's employment by the Company shall be subject
to an Involuntary Termination, then the Covered Employee shall be entitled to
the following:
-3-
<PAGE> 4
(a) a lump sum cash payment within a reasonable period of
time after his termination of employment in an amount equal to the Severance
Amount. Payments provided herein shall be subject to any required tax
withholding and any employee benefit premiums, and
(b) continued availability, for a period of six months,
of the dental and medical insurance benefits in effect immediately prior to the
date of termination at the same cost to the Covered Employee in effect at such
time. Such dental and medical benefits, however, shall be subject, in the
Company's discretion, to such changes, if any, made thereto in respect of
benefits provided to retained Company employees. The Company shall have no
obligation to continue any other benefits, including, without limitation, life
insurance, accidental death and dismemberment insurance, long-term disability
benefits or any other benefits.
2.2 Release and Full Settlement. As a condition to the receipt of
any severance payment hereunder, the Company, in its sole discretion, may
require a Covered Employee whose employment by the Company has been subject to
an Involuntary Termination to first execute a release, in the form established
by the Company, releasing the Company, its shareholders, partners, officers,
directors, employees and agents from any and all claims and from any and all
causes of action of any kind or character, including but not limited to all
claims or causes of action arising out of such Covered Employee's employment
with the Company or the termination of such employment, and the performance of
the Company's obligations hereunder and the receipt of the benefits provided
hereunder by such Covered Employee shall constitute full settlement of all such
claims and causes of action.
2.3 Mitigation. A Covered Employee shall not be required to
mitigate the amount of any payment provided for in this Article II by seeking
other employment or otherwise, nor shall the amount of any payment provided for
in this Article II be reduced by any compensation or benefit earned by the
Covered Employee as a result of employment by another employer or by retirement
benefits. The benefits under the Plan are in addition to any other benefits to
which a Covered Employee is otherwise entitled.
III.
ADMINISTRATION OF PLAN
3.1 Appointment of Committee. The Plan shall be administered by
the Committee. The members of the Committee shall serve at the pleasure of the
Board and shall administer the Plan on behalf of the Company. At any time
during the term of his office, a member of the Committee may resign by giving
written notice to the Board and the Committee, such resignation to become
effective upon the appointment of a substitute member or, if earlier, the lapse
of thirty days after such notice is given as herein provided.
-4-
<PAGE> 5
3.2 Committee Procedure. A majority of the members of the
Committee shall constitute a quorum. Action by the Committee may be taken at a
meeting by a vote of a majority of those present or without a meeting by
unanimous consent in writing of all members. If a majority of Committee
members may not decide a particular issue or take action with respect to the
Plan because of the application of Section 3.4, the Board shall take such
action or decide such matter. The Committee shall also designate the person or
persons who shall be authorized to sign for the Committee and, upon such
designation, the signature of such person or persons shall bind the Committee.
3.3 Committee's Powers and Duties. It shall be a principal duty
of the Committee to see that the Plan is carried out, in accordance with its
terms, for the exclusive benefit of persons entitled to participate in the
Plan. The Committee shall be the named fiduciary and shall have full power to
administer the Plan in all of its details, subject to applicable requirements
of law. For this purpose, the Committee's powers shall include, but not be
limited to, the following authority, in addition to all other powers provided
by this Plan:
(a) to make and enforce such rules and regulations as it
deems necessary or proper for the efficient administration of the
Plan;
(b) to interpret the Plan, its interpretation thereof to
be final and conclusive on all persons claiming benefits under the
Plan;
(c) to decide all questions concerning the Plan and the
eligibility of any person to participate in the Plan;
(d) to make a determination as to the right of any person
to a benefit under the Plan (including, without limitation, to
determine whether and when there has been a termination of a Covered
Employee's employment and the cause of such termination);
(e) to appoint such agents, counsel, accountants,
consultants, claims administrator and other persons as may be required
to assist in administering the Plan;
(f) to allocate and delegate its responsibilities under
the Plan and to designate other persons to carry out any of its
responsibilities under the Plan, any such allocation, delegation or
designation to be in writing;
(g) to sue or cause suit to be brought in the name of the
Plan; and
(h) to obtain from the Company and from Covered Employees
such information as is necessary for the proper administration of the
Plan.
-5-
<PAGE> 6
3.4 Member's Own Participation. No Covered Employee or agent of
the Committee may act, vote, or otherwise influence a decision of the Committee
specifically relating to himself as a participant in the Plan.
3.5 Indemnification of Committee. The Company agrees to indemnify
and to defend to the fullest extent permitted by law any member of the
Committee against all liabilities, damages, costs and expenses (including
attorneys' fees and amounts paid in settlement of any claims approved by the
Company) occasioned by any act or omission to act in connection with the Plan,
if such act or omission was in good faith.
3.6 Compensation, Bond and Expenses. The members of the Committee
shall not receive compensation with respect to their services in respect of the
Plan. To the extent required by applicable law, but not otherwise, Committee
members shall furnish bond or security for the performance of their duties
hereunder. Any expenses properly incurred by the Committee incident to the
administration, termination or protection of the Plan, including the cost of
furnishing bond, shall be paid by the Company.
3.7 Claims Review. In any case in which a Covered Employee's
claim for Plan benefits is denied or modified, the Committee shall:
(a) state the specific reason or reasons for the denial
or modification;
(b) provide specific reference to pertinent Plan
provisions on which the denial or modification is based;
(c) provide a description of any additional material or
information necessary for the Covered Employee or his representative
to perfect the claim and an explanation of why such material or
information is necessary; and
(d) explain the Plan's claim review procedure as
contained herein.
In the event the request is denied or modified, if the Covered Employee or his
representative desires to have such denial or modification reviewed, he must,
within sixty days following receipt of the notice of such denial or
modification, submit a written request for review by the Committee of its
initial decision. Within sixty days following such request for review the
Committee shall, after providing a full and fair review, render its final
decision in writing to the Covered Employee or his representative stating
specific reasons for such decision. If special circumstances require an
extension of such sixty-day period, the Committee's decision shall be rendered
as soon as possible, but not later than 120 days after receipt of the request
for review. If an extension of time for review is required, written notice of
the extension shall be furnished to the Covered Employee or representative
prior to the commencement of the extension period.
-6-
<PAGE> 7
IV.
GENERAL PROVISIONS
4.1 Funding. The benefits provided herein shall be unfunded and
shall be provided from the Company's general assets.
4.2 Cost of Plan. The entire cost of the Plan shall be borne by
the Company and no contributions shall be required of the Covered Employees.
4.3 Plan Year. The initial Plan year shall be from July 1, 1998
through December 31, 1998. Thereafter, the Plan shall operate on a plan year
consisting of the twelve consecutive month period commencing on January 1 of
each year.
4.4 Amendment and Termination. The Plan may be amended from time
to time, or terminated and discontinued, at any time, in each case at the
discretion of the Board.
4.5 Other Adopting Entities. It is contemplated that affiliates
of the Company may adopt this Plan and thereby become a "Participating Company"
hereunder. Any such entity, whether or not presently existing, may become,
upon approval of the Board, a party hereto by appropriate action of its board
of directors or noncorporate counterpart. The provisions of the Plan shall
apply separately and equally to each Participating Company and its employees in
the same manner as is expressly provided for the Company and its employees,
except that the power to affect the Committee and the power to amend or
terminate the Plan shall be exercised by the Board alone. Nevertheless, any
Participating Company may, with the consent of the Board, incorporate in its
adoption agreement or in an amendment document specific provisions relating to
the operation of the Plan, and such provisions shall become a part of the Plan
as to such Participating Company only. Transfer of employment among the
Company and Participating Companies (and among any of their affiliates) shall
not be considered an Involuntary Termination hereunder. Any Participating
Company may, by appropriate action of its board of directors or noncorporate
counterpart, terminate its participation in the Plan. Moreover, the Board may,
in its discretion, terminate a Participating Company's Plan participation at
any time.
4.6 Not Contract of Employment. The adoption and maintenance of
the Plan shall not be deemed to be a contract of employment between the Company
and any person or to be consideration for the employment of any person.
Nothing herein contained shall be deemed to give any person the right to be
retained in the employ of the Company or to restrict the right of the Company
to discharge any person at any time nor shall the Plan be deemed to give the
Company the right to require any person to remain in the employ of the Company
or to restrict any person's right to terminate his employment at any time.
-7-
<PAGE> 8
4.7 Severability. Any provision in the Plan that is prohibited or
unenforceable in any jurisdiction by reason of applicable law shall, as to such
jurisdiction, be ineffective only to the extent of such prohibition or
unenforceability without invalidating or affecting the remaining provisions
hereof, and any such prohibitions or unenforceability in any jurisdiction shall
not invalidate or render unenforceable such provision in any other
jurisdiction.
4.8 Nonalienation. Covered Employees shall not have any right to
pledge, hypothecate, anticipate or assign benefits or rights under the Plan,
except by will or the laws of descent and distribution.
4.9 Governing Law. THE PLAN SHALL BE INTERPRETED AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS EXCEPT TO THE EXTENT PREEMPTED
BY FEDERAL LAW.
-8-
<PAGE> 1
FIRST AMENDMENT TO
EMPLOYMENT AGREEMENT
This First Amendment to Employment Agreement effective as of July 1,
1998 (this "Amendment") is between TOM BROWN, INC., a Delaware corporation (the
"Company"), and DONALD L. EVANS ("Employee").
R E C I T A L S :
A. The Company and Employee entered into that certain Second
Amended and Restated Employment Agreement effective January 1, 1997 (the
"Agreement").
B. The Company and Employee desire to amend the Agreement in
accordance with Paragraph 15 thereof as provided hereinbelow.
IN CONSIDERATION of the premises and other good and valuable
consideration the receipt and sufficiency of which is hereby acknowledged, the
Company and Employee hereby agree to amend the Agreement by adding a new
paragraph 21 as follows:
"21. Effective September 1, 1998, Employee and the Company
have entered into that certain Severance Agreement (the "Severance
Agreement") which provides Employee with compensation in the event of
a Change in Control or an Asset Acquisition (each as defined therein
and collectively referred to herein as "Severance Events").
Notwithstanding anything to the contrary set forth in this Agreement,
if Employee's employment with the Company is terminated such that the
provisions of the Severance Agreement are applicable to Employee,
Employee shall have the option to accept the greater of the benefits
of this Agreement or the Severance Agreement (which benefits are
intended to be mutually exclusive and not cumulative upon a
termination in conjunction with the occurrence of either of the
Severance Events)."
Except as specifically amended hereby, the Agreement shall remain in
full force and effect as to its terms.
IN WITNESS WHEREOF, the Company and Employee hereby execute this
Amendment to be effective as of the date first mentioned above.
EMPLOYEE TOM BROWN, INC.
/s/ Donald L. Evans By: /s/ William R. Granberry
- -------------------------------- -------------------------------
Donald L. Evans William R. Granberry, President
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