<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, 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 November 12, 1998.
<TABLE>
<CAPTION>
CLASS OF COMMON STOCK OUTSTANDING AT NOVEMBER 12, 1998
--------------------- --------------------------------
<S> <C>
$.10 PAR VALUE 29,259,989
</TABLE>
<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, 1998 and December 31, 1997 4
Consolidated Statements of Operations,
Three Months and Nine Months ended
September 30, 1998 and 1997 6
Consolidated Statements of Cash Flows,
Nine Months ended September 30, 1998 and 1997 7
Notes to Consolidated Financial Statements
Three and Nine Months ended September 30, 1998 and 1997 9
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 12
Part II. Other Information:
Item 6. Exhibits and Reports on Form 8-K 18
Signature 19
</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>
September 30, December 31,
1998 1997
---------- ----------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 10,962 $ 6,537
Accounts receivable 27,163 40,949
Inventories 533 365
Other 472 271
---------- ----------
Total current assets 39,130 48,122
---------- ----------
PROPERTY AND EQUIPMENT, AT COST:
Oil and gas properties, based on the successful
efforts accounting method 543,648 500,561
Other equipment 70,647 55,735
---------- ----------
614,295 556,296
Less: Accumulated depreciation and depletion 193,145 160,480
---------- ----------
Net property and equipment 421,150 395,816
---------- ----------
OTHER ASSETS:
Deferred income taxes, net 6,550 2,606
Other assets, net 7,825 4,382
---------- ----------
Total other assets 14,375 6,988
---------- ----------
$ 474,655 $ 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>
September 30, December 31,
1998 1997
---------- ----------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 25,670 $ 32,367
Accrued expenses 7,240 7,332
Note payable, current -- 5,168
---------- ----------
Total current liabilities 32,910 44,867
---------- ----------
BANK DEBT 70,500 23,000
---------- ----------
OTHER NON-CURRENT LIABILITIES 3,717 6,661
---------- ----------
STOCKHOLDERS' EQUITY:
Convertible preferred stock,
at $.10 par value. Authorized 2,500,000 shares;
Outstanding 1,000,000 shares with a liquidation
preference of $25,000,000 100 100
Common stock, at $.10 par value
Authorized 40,000,000 shares;
Outstanding 29,259,989 and
29,210,354 shares, respectively 2,926 2,921
Additional paid-in capital 431,082 430,502
Accumulated deficit (66,580) (57,125)
---------- ----------
Total stockholders' equity 367,528 376,398
---------- ----------
$ 474,655 $ 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 Nine Months ended
September 30, September 30,
----------------------------- -----------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Gas and oil sales $ 19,345 $ 18,833 $ 61,057 $ 66,660
Marketing, gathering and processing 11,163 8,642 32,809 23,146
Drilling 1,465 -- 3,301 --
Interest income and other 11 184 441 1,091
---------- ---------- ---------- ----------
Total revenues 31,984 27,659 97,608 90,897
---------- ---------- ---------- ----------
Costs and expenses:
Gas and oil production 4,480 3,850 12,558 12,046
Taxes on gas and oil production 1,652 1,455 5,917 5,144
Cost of gas sold 11,951 7,428 32,383 19,312
Cost of drilling 1,539 -- 3,022 --
Exploration costs 3,532 2,237 8,508 4,885
Impairments of leasehold costs 750 180 2,465 540
General and administrative 2,653 2,175 9,237 7,236
Depreciation, depletion and amortization 11,489 8,728 32,187 26,079
Interest expense and other 1,061 1,423 2,842 5,090
---------- ---------- ---------- ----------
Total costs and expenses 39,107 27,476 109,119 80,332
---------- ---------- ---------- ----------
Income (loss) before income taxes (7,123) 183 (11,511) 10,565
Income tax benefit (provision) 2,339 (83) 3,369 (3,323)
---------- ---------- ---------- ----------
Net income (loss) (4,784) 100 (8,142) 7,242
---------- ---------- ---------- ----------
Preferred stock dividend (438) (438) (1,313) (1,313)
---------- ---------- ---------- ----------
Net income (loss) attributable to
common stock $ (5,222) $ (338) $ (9,455) $ 5,929
========== ========== ========== ==========
Weighted average number of
common shares outstanding
Basic 29,260 24,152 29,248 24,032
========== ========== ========== ==========
Diluted 29,706 25,158 29,946 24,927
========== ========== ========== ==========
Net income (loss) per common share
Basic $ (.18) $ (.01) $ (.32) $ .25
========== ========== ========== ==========
Diluted $ (.18) $ (.01) $ (.32) $ .24
========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE> 7
TOM BROWN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months ended
September 30,
-------------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (8,142) $ 7,242
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Depreciation, depletion and amortization 32,187 26,079
Gain on sales of assets (2) (10)
Exploration costs 8,508 4,885
Impairments of leasehold costs 2,465 540
Deferred income taxes (3,944) 2,630
Changes in operating assets and
liabilities:
Decrease in accounts receivable 13,786 2,718
Increase in inventories (168) (91)
(Increase) decrease in other current assets (201) 179
Increase (decrease) in accounts
payable and accrued expenses 328 (5,354)
Increase in other non-current accounts (6,387) 523
-------- --------
Net cash provided by operating activities $ 38,430 $ 39,341
-------- --------
</TABLE>
(continued)
See accompanying notes to consolidated financial statements.
7
<PAGE> 8
TOM BROWN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months ended
September 30,
---------------------------
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from investing activities:
Capital and exploration expenditures $ (70,896) $ (41,164)
Changes in accounts payable and accrued
expenses for oil and gas expenditures (7,117) (2,137)
Proceeds from sales of assets 2,404 12,613
--------- ---------
Net cash used in investing activities (75,609) (30,688)
--------- ---------
Cash flows from financing activities:
Repayments of long-term bank debt (53,500) (29,000)
Repayments of note payable, current (5,168) --
Borrowings of long-term bank debt 101,000 6,000
Preferred stock dividends (1,313) (1,313)
Proceeds from exercise of stock options 585 1,528
--------- ---------
Net cash provided by financing activities 41,604 (22,785)
--------- ---------
Net increase (decrease) in cash and cash
equivalents 4,425 (14,132)
--------- ---------
Cash and cash equivalents at beginning
of period 6,537 20,504
--------- ---------
Cash and cash equivalents at end of period $ 10,962 $ 6,372
========= =========
Cash paid during the period for:
Interest $ 2,204 $ 4,945
Taxes 575 270
</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, 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. On October 19, 1998, the Company amended the New Credit Facility by
increasing the total commitment to $100 million. Borrowings under the amended
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 .75% to 1.25%. Interest on amounts outstanding
under the amended New 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
September 30, 1998, the outstanding balance was $70.5 million at an average
interest rate of 6.43%.
Financial covenants of the New 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
September 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 Oil Company, which the Company acquired in December
1996. 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>
September 30, December 31,
1998 1997
-------- --------
(in thousands)
<S> <C> <C>
Net operating loss carryforwards $ 17,276 $ 17,072
Gas and oil acquisition, exploration and development
costs deducted for tax purposes in excess of book (12,045) (16,819)
Investment tax credit carryforwards 857 857
Option plan compensation 1,559 1,559
Other 6,331 5,492
-------- --------
Net deferred tax asset 13,978 8,161
Valuation allowance (7,428) (5,555)
-------- --------
Recognized net deferred tax asset $ 6,550 $ 2,606
======== ========
</TABLE>
A valuation allowance of approximately $7.4 million at September 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 September 30, 1998, the Company had investment tax credit
carryforwards of approximately $.9 million and net operating loss carryforwards
of approximately $49.4 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 $2.1 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 September 30, 1998, revenues from
natural gas production increased $2.2 million to $16.5 million compared to the
same period in 1997. Such increase in gas revenues was the result of an
increase in natural gas sales volumes of 19% which increased revenues by
approximately $2.6 million. Average natural gas sales prices received by the
Company decreased from $1.82 per Mcf to $1.77 per Mcf which decreased revenues
by approximately $.4 million. During the same three month period, revenues
from oil production decreased $1.7 million to $2.8 million compared to 1997.
Such decrease in oil revenues was the result of a decrease in (i) oil sales
volumes of 6% which decreased revenues by approximately $.2 million and (ii)
average crude oil sales prices from $16.92 to $11.19 per barrel which
decreased revenues $1.5 million.
During the nine month period ended September 30, 1998, revenues from
natural gas and oil production decreased $5.6 million to $61.1 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 $2.13 per Mcf to $1.92 per Mcf which decreased revenues by
approximately $5.0 million, (ii) oil sales volumes of 14% which decreased
revenues by approximately $1.5 million and (iii) average crude oil sales
prices from $18.37 to $11.97 per barrel which decreased revenues $5.8 million.
An increase in natural gas sales volumes of 15% increased revenues by
approximately $6.7 million.
Marketing, gathering and processing revenues increased $2.5 million and
$9.7 million, respectively, for the three and nine month periods ended
September 30, 1998 as a result of increased activity in the Company's natural
gas marketing operations through Wildhorse, a joint venture with KN Energy,
Inc., and due to gathering revenues from a December 1997 purchase of gas
gathering and processing facilities, also through Wildhorse. The gross margin
from these activities decreased, however, during these periods, due to
compressed differentials between Rockies gas and Mid-Continent gas and lower
natural gas liquids prices.
Drilling revenue is the result of the purchase of Sauer Drilling Company
in January, 1998. Drilling revenues compared to cost of drilling netted a
gross margin (loss) for the three and nine months ended September 30, 1998
approximately ($.1) million and $.3 million, respectively.
12
<PAGE> 13
Selected Operating Data
<TABLE>
<CAPTION>
Three Months ended Nine Months ended
September 30, September 30,
------------------------- -------------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues (in thousands):
Natural gas sales $ 16,524 $ 14,315 $ 51,698 $ 50,013
Crude oil sales 2,821 4,518 9,359 16,647
Marketing, gathering and processing 11,163 8,642 32,809 23,146
Drilling 1,465 -- 3,301 --
Other 11 184 441 1,091
-------- -------- -------- --------
Total revenues $ 31,984 $ 27,659 $ 97,608 $ 90,897
======== ======== ======== ========
Net income (loss) attributable to common
stock, (in thousands) $ (5,222) $ (338) $ (9,455) $ 5,929
======== ======== ======== ========
Natural gas production (MMcf) 9,342 7,881 26,930 23,435
Crude oil production (MBbls) 252 267 782 906
Average natural gas sales price ($/Mcf) $ 1.77 $ 1.82 $ 1.92 $ 2.13
Average crude oil sales price ($/Bbl) $ 11.19 $ 16.92 $ 11.97 $ 18.37
</TABLE>
Costs and Expenses
Costs and expenses for the three months ended September 30, 1998 increased
approximately 43% to $39.1 million as compared to the same period in 1997.
Lifting costs increased $.8 million due to increased gas volumes sold during
the third quarter of 1998 as compared to the same period in 1997. Cost of gas
sold increased $4.5 million as a result of the addition of the December 1997
purchase of gas gathering and processing facilities, increased marketing
volumes, and the increased cost of transportation due to the narrowing margins
received between pipelines. Exploration costs increased $1.3 million due mainly
to the cost related to the Swanson Heirs #1 well being written off in the third
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 $.5 million due to increases in salaries,
professional fees and insurance. Depreciation, depletion and amortization
increased $2.8 million due to the additional gas volumes produced in the third
quarter of 1998, as well as the addition of depreciation expense from Sauer
Drilling.
Costs and expenses for the nine months ended September 30, 1998, increased
36% to $109.1 million as compared to the same period in 1997. Lifting cost
increased $1.3 million as a result of increased gas production in the first
nine months of 1998. Cost of gas sold increased $13.1 million as a result of
the addition of the December 1997 purchase of gas gathering and processing
facilities, increased marketing volumes, and the increased cost of
transportation due to the narrowing margins received between pipelines.
Exploration costs increased $3.6 million due to increased exploratory activity
in the first nine months of 1998. Impairments of leasehold costs increased $1.9
million as a result of additional accruals for future impairments. General and
administrative expenses increased $2.0 million due to increases in salaries,
professional fees and insurance. Depreciation, depletion and amortization
increased $6.1 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 $2.2 million due to the higher level of debt outstanding
for the nine months ended September 30, 1997 compared to the first nine months
of 1998.
13
<PAGE> 14
A valuation allowance of approximately $7.4 million at September 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 nine
month periods ended September 30, 1998 were approximately $17.3 million and
$70.9 million as compared to $18.2 and $41.2 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
nine months ended September 30, 1998, net cash provided by operating activities
was $38.4 million as compared to $39.3 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. On October 19, 1998, the Company amended the New
Credit Facility by increasing the total commitment to $100 million. The amount
of the borrowing base is determined by reference to the collateral value of the
Company's net proved reserves. At September 30, 1998, the aggregate outstanding
balance under the new Credit Facility was $70.5 million, bearing interest at
approximately 6.43% 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 0.75% to 1.25%. 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 nine
months ended September 30,1998, Wildhorse invested approximately $9.3 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 nine months of 1998, the average prices received for gas and oil by
the Company were $1.92 per Mcf and $11.97 per barrel, respectively, as compared
to $2.13 Mcf and $18.37 per barrel for the same period in 1997.
Year 2000
Many computer software systems were structured to use a two-digit date
field meaning that they will not be able to properly recognize dates in the
Year 2000. As a result, computer systems and software may need to be upgraded
to comply with such "Year 2000" requirements. Significant uncertainty exists
concerning the potential effects associated with such compliance as systems
that do not properly recognize such information could generate erroneous data
or cause a system to fail.
The Company has made a review of both its information technology and
its non-information technology systems to determine whether they are Year 2000
compliant, and has not identified any material systems which are not Year 2000
compliant. The Company has prepared a formal questionnaire for all significant
suppliers, customers and service providers to determine the extent to which the
Company is vulnerable to those third parties' failure to remediate the Year
2000 problem. The Company has received written assurances of Year 2000
compliance from many of the third parties with whom it has relationships and
this process is ongoing. The Company believes that its operations will not be
significantly disrupted even if third parties with whom the Company has
relationships are not Year 2000 compliant. Further, the Company believes that
it will not be required to make any material expenditures to address the Year
2000 problem as it relates to its existing systems. However, uncertainty exists
concerning the potential costs and effects associated with any Year 2000
compliance, and the Company intends to continue to make efforts to ensure that
third parties with whom it has relationships are Year 2000 compliant.
Therefore, there can be no assurance that unexpected Year 2000 compliance
problems of either the Company or its vendors, customers and service providers
would not materially and adversely affect the Company's business, financial
condition or operating results. The Company will continue to consider the
likelihood of a material business interruption due to the Year 2000 issue, and,
if necessary, implement appropriate contingency plans.
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
15
<PAGE> 16
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.
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 nine months ended September 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 98-1 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 statements for
periods 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 6. Exhibits and Reports on Form 8-K and Form 8-K/A
<TABLE>
<CAPTION>
(a) Exhibit No. Description
----------- -----------
<S> <C>
10.1* First Amendment, dated October 19, 1998, to the Credit Agreement, dated April
17, 1998.
27 Financial Data Schedule
</TABLE>
* Filed herewith
(b) Reports on Form 8-K
None
18
<PAGE> 19
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 12, 1998 /s/ Kim Harris
- ----------------- -------------------------------
Date Kim Harris
Controller
(Mr. Harris is the Controller
and is duly authorized to sign
on behalf of the Registrant)
19
<PAGE> 20
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
10.1* First Amendment, dated October 19, 1998, to the Credit Agreement, dated April
17, 1998.
27 Financial Data Schedule
</TABLE>
* Filed herewith
<PAGE> 1
EXHIBIT 10.1
EXECUTION COPY
FIRST AMENDMENT, dated as of October 19, 1998 (this "Amendment"), to
the Credit Agreement, dated as of April 17, 1998 (the "Credit Agreement"), among
Tom Brown, Inc., a Delaware corporation (the "Borrower"), the several banks and
other financial institutions from time to time parties thereto (the "Lenders")
and The Chase Manhattan Bank, a New York banking corporation, as administrative
agent for the Lenders thereunder (in such capacity, the "Agent").
WITNESSETH:
WHEREAS, the Borrower, the Lenders and the Agent are parties to the
Credit Agreement; and
WHEREAS, the Borrower has requested, and, upon this Amendment becoming
effective, the Lenders have agreed to amend the Credit Agreement to increase the
Commitments thereunder to $100,000,000.
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the Borrower, the Agent and the Lenders hereby agree as follows:
1. Defined Terms. Capitalized terms used herein and not otherwise
defined shall have the respective meanings set forth in the Credit Agreement.
2. Amendment to Subsection 1.1. (a) Subsection 1.1 of the Credit
Agreement is hereby amended by deleting the definition of "Applicable Margin"
appearing in such subsection and substituting in lieu thereof the following
definition:
"Applicable Margin: on each day when the Utilization
Percentage is less than 50%, 0.75% per annum; on each
day when the Utilization Percentage is equal to or
greater than 50% but less than or equal to 75%, 1.00%
per annum; and on each day when the Utilization
Percentage is greater than 75%, 1.25% per annum."
(b) Subsection 1.1 of the Credit Agreement is hereby amended by
deleting the amount "$75,000,000" from the definition of "Maximum Loan Amount"
and substituting therefor the amount "$100,000,000".
3. Amendment to Schedule I. Schedule I to the Credit Agreement is
hereby amended by deleting such Schedule I in its entirety and inserting in lieu
thereof Schedule I to this Amendment.
<PAGE> 2
2
4. Amendment to Subsection 6.4. (a) Subsection 6.4(b) of the Credit
Agreement is hereby amended by deleting the word "and" at the end of such
subsection.
(b) Subsection 6.4(c) of the Credit Agreement is hereby amended by
deleting the period at the end of such subsection and substituting in lieu
thereof "; and".
(c) Subsection 6.4 to the Credit Agreement is hereby amended by
adding the following new paragraph (d) to the end of such subsection:
"(d) Guarantee Obligations in respect of Petroleum
Price Hedge Agreements and Interest Rate Protection
Agreements entered into in compliance with subsection
6.15."
5. Agreement. Notwithstanding any provision in the Credit Agreement:
(a) Additional Loans made on or after the date of the Amendment
Effective Date (as defined below) shall be made in accordance with the pro rata
provisions of subsection 2.13 of the Credit Agreement based on the Commitment
Percentages in effect on and after the Amendment Effective Date (except to the
extent that any such pro rata borrowings would result in any Lender making an
aggregate principal amount of Loans in excess of its Commitment, in which case
such excess amount will be made pro rata and allocated to the remaining Lenders
based on their respective Commitments in effect on and after the Amendment
Effective Date).
(b) In the event that on the Amendment Effective Date there is an
unpaid principal amount of ABR Loans, the Borrower shall make prepayments
thereof and the Borrower shall make borrowings of ABR Loans and/or Eurodollar
Loans in accordance with subsection 2.2, as the Borrower shall determine, so
that, after giving effect thereto, the ABR loans and Eurodollar Loans
outstanding are held as nearly as may be in accordance with the pro rata
provisions of subsection 2.13 of the Credit Agreement and the Commitment
Percentages in effect on and after the Amendment Effective Date.
(c) In the event that on the Amendment Effective Date there is an
unpaid principal amount of Eurodollar Loans, such Eurodollar Loans shall remain
outstanding with the respective holders thereof until the expiration of their
respective Interest Periods (unless the Borrower elects to prepay any thereof in
accordance with the applicable provisions of the Credit Agreement), and on the
last day of the respective Interest Periods, the Borrower shall make prepayments
thereof and the Borrower shall make borrowings of ABR Loans and/or Eurodollar
Loans in accordance with Subsection 2.2, so that, after giving effect thereto,
the ABR Loans and Eurodollar Loans outstanding are held as nearly as may be in
accordance with the pro rata provisions of subsection 2.13 of the Credit
Agreement and the Commitment Percentages in effect on and after the Amendment
Effective Date.
<PAGE> 3
3
6. Effectiveness. The amendments provided for herein shall become
effective on the date (the "Amendment Effective Date") that the following
conditions precedent have been satisfied:
(a) the Agent shall have received, with a counterpart for each
Lender, this Amendment, duly executed and delivered by the Borrower, the
Required Lenders, each Lender whose Commitment is being increased and the Agent;
(b) the Agent shall have received, with a counterpart for each
Lender, a copy of the resolutions, in form and substance satisfactory to the
Agent, of the Borrower authorizing the execution, delivery and performance by
the Borrower of this Amendment;
(c) the Agent shall have received, with a counterpart for each
Lender, an opinion of Lynch, Chappell & Alsup, counsel to the Borrower, dated
the date hereof, in form and substance satisfactory to the Agent covering such
matters as the Agent may reasonably request;
(d) each of the Agent and each Lender shall have received any fees
and expenses required to be received by it on the Amended Effective Date;
(e) each Lender shall have received for its account a promissory
note of the Borrower evidencing the Revolving Credit Loans of such Lender,
substantially in the form of Exhibit A to the Credit Agreement, with appropriate
insertions as to date and principal amount; and
(f) the Agent shall have received, in form and substance
satisfactory to it, a written confirmation of the Subsidiaries Guarantee,
executed and delivered by a duly authorized officer of each Subsidiary
Guarantor.
7. Representations and Warranties. After giving effect to this
Amendment, on the Amendment Effective Date, the Borrower hereby confirms,
reaffirms and restates the representations and warranties set forth in Section 3
of the Credit Agreement.
8. Miscellaneous. (a) Except as otherwise expressly modified by this
Amendment, the Credit Agreement is and shall continue to be in full force and
effect in accordance with its terms.
(b) The Borrower shall pay the reasonable fees and disbursements of
counsel to the Agent incurred in connection with this Amendment, including,
without limitation, the reasonable fees and disbursements of counsel to the
Agent.
(c) This Amendment may be executed by the parties hereto on one or
more counterparts, and all of such counterparts shall be deemed to constitute
one and the same instrument. This Amendment may be delivered by facsimile
transmission of the relevant signature pages hereof.
<PAGE> 4
4
(d) THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE
WITH, THE LAWS OF THE STATE OF NEW YORK.
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be executed and delivered by their duly authorized officers on the
date first above written.
TOM BROWN, INC.
By: /s/ Donald L. Evans
---------------------------------------
Name: Donald L. Evans
Title: Chairman of the Board of Directors
and Chief Executive Officer
THE CHASE MANHATTAN BANK,
as Agent and as a Lender
By: /s/ Peter M. Ling
---------------------------------------
Name: Peter M. Ling
Title: Vice President
NATIONSBANK, N.A., as successor in merger
with NationsBank of Texas, N.A.,
as Co-Agent and as a Lender
By: /s/ Frank K. Stowers
---------------------------------------
Name: Frank K. Stowers
Title: Vice President
U.S. BANK NATIONAL ASSOCIATION,
as a Lender
By: /s/ Charles S. Searle
--------------------------------------
Name: Charles S. Searle
Title: Senior Vice President
<PAGE> 6
Schedule I
----------
Commitments
-----------
The Chase Manhattan Bank $ 35,000,000
NationsBank, N.A.(1) $ 32,500,000
U.S. Bank National Association $ 32,500,000
------------
$100,000,000
Addresses for Notices
---------------------
The Chase Manhattan Bank
270 Park Avenue, 32nd Floor
New York, New York 10017
Attention: Oil & Gas Group
Fax: (212) 270-3897
NationsBank, N.A.1
901 Main Street, 64th Floor
Dallas, Texas 75202
Attention: Dale Wilson
Fax: (214) 508-1286
U.S. Bank National Association
918 17th Street
CNBB0300
Denver, CO 80202
Attention: Charles S. Searle
Fax: (303) 585-4362
---------
(1) As successor in merger with NationsBank of Texas, N.A.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 10,962
<SECURITIES> 0
<RECEIVABLES> 27,163
<ALLOWANCES> 0
<INVENTORY> 533
<CURRENT-ASSETS> 39,130
<PP&E> 614,295
<DEPRECIATION> 193,145
<TOTAL-ASSETS> 474,655
<CURRENT-LIABILITIES> 32,910
<BONDS> 0
0
100
<COMMON> 2,926
<OTHER-SE> 364,502
<TOTAL-LIABILITY-AND-EQUITY> 474,655
<SALES> 61,057
<TOTAL-REVENUES> 97,608
<CGS> 54,030
<TOTAL-COSTS> 109,119
<OTHER-EXPENSES> 9,237
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,842
<INCOME-PRETAX> (11,511)
<INCOME-TAX> 3,369
<INCOME-CONTINUING> (9,455)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,455)
<EPS-PRIMARY> (.32)
<EPS-DILUTED> (.32)
</TABLE>
