<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, 1999
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.)
555 SEVENTEENTH STREET, SUITE 1850
DENVER, CO 80202-3918
---------------------------------------- ----------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
303- 260-5000
-------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NOT APPLICABLE
--------------
(FORMER ADDRESS)
508 W. WALL, SUITE 500
MIDLAND, TX 79701
915-682-9715
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, 1999.
CLASS OF COMMON STOCK OUTSTANDING AT NOVEMBER 12, 1999
--------------------- --------------------------------
$.10 PAR VALUE 35,149,489
<PAGE> 2
TOM BROWN, INC. AND SUBSIDIARIES
QUARTERLY REPORT FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page No.
<S> <C>
Part I. Item 1. Financial Information (Unaudited):
Consolidated Balance Sheets,
September 30, 1999 and December 31, 1998 4
Consolidated Statements of Operations,
Three and Nine Months ended September 30, 1999 and 1998 6
Consolidated Statements of Cash Flows,
Nine Months ended September 30, 1999 and 1998 7
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 14
Item 3. Quantitative and Qualitative Disclosure about
Market Risk 19
Part II. Other Information:
Item 6. Exhibits and Reports on Form 8-K 21
Signature 22
</TABLE>
2
<PAGE> 3
TOM BROWN, INC.
555 Seventeenth Street, Suite 1850
Denver, CO 80202-3918
----------------------
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,
1999 1998
------------- ------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 7,708 $ 2,670
Accounts receivable 40,941 32,390
Inventories 902 532
Marketable securities 1,175 --
Deferred income taxes 2,400 8,585
Other 717 260
-------- --------
Total current assets 53,843 44,437
-------- --------
PROPERTY AND EQUIPMENT, AT COST:
Oil and gas properties, based on the successful
efforts accounting method 461,409 387,336
Gas gathering and processing and other plant 75,082 51,561
Other equipment 21,855 20,340
-------- --------
Total property and equipment 558,346 459,237
Less: Accumulated depreciation, depletion and amortization 124,862 92,232
-------- --------
Net property and equipment 433,484 367,005
-------- --------
OTHER ASSETS:
Deferred income taxes, net 28,935 23,429
Other assets, net 6,480 7,011
-------- --------
Total other assets 35,415 30,440
-------- --------
$522,742 $441,882
======== ========
</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,
1999 1998
--------- ---------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 30,957 $ 23,124
Accrued expenses 5,229 4,754
Advances from gas purchasers 6,857 24,529
--------- ---------
Total current liabilities 43,043 52,407
--------- ---------
BANK DEBT 81,000 55,000
--------- ---------
OTHER NON-CURRENT LIABILITIES 2,719 2,725
--------- ---------
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 55,000,000 shares;
Outstanding 35,149,489 and
29,259,989 shares, respectively 3,515 2,926
Additional paid-in capital 495,010 431,082
Accumulated deficit (103,164) (102,358)
Unrealized gain on marketable securities 519 --
--------- ---------
Total stockholders' equity 395,980 331,750
--------- ---------
$ 522,742 $ 441,882
========= =========
</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,
------------------------ ------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
(Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Gas and oil sales $ 31,197 $ 18,756 $ 69,614 $ 59,448
Marketing, gathering and processing 24,260 11,163 50,438 32,809
Drilling 1,477 1,465 3,629 3,301
Interest income and other 187 11 1,351 441
--------- --------- --------- ---------
Total revenues 57,121 31,395 125,032 95,999
--------- --------- --------- ---------
Costs and expenses:
Gas and oil production 5,604 3,891 13,027 10,949
Taxes on gas and oil production 2,741 1,652 6,730 5,917
Cost of gas sold 23,258 11,951 49,025 32,383
Drilling operations 1,366 1,539 3,266 3,022
Exploration costs 2,238 4,599 5,484 12,277
Impairments of leasehold costs 900 750 2,700 2,465
General and administrative 1,893 1,586 5,801 5,468
Depreciation, depletion and amortization 11,642 11,489 32,660 32,187
Interest expense and other 1,543 1,061 4,398 2,842
--------- --------- --------- ---------
Total costs and expenses 51,185 38,518 123,091 107,510
--------- --------- --------- ---------
Income (loss) before income taxes 5,936 (7,123) 1,941 (11,511)
Income tax benefit (provision)
Current (260) (93) (755) (575)
Deferred (2,077) 2,432 (679) 3,944
--------- --------- --------- ---------
Net income (loss) 3,599 (4,784) 507 (8,142)
Preferred stock dividend (438) (438) (1,313) (1,313)
--------- --------- --------- ---------
Net income (loss) attributable to common stock $ 3,161 $ (5,222) $ (806) $ (9,455)
========= ========= ========= =========
Weighted average number of common
shares outstanding
Basic 35,084 29,260 31,227 29,248
========= ========= ========= =========
Diluted 35,575 29,260 31,227 29,248
========= ========= ========= =========
Net income (loss) per common share
Basic $ .09 $ (.18) $ (.03) $ (.32)
========= ========= ========= =========
Diluted $ .09 $ (.18) $ (.03) $ (.32)
========= ========= ========= =========
</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>
Nine Months ended
September 30,
1999 1998
-------- --------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 507 $ (8,142)
Adjustments to reconcile net loss
to net cash provided by operating
activities:
Depreciation, depletion and amortization 32,660 32,187
Gain on sales of assets (758) (2)
Exploration costs 5,484 8,508
Impairments of leasehold costs 2,700 2,465
Deferred taxes 679 (3,944)
-------- --------
41,272 31,072
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (9,207) 13,786
Increase in inventories (370) (168)
Increase in other current assets (457) (201)
Increase in accounts
payable and accrued expenses 12,334 328
Increase (decrease) in other assets, net 525 (6,387)
Advances from gas purchasers (17,672) --
-------- --------
Net cash provided by operating activities $ 26,425 $ 38,430
-------- --------
</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>
Nine Months ended
September 30,
------------------------
1999 1998
--------- ---------
(Unaudited)
<S> <C> <C>
Cash flows from investing activities:
Capital and exploration expenditures $ (44,399) $ (70,896)
Changes in accounts payable and accrued
expenses for oil and gas expenditures (4,002) (7,117)
Proceeds from sales of assets 1,324 2,404
--------- ---------
Net cash used in investing activities (47,077) (75,609)
--------- ---------
Cash flows from financing activities:
Repayments of long-term bank debt (10,000) (53,500)
Repayments of note payable, current -- (5,168)
Borrowings of long-term bank debt 36,000 101,000
Preferred stock dividends (1,313) (1,313)
Proceeds from exercise of stock options 1,003 585
--------- ---------
Net cash provided by financing activities 25,690 41,604
--------- ---------
Net increase in cash and cash
equivalents 5,038 4,425
--------- ---------
Cash and cash equivalents at beginning
of period 2,670 6,537
--------- ---------
Cash and cash equivalents at end of period $ 7,708 $ 10,962
========= =========
Cash paid during the period for:
Interest $ 3,231 $ 2,204
Taxes 716 575
Noncash investing and financing activities:
Issuance of common stock for acquisition
of Unocal properties $ 63,490 $ --
Receipt of marketable securities for settlement
of trade receivable 1,175 --
</TABLE>
See accompanying notes to consolidated financial statements.
8
<PAGE> 9
TOM BROWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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, 1998 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. Certain
reclassifications have been made to amounts reported in previous periods to
conform to the current presentation.
(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 serves
the drilling needs of operators in the central Rocky Mountain region in addition
to drilling for the Company.
Acquisition of Unocal Corporation Rocky Mountain Assets
In July 1999, the Company completed the acquisition of most of the Rocky
Mountain gas and oil assets of Spirit Energy 76 ("Unocal"), Unocal Corporation's
lower 48 exploration and production unit for a consideration of 5.8 million
shares of the Company's common stock and $5 million. The effective date of the
transaction was January 1, 1999. The purchase price was adjusted for the net
operating results of the acquired properties since the effective date, which
resulted in a net cash payment to the Company. Included in the acquisition is
the Lisbon Plant, a modern sophisticated cryogenic (60 million cubic feet per
day capacity) natural gas processing plant that extracts natural gas liquids and
merchantable helium and separates carbon dioxide, hydrogen sulfide and nitrogen
from the raw gas stream. The average net sales from the acquired properties for
1998 was approximately 18 million cubic feet per day of natural gas, 290 barrels
of oil per day and 92,000 gallons of gas plant liquids per day, or approximately
33 million cubic feet equivalent per day (assuming gas plant liquids and oil
converted at 6:1). The net proved reserves of these acquired properties are
estimated to be 89 billion cubic feet equivalent of gas as of the acquisition
effective date. Approximately 65,000 net undeveloped acres were also acquired.
9
<PAGE> 10
TOM BROWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Pro-Forma Information
The following table presents the unaudited pro forma revenues, net
income (loss) and net income (loss) per share of the Company for the nine months
ended September 30, 1999 and 1998, assuming that the Unocal acquisition occurred
on January 1, 1998.
<TABLE>
<CAPTION>
Nine Months ended September 30,
-------------------------------
1999 1998
--------- ---------
(in thousands, except for per share amounts)
<S> <C> <C>
Revenues $ 136,323 $ 112,876
========= =========
Net income (loss) 3,091 (5,712)
========= =========
Net income (loss) attributable to common stock 1,778 (7,025)
========= =========
Net income (loss) per common share:
Basic $ .05 $ (.20)
========= =========
Diluted $ .05 $ (.20)
========= =========
</TABLE>
(3) MARKETABLE SECURITIES
During the third quarter of 1999, the Company received 410,700 shares
of common stock from an unrelated party as part of a negotiated settlement of an
outstanding trade receivable. This stock is not transferable until May 27, 2000
and is classified by the Company as available-for-sale. Accordingly, the
adjustment to fair value of approximately $519,000 is shown as a component of
stockholders' equity and has no effect on the statement of operations.
(4) DEBT
In April 1998, the Company repaid and cancelled its $125 million
revolving credit facility and entered into a new $75 million credit facility
(the New Credit Facility) that matures in April 2001. In October 1998, the
Company amended the New Credit Facility by increasing the total commitment to
$100 million. The New Credit Facility has a current borrowing base of $130
million. The amount of the borrowing base may be redetermined as of December 31
and June 30 of each calendar year at the sole discretion of the lender.
10
<PAGE> 11
TOM BROWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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 an
applicable margin or (ii) the agent bank's Eurodollar rate plus an applicable
margin. The New Credit Facility contains certain financial covenants among other
restrictions. At September 30, 1999, the outstanding balance was $81 million at
an average interest rate of 6.6% and $19 million was available for borrowing
under the New Credit Facility.
At September 30, 1999, standby letters of credit of approximately
$532,000 had been issued 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. Another agreement and
the related letter of credit of approximately $1,656,000 expired on April 1,
1999.
(5) 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,
1999 1998
------------- ------------
(in thousands)
<S> <C> <C>
Net operating loss carryforwards $ 22,944 $ 10,950
Gas and oil acquisition, exploration and development
costs deducted for tax purposes under book (652) 6,254
Advances from gas purchasers 2,400 8,585
AMT credit carryforwards 4,499 4,119
Investment tax credit carryforwards 489 857
Option plan compensation 1,559 1,559
Other 2,304 2,265
-------- --------
Net deferred tax asset 33,543 34,589
Valuation allowance (2,207) (2,575)
-------- --------
Recognized net deferred tax asset $ 31,336 $ 32,014
======== ========
</TABLE>
Net deferred tax assets are comprised of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- -----------
(in thousands)
<S> <C> <C>
Current $ 2,400 $ 8,585
Long-term 28,936 23,429
------- -------
$31,336 $32,014
======= =======
</TABLE>
11
<PAGE> 12
TOM BROWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
A valuation allowance of approximately $2.2 million and $2.6 million at
September 30, 1999 and December 31, 1998, respectively, has been provided
against the Company's net deferred tax assets based on management's estimate of
the recoverability of future tax benefits. The Company evaluated all appropriate
factors to determine the proper valuation allowance for carryforwards, including
any limitations concerning their use, the year the carryforward expires and the
levels of taxable income necessary for utilization and tax planning. In this
regard, full valuation allowances were provided for investment tax credit
carryforwards and option plan compensation. Based on its recent operating
results and its expected levels of future earnings, the Company believes it
will, more likely than not, generate sufficient taxable income to realize the
benefit attributable to the net operating loss carryforward and other deferred
tax assets for which valuation allowances were not provided.
At September 30, 1999, the Company had investment tax credit
carryforwards of approximately $.5 million and net operating loss carryforwards
of approximately $65.6 million. The Company has no current liability for 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 net operating loss carryforwards expire as follows: $17.6
million in 2000, $7.8 million in 2001, $.7 million in 2002, $2.9 million in
2003, $2.3 million in 2004, and $34.3 million in 2020. Additionally, the Company
has approximately $6.1 million of statutory depletion carryforwards and $4.5
million of AMT credit carryforwards that may be carried forward until utilized.
(6) SEGMENT INFORMATION
The Company operates in three reportable segments: (i) gas and oil
exploration and development, (ii) marketing, gathering and processing and (iii)
drilling. The following tables present information related to these segments.
<TABLE>
<CAPTION>
Nine months ended
September 30, 1999
---------------------------------------------------
Gas & Oil Marketing,
Exploration & Gathering & Total
Development Processing Drilling Segments
------------- ----------- -------- --------
<S> <C> <C> <C> <C>
Revenues from external purchasers $ 56,202 $ 58,297 $ 3,627 $118,126
Intersegment revenues 14,640 -- 3,127 17,767
Segment profit (loss) 8,487 (1,866) 154 6,775
</TABLE>
<TABLE>
<CAPTION>
Nine months ended
September 30, 1999
---------------------------------------------------
Gas & Oil Marketing,
Exploration & Gathering & Total
Development Processing Drilling Segments
------------- ----------- -------- --------
<S> <C> <C> <C> <C>
Revenues from external purchasers $ 48,063 $ 38,188 $ 3,301 $ 89,552
Intersegment revenues 11,722 -- 3,722 15,444
Segment profit (loss) (6,975) (1,651) (159) (8,785)
</TABLE>
12
<PAGE> 13
TOM BROWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
<TABLE>
<CAPTION>
Nine months ended
September 30,
1999 1998
--------- ---------
<S> <C> <C>
Revenues
Revenues from external purchasers $ 118,126 $ 89,552
Intersegment revenues 17,767 15,444
Intercompany eliminations (10,861) (8,997)
--------- ---------
Total consolidated revenues $ 125,032 $ 95,999
========= =========
Income or (loss)
Total reportable segment income (loss) $ 6,775 $ (8,785)
Interest expense (4,398) (2,842)
Elimination and other 116
--------- ---------
(436)
Income (loss) before income taxes $ 1,941 $ (11,511)
========= =========
</TABLE>
13
<PAGE> 14
TOM BROWN, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Revenues
During the three month period ended September 30, 1999, revenues from gas
production increased 49% to $23.7 million while revenues from oil production
increased 60% to $4.4 million. Such increase in gas revenues was the result of
an increase in (i) natural gas sales volumes of 15% which increased revenues by
approximately $3.1 million and (ii) average natural gas sales prices received by
the Company from $1.71 to $2.21 per Mcf which increased revenues by
approximately $4.7 million. Revenues from oil production increased as a result
of an increase in average crude oil sales prices from $11.22 to $19.69 per
barrel which increased revenues by approximately $2.1 million. However, this
increase was partially offset by a reduction in oil sales volumes of 9% which
decreased revenues by approximately $.4 million. Revenues from natural gas
liquid production increased as a result of the acquisition of the Unocal
properties. Prior to this quarter, natural gas liquids revenues were
insignificant and combined into oil revenues.
During the nine month period ended September 30, 1999, revenues from
natural gas, oil and natural gas liquids production increased $10.2 million to
$69.6 million compared to the same period in 1998. Such increase in gas and oil
revenue was the result of an increase in (i) average natural gas sales prices
received by the Company from $1.86 to $1.93 per Mcf which increased revenues by
approximately $1.9 million, (ii) natural gas sales volumes of 8% which increased
revenues by approximately $3.9 million and (iii) average crude oil sales prices
from $11.98 to $15.31 per barrel which increased revenues by approximately $2.6
million. These increases were partially offset by a decrease in oil sales
volumes of 10% which decreased revenues by approximately $1.2 million. Revenues
from natural gas liquid production increased as a result of the acquisition of
the Unocal properties. Prior to this quarter, natural gas liquids revenues were
insignificant and combined into oil revenues.
Marketing, gathering and processing revenues increased $13.1 million and
$17.6 million, respectively, for the three and nine month periods ended
September 30, 1999. The increase was a result of increased activity in the
Company's natural gas marketing operations. The gross margin from these
activities increased during these periods, due to higher natural gas liquids
prices and the revenues associated with helium generated from the acquisition of
the Unocal properties.
Drilling operations are conducted through Sauer Drilling Company, which was
acquired by the Company in January 1998. Drilling revenues increased $.3 million
for the nine month period ended September 30, 1999 as a result of increased
utilization of the Company's rigs. Drilling revenues compared to cost of
drilling operations netted a gross margin for the three and nine months ended
September 30, 1999 of approximately $.1 million and $.4 million, respectively.
14
<PAGE> 15
Selected Operating Data
<TABLE>
<CAPTION>
Three Months ended Nine Months ended
September 30, September 30,
1999 1998 1999 1998
------- --------- ------- --------
<S> <C> <C> <C> <C>
Revenues (in thousands):
Natural gas sales $23,692 $ 15,935 $ 55,943 $50,089
Crude oil sales 4,449 2,782 10,576 9,197
Natural gas liquids sales 3,056 39 3,095 162
Marketing, gathering and processing 24,260 11,163 50,438 32,809
Drilling 1,477 1,465 3,629 3,301
Other 187 11 1,351 441
------- -------- -------- -------
Total revenues $57,121 $ 31,395 $125,032 $95,999
======= ======== ======== =======
Net income (loss) attributable to common
stock, (in thousands) $ 3,161 $ (5,222) $ (806) $(9,455)
======= ======== ======== =======
Natural gas production (MMcf) 10,743 9,342 28,961 26,930
Crude oil production (MBbls) 226 248 691 768
Natural gas liquids production (MBbls) 249 4 254 14
Average natural gas sales price ($/Mcf) $ 2.21 $ 1.71 $ 1.93 $ 1.86
Average crude oil sales price ($/Bbl) $ 19.69 $ 11.22 $ 15.31 $ 11.98
Average natural gas liquids sale price ($/Bbl) $ 12.27 $ 9.75 $ 12.19 $ 11.57
</TABLE>
Costs and Expenses
Costs and expenses for the three months ended September 30, 1999 increased
approximately 33% to $51.2 million as compared to the same period in 1998. Gas
and oil production increased $1.7 million as a result of the operating cost
associated with the acquisition of the Unocal properties. Taxes on gas and oil
production increased $1.1 million due to higher prices being received during the
third quarter of 1999 and to a lesser extent, the higher volumes produced as a
result of the Unocal property acquisition. Cost of gas sold increased $11.3
million as a result of increased activity in the Company's natural gas marketing
operations. Exploration costs decreased $2.4 million due to a lesser amount of
exploratory drilling in the third quarter of 1999. Interest expense increased
$.5 million due to activity associated with prepaid gas contracts entered into
in the fourth quarter of 1998 and higher debt levels in the third quarter of
1999.
Cost and expenses for the nine months ended September 30, 1999, increased
15% to $123.1 million as compared to the same period in 1998. Gas and oil
production increased $2.1 million as a result of the acquisition of the
operating cost associated with the Unocal properties. Taxes on gas and oil
production increased $.8 million due to the higher prices being received during
the first nine months of 1999 and to a lesser extent, the higher volumes
produced as a result of the Unocal property acquisition. Cost of gas sold
increased $16.6 million as a result of increased activity in the Company's
natural gas marketing operations. Exploration costs decreased $6.8 million due
to a lesser amount of exploratory drilling and seismic activity during 1999.
Depreciation, depletion and amortization increased $.5 million due to higher gas
volumes produced in 1999 as a result of the acquisition of the Unocal
properties. Interest expense increased $1.6 million due to activity associated
with prepaid gas contracts entered into in the fourth quarter of 1998 and higher
debt levels for 1999.
A valuation allowance of approximately $2.2 million at September 30, 1999
has been provided against the Company's net deferred tax assets based on
management's estimate of the recoverability of future tax benefits. 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 and tax planning. 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.
15
<PAGE> 16
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, 1999 were approximately $21.0 million and
$44.4 million as compared to $14.6 million and $70.9 million in the same period
in 1998. The Company acquired Sauer Drilling Company for $8.1 million in 1998
and reduced its drilling and seismic programs for 1999.
In July 1999, the Company completed the acquisition of the Rocky Mountain
gas and oil assets of Unocal for a consideration of 5.8 million shares of the
Company's common stock and $5 million. The effective date of the transaction was
January 1, 1999. The purchase price was adjusted for the net operating results
of the acquired properties since the effective date, which resulted in a net
cash payment to the Company.
The Company has historically funded capital expenditures and working
capital requirements with internally generated cash and borrowings. During the
nine months ended September 30, 1999, net cash provided by operating activities
was $26.4 million as compared to $38.4 million for the same period of 1998. The
decrease in 1999 was due primarily to the decrease in advances from gas
purchasers.
Bank Credit Facility
The Company's Credit Facility provides for a $100 million revolving line of
credit with a current borrowing base of $130 million. The amount of the
borrowing base may be redetermined as of December 31 and June 30 of each
calendar year at the sole discretion of the lender.
At September 30, 1999, the aggregate outstanding balance under the Credit
Facility was $81 million, bearing interest at approximately 6.6% per annum. The
amount available for borrowing under the Credit Facility at September 30, 1999
was $19 million. The Credit Facility contains certain financial covenants which
require the Company to maintain a minimum consolidated tangible net worth as
well as certain financial ratios. The Company was in compliance with the
covenants contained in the Credit Facility, as amended, at September 30, 1999.
Markets and Prices
Wildhorse Energy Partners, L.L.C. ("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. Wildhorse is operated by KNE under the direction of an operating team
with equal representation from KNE and the Company. During the nine months ended
September 30,1999, the Company's share of Wildhorse's investments was
approximately $1.9 million for gas gathering and processing assets.
Effective September 1, 1999, Wildhorse distributed the marketing assets 45%
to Retex, a wholly owned subsidiary of the Company, and 55% to KNE. Retex began
as of that date to market all of the Company's natural gas. The Company
continues to hold its 45% interest In Wildhorse's gathering and processing
operations.
16
<PAGE> 17
The Company has dedicated significant amounts of its Rocky Mountain gas
production to Wildhorse for gathering and processing.
The Company's revenues and associated cash flows are significantly impacted
by changes in gas and oil prices. Substantially all of the Company's gas and oil
production is currently market sensitive. During the first nine months of 1999,
the average prices received for gas and oil by the Company were $1.93 per Mcf
and $15.31 per barrel, respectively, as compared to $1.86 Mcf and $11.97 per
barrel for the same period in 1998.
Year 2000
Year 2000 Issue. 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.
Compliance Program. In order to address the Year 2000 issue, the Company
appointed the Computer Information Systems department to assure that key
automated systems and related processors would remain functional through year
2000. The department addressed the project by reviewing the information
technology ("IT") and non-information technology systems to determine whether
they were Year 2000 compliant. Also, the department prepared a formal
questionnaire for all significant suppliers, customers, and service providers to
determine the extent to which the Company was vulnerable to those third parties'
failure to remediate the Year 2000 problem.
Company State of Readiness. A review and assessment of the information
technology and non-information technology systems was completed as of December
31, 1998 and did not identify any material systems which are not Year 2000
compliant. In addition, the Company has received written assurances of Year 2000
compliance from approximately 81% of its operators and purchasers and 65% of its
vendors. The operators and purchasers who responded as being Year 2000 compliant
represented 96% of the total dollar amount from that source to the Company and
the vendors who responded as being Year 2000 compliant represent 70%. The third
party confirmation process is still ongoing. The Company believes that any
disruption caused from a third party's inability to be Year 2000 compliant will
not be material to its operations, although there can be no assurances.
Cost to Address Year 2000 Compliance Issues. 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. To date, costs incurred to
address Year 2000 compliance have been internal in nature and have been charged
to expense as incurred. Such costs have been funded from cash provided by
operating activities. 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. The Computer Information Systems
department is not aware of any IT projects that have been delayed due to the
Year 2000 compliance program.
Risk of Non-Compliance and Contingency Plan. The goal of the Year 2000
project has been to ensure that all of the critical systems and processes which
are under the direct control of the Company remain functional. However, because
certain systems and processes may be interrelated with systems outside of the
control of the Company, there can be no assurance that all implementations will
be successful. The principal area of risk to the Company is thought to be gas
measurement control systems of pipeline volumes provided by third parties. A
likely worst case scenario is that despite the Company's efforts, there could be
failures of such systems which might cause disruption to the natural gas
delivery process. However, the Company believes that the risk of such occurrence
is low based upon its review and confirmation efforts concerning Year 2000
compliance with third party pipelines. Accordingly, as part of the Year 2000
project, contingency plans will be developed to respond to any potential
failures as they may be identified. 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 throughout 1999 to consider the likelihood of a material business
interruption due to the Year 2000 issue.
17
<PAGE> 18
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 gas and oil 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 gas and oil
prices also could affect results of operations and cash flows.
Recent Accounting Pronouncements
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. SFAS No. 133 is effective for fiscal years
beginning after June 15, 2000, as amended by SFAS No. 137, and cannot be applied
retroactively. SFAS No. 133 must be applied to derivative instruments that were
issued, acquired, or substantially modified after December 31, 1997. The Company
is evaluating SFAS No. 133 and has not yet quantified the impact adopting the
Statement will have on its financial statements. However, SFAS No. 133 could
increase volatility in earnings and other comprehensive income (stockholders'
equity) should the Company enter into transactions covered by the pronouncement.
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
adopted SOP 98-1 in the first quarter of 1999. The adoption did not have a
significant effect on the Company's consolidated financial statements.
18
<PAGE> 19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company utilizes various financial instruments which inherently have
some degree of market risk. The primary sources of market risk include
fluctuations in commodity prices and interest rate fluctuations.
Price Fluctuations
The Company's results of operations are highly dependent upon the prices
received for oil and natural gas production. Accordingly, in order to increase
the financial flexibility and to protect the Company against commodity price
fluctuations, the Company may, from time to time in the ordinary course of
business, enter into non-speculative hedge arrangements, commodity swap
agreements, forward sale contracts, commodity futures, options and other similar
agreements relating to natural gas and crude oil.
In 1998, in connection with advance payments for future natural gas
deliveries, the Company entered into three gas price swap contracts with third
parties under which the Company became a fixed price payor for 35,000 Mmbtu per
day for a twelve month period commencing January 1999 at a weighted average
price of $2.02 per Mmbtu. At September 30, 1999, the estimated fair value of the
open gas price swap contracts was an unrealized gain of approximately
$1,884,000.
Interest Rate Risk
At September 30, 1999, the Company had $81 million outstanding under its
credit facility at an average interest rate of 6.6%. Borrowings under the
Company's credit facility 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 an applicable margin or (ii) the agent bank's Eurodollar rate, plus an
applicable margin. As a result, the Company's annual interest cost in 1999 will
fluctuate based on short-term interest rates. Assuming no change in the amount
outstanding during 1999, the impact on interest expense of a ten percent change
in the average interest rate would be approximately $535,000. As the interest
rate is variable and is reflective of current market conditions, the carrying
value approximates the fair value.
19
<PAGE> 20
TOM BROWN, INC.
555 Seventeenth Street, Suite 1850
Denver, CO 80202-3918
--------------------------
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
20
<PAGE> 21
TOM BROWN, INC. AND SUBSIDIARIES
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K and Form 8-K/A
(a) Exhibit No. Description
27 * Financial Data Schedule
----------------
* Filed herewith
(b) Reports on Form 8-K
In its Form 8-K Report dated July 2, 1999 the Company reported
under Item 2., Acquisition or Disposition of Assets that it
completed the acquisition from Union Oil Company of California
("Unocal") certain oil and gas interests and properties located
in the states of Colorado, Wyoming, North Dakota and Utah, a gas
processing plant in San Juan County, Utah and an approximate 66
mile 10 inch pipeline from the gas processing plant to Aneth,
Utah. Approximately 65,000 net undeveloped acres located
primarily in the states of Colorado, Wyoming and Utah were also
acquired. The consideration for the properties was paid in the
form of 5,800,000 shares of the Company's common stock and $5
million in cash. The effective date of the transaction was
January 1, 1999, which resulted in a net cash payment to the
Company, reflecting the net operating results of the Unocal
properties since the effective date.
21
<PAGE> 22
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)
/s/ Daniel G. Blanchard
---------------------------------
Daniel G. Blanchard
Chief Financial Officer
November 12, 1999 /s/ R. Kim Harris
- ----------------- ---------------------------------
Date R. Kim Harris
Vice President of Finance and Controller
22
<PAGE> 23
INDEX TO EXHIBITS
<TABLE>
Exhibit
Number Description
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 7,708
<SECURITIES> 0
<RECEIVABLES> 40,941
<ALLOWANCES> 0
<INVENTORY> 902
<CURRENT-ASSETS> 53,843
<PP&E> 558,346
<DEPRECIATION> 124,862
<TOTAL-ASSETS> 522,742
<CURRENT-LIABILITIES> 43,043
<BONDS> 81,000
3,515
0
<COMMON> 100
<OTHER-SE> 392,365
<TOTAL-LIABILITY-AND-EQUITY> 522,742
<SALES> 69,614
<TOTAL-REVENUES> 125,032
<CGS> 72,048
<TOTAL-COSTS> 123,091
<OTHER-EXPENSES> 6,801
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,398
<INCOME-PRETAX> 1,941
<INCOME-TAX> (1,434)
<INCOME-CONTINUING> (806)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (806)
<EPS-BASIC> (.03)
<EPS-DILUTED> (.03)
</TABLE>
