<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 MARCH 31, 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.)
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 May 13, 1999.
CLASS OF COMMON STOCK OUTSTANDING AT MAY 13, 1999
--------------------- ---------------------------
$.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> <C>
Part I. Item 1. Financial Information (Unaudited):
Consolidated Balance Sheets,
March 31, 1999 and December 31, 1998 4
Consolidated Statements of Operations,
Three Months ended March 31, 1999 and 1998 6
Consolidated Statements of Cash Flows,
Three Months ended March 31, 1999 and 1998 7
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 12
Item 3. Quantitative and Qualitative Disclosure about
Market Risk 16
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>
March 31, December 31,
1999 1998
-------------- --------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 4,051 $ 2,670
Accounts receivable 26,450 32,390
Inventories 578 532
Deferred income taxes 6,566 8,585
Other 465 260
-------------- --------------
Total current assets 38,110 44,437
-------------- --------------
PROPERTY AND EQUIPMENT, AT COST:
Oil and gas properties, based on the successful
efforts accounting method 392,295 387,336
Gas gathering and processing and other plant 53,238 51,561
Other equipment 20,648 20,340
-------------- --------------
Total property and equipment 466,181 459,237
Less: Accumulated depreciation, depletion and amortization 102,946 92,232
-------------- --------------
Net property and equipment 363,235 367,005
-------------- --------------
OTHER ASSETS:
Deferred income taxes, net 26,766 23,429
Other assets, net 7,106 7,011
-------------- --------------
Total other assets 33,872 30,440
-------------- --------------
$ 435,217 $ 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>
March 31, December 31,
1999 1998
-------------- --------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 16,640 $ 23,124
Accrued expenses 5,388 4,754
Advances from gas purchasers 18,759 24,529
-------------- --------------
Total current liabilities 40,787 52,407
-------------- --------------
BANK DEBT 63,000 55,000
-------------- --------------
OTHER NON-CURRENT LIABILITIES 2,651 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 40,000,000 shares;
Outstanding 29,259,989 shares 2,926 2,926
Additional paid-in capital 431,082 431,082
Accumulated deficit (105,329) (102,358)
-------------- --------------
Total stockholders' equity 328,779 331,750
-------------- --------------
$ 435,217 $ 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
March 31,
--------------------------------
1999 1998
-------------- --------------
(Unaudited)
<S> <C> <C>
Revenues:
Gas and oil sales $ 17,579 $ 19,593
Marketing, gathering and processing 12,473 11,012
Drilling 1,056 1,194
Interest income and other 405 161
-------------- --------------
Total revenues 31,513 31,960
-------------- --------------
Costs and expenses:
Gas and oil production 3,930 3,769
Taxes on gas and oil production 1,766 1,846
Cost of gas sold 11,962 10,359
Drilling operations 997 976
Exploration costs 1,989 3,635
Impairments of leasehold costs 900 965
General and administrative 1,471 2,406
Depreciation, depletion and amortization 10,656 9,816
Interest expense and other 1,445 783
-------------- --------------
Total costs and expenses 35,116 34,555
-------------- --------------
Loss before income taxes (3,603) (2,595)
Income tax benefit (provision)
Current (248) (201)
Deferred 1,318 1,202
-------------- --------------
Net loss (2,533) (1,594)
Preferred stock dividend (438) (438)
-------------- --------------
Net loss attributable to common stock $ (2,971) $ (2,032)
============== ==============
Weighted average number of common shares outstanding
Basic 29,260 29,226
============== ==============
Diluted 29,260 29,226
============== ==============
Net loss per common share
Basic $ (.10) $ (.07)
============== ==============
Diluted $ (.10) $ (.07)
============== ==============
</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>
Three Months ended
March 31,
------------------------
1999 1998
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (2,533) $ (1,594)
Adjustments to reconcile net loss
to net cash provided by operating
activities:
Depreciation, depletion and amortization 10,656 9,816
Gain on sales of assets (24) (2)
Exploration costs 1,989 3,635
Impairments of leasehold costs 900 965
Deferred taxes (1,318) (1,202)
---------- ----------
9,670 11,618
Changes in operating assets and liabilities:
Decrease in accounts receivable 5,940 12,332
Increase in inventories (46) (402)
(Increase) decrease in other current assets (205) 29
Decrease in accounts
payable and accrued expenses (3,310) (9,219)
Increase in other assets, net (169) (232)
Advances from gas purchasers (5,770) --
---------- ----------
Net cash provided by operating activities $ 6,110 $ 14,126
---------- ----------
</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>
Three Months ended
March 31,
--------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from investing activities:
Capital and exploration expenditures $ (9,778) $(39,090)
Changes in accounts payable and accrued
expenses for oil and gas expenditures (2,540) (2,188)
Proceeds from sales of assets 27 2,398
-------- --------
Net cash used in investing activities (12,291) (38,880)
-------- --------
Cash flows from financing activities:
Repayments of long-term bank debt -- --
Repayments of note payable, current -- (5,168)
Borrowings of long-term bank debt 8,000 27,500
Preferred stock dividends (438) (438)
Proceeds from exercise of stock options -- 523
-------- --------
Net cash provided by financing activities 7,562 22,417
-------- --------
Net increase (decrease) in cash and cash
equivalents 1,381 (2,337)
-------- --------
Cash and cash equivalents at beginning
of period 2,670 6,537
-------- --------
Cash and cash equivalents at end of period $ 4,051 $ 4,200
======== ========
Cash paid during the period for:
Interest $ 923 $ 479
Taxes 248 150
</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.
(3) 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. At May
10, 1999, a redetermination as of December 31, 1998 had not yet been made.
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 .75% to 1.25%.
Interest on amounts outstanding under the 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 March 31, 1999, the outstanding balance was $63 million at an
average interest rate of 5.7% and $37 million was available for borrowing under
the New Credit Facility.
The New Credit Facility contains certain financial covenants among other
restrictions. Financial covenants of the New Credit Facility, as amended in
March 1999, require the Company to maintain a minimum consolidated tangible net
worth of not less than $300 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 expense to (ii) consolidated fixed
charges, as defined in the New Credit Facility, 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.
At March 31, 1999, standby letters of credit of approximately $2,188,000
had been issued under two agreements. One agreement and the related letter of
credit of approximately $1,656,000 expired on April 1, 1999.
9
<PAGE> 10
TOM BROWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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.
(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>
March 31, December 31,
1999 1998
-------------- --------------
(in thousands)
<S> <C> <C>
Net operating loss carryforwards $ 15,722 $ 10,950
Gas and oil acquisition, exploration and development
costs deducted for tax purposes under book 4,386 6,254
Advances from gas purchasers 6,566 8,585
AMT credit carryforwards 4,499 4,119
Investment tax credit carryforwards 489 857
Option plan compensation 1,559 1,559
Other 2,318 2,265
-------------- --------------
Net deferred tax asset 35,539 34,589
Valuation allowance (2,207) (2,575)
-------------- --------------
Recognized net deferred tax asset $ 33,332 $ 32,014
============== ==============
</TABLE>
Net deferred tax assets are comprised of the following (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
-------------- --------------
(in thousands)
<S> <C> <C>
Current $ 6,566 $ 8,585
Long-term 26,766 23,429
-------------- --------------
$ 33,332 $ 32,014
============== ==============
</TABLE>
A valuation allowance of approximately $2.2 million and $2.6 million at
March 31, 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, 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 March 31, 1999, the Company had investment tax credit carryforwards
of approximately $.5 million and net
10
<PAGE> 11
TOM BROWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
operating loss carryforwards of approximately $45.1 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 $13.8 million in 2020.
Additionally, the Company has approximately $6.2 million of statutory depletion
carryforwards and $4.5 million of AMT credit carryforwards that may be carried
forward until utilized.
(5) 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>
March 31, 1999
-------------------------------------------------------------------
Gas & Oil Marketing,
Exploration & Gathering & Total
Development Processing Drilling Segments
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues from external purchasers $ 14,213 $ 14,178 $ 1,055 $ 29,446
Intersegment revenues 3,758 -- 1,055 4,813
Segment profit (loss) (1,474) (544) 85 (1,933)
</TABLE>
<TABLE>
<CAPTION>
March 31, 1998
-------------------------------------------------------------------
Gas & Oil Marketing,
Exploration & Gathering & Total
Development Processing Drilling Segments
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues from external purchasers $ 15,787 $ 12,802 $ 1,194 $ 29,783
Intersegment revenues 3,958 -- 1,103 5,061
Segment profit (loss) (1,819) 14 18 (1,787)
</TABLE>
<TABLE>
<CAPTION>
March 31,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Revenues
Revenues from external purchasers $ 29,446 $ 29,783
Intersegment revenues 4,813 5,061
Intercompany eliminations (2,746) (2,884)
------------ ------------
Total consolidated revenues $ 31,513 $ 31,960
============ ============
Profit or (loss)
Total reportable segment loss $ (1,933) $ (1,787)
Interest expense (1,445) (783)
Elimination and other (225) (25)
------------ ------------
Loss before income taxes $ (3,603) $ (2,595)
============ ============
</TABLE>
11
<PAGE> 12
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 March 31, 1999, revenues from gas and
oil production decreased 10% to $17.6 million compared to the same period in
1998. Such decrease in gas and oil revenues was the result of a decrease in (i)
average gas sales prices received by the Company from $1.96 per Mcf to $1.63
per Mcf which decreased revenues by approximately $2.7 million, (ii) average
crude oil sales prices received from $12.91 to $10.44 per barrel which
decreased revenues $ .7 million and, (iii) oil sales volumes of 3%. Gas sales
volumes increased 10% to 9.2 Bcf which increased revenues by approximately $1.4
million.
Marketing, gathering and processing revenues increased $1.5 million for
the three month period ended March 31, 1999 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 an acquisition in the first quarter of
1998. The gross margin from these activities increased due to a reduction in
the rate on one of the pipelines.
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 months ended March 31, 1999 and 1998 of approximately $.1
million and $.2 million, respectively.
Selected Operating Data
<TABLE>
<CAPTION>
Three Months ended
March 31,
---------------------
1999 1998
-------- --------
<S> <C> <C>
Revenues (in thousands):
Natural gas sales $ 14,959 $ 16,236
Crude oil sales 2,620 3,357
Marketing, gathering and processing 12,473 11,012
Drilling 1,056 1,194
Other 405 161
-------- --------
Total revenues $ 31,513 $ 31,960
======== ========
Net loss attributable to common
stock, (in thousands) $ (2,971) $ (2,032)
======== ========
Natural gas production (MMcf) 9,172 8,303
Crude oil production (MBbls) 251 260
Average natural gas sales price ($/Mcf) $ 1.63 $ 1.96
Average crude oil sales price ($/Bbl) $ 10.44 $ 12.91
</TABLE>
12
<PAGE> 13
Costs and Expenses
Costs and expenses for the three months ended March 31, 1999 increased
approximately 2% to $35.1 million as compared to the same period in 1998. Cost
of gas sold increased $1.6 million as a result of an acquisition of gas
gathering and processing facilities in the first quarter of 1999 and increased
marketing volumes. These increases were partially offset by a reduction in
transportation charges accrued pursuant to a FERC rate ruling relative to one of
the pipelines. Exploration costs decreased $1.6 million due to a lesser amount
of exploratory drilling activity in the first quarter of 1999. General and
administrative expenses decreased $.9 million due to a reduction in incentive
compensation payments and consulting fees. Depreciation, depletion and
amortization increased $.8 million due to the additional gas volumes produced in
the first quarter of 1999.
A valuation allowance of approximately $2.2 million at March 31, 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.
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 month
periods ended March 31, 1999 was approximately $9.8 million as compared to $39.1
million in the same period in 1998. In the first quarter of 1998, the Company
acquired Sauer Drilling Company for $8.1 million and drilled more wells than in
the first quarter of 1999.
The Company has historically funded capital expenditures and working
capital requirements with internally generated cash and borrowings. During the
three months ended March 31, 1999, net cash provided by operating activities was
$6.1 million as compared to $14.1 million for the same period of 1998. The
decrease in 1999 was due primarily to lower commodity prices and the related
affects on individual components of working capital.
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. A redetermination as of May
10, 1999 had not yet been made.
At March 31, 1999, the aggregate outstanding balance under the Credit
Facility was $63 million, bearing interest at approximately 5.7% per annum. The
amount available for borrowing under the Credit Facility at March 31, 1999 was
$37 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 March 31, 1999.
Borrowings under the 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
13
<PAGE> 14
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%.
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. During the three months ended March 31,1999, the Company's share of
Wildhorse's investments was approximately $1.7 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.
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 three
months of 1999, the average prices received for gas and oil by the Company were
$1.63 per Mcf and $10.44 per barrel, respectively, as compared to $1.96 Mcf and
$12.91 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
represent 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.
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.
14
<PAGE> 15
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.
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, 1999 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.
15
<PAGE> 16
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 March 31, 1999, the estimated fair value of the
open gas price swap contracts was an unrealized loss of approximately $48,000.
Interest Rate Risk
At March 31, 1999, the Company had $63 million outstanding under its
credit facility at an average interest rate of 5.7%. 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 0.50% or (ii) the agent bank's Eurodollar rate, plus a margin ranging from
0.75% to 1.00%. 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 $359,000. As the interest
rate is variable and is reflective of current market conditions, the carrying
value approximates the fair value.
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
(a) Exhibit No. Description
----------- -----------
27 Financial Data Schedule
(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)
May 13, 1999 /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)
19
<PAGE> 20
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
-------- ------------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 4,051
<SECURITIES> 0
<RECEIVABLES> 26,450
<ALLOWANCES> 0
<INVENTORY> 578
<CURRENT-ASSETS> 38,110
<PP&E> 466,181
<DEPRECIATION> 102,946
<TOTAL-ASSETS> 435,217
<CURRENT-LIABILITIES> 40,787
<BONDS> 63,000
0
100
<COMMON> 2,926
<OTHER-SE> 325,753
<TOTAL-LIABILITY-AND-EQUITY> 435,217
<SALES> 17,579
<TOTAL-REVENUES> 31,513
<CGS> 17,658
<TOTAL-COSTS> 35,116
<OTHER-EXPENSES> 1,471
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,445
<INCOME-PRETAX> (3,603)
<INCOME-TAX> 1,070
<INCOME-CONTINUING> (2,971)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,971)
<EPS-PRIMARY> (.10)
<EPS-DILUTED> (.10)
</TABLE>
