<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, 2000
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 COLORADO 80202
---------------------------------------- ----------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
303-260-5000
------------
(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 10, 2000.
CLASS OF COMMON STOCK OUTSTANDING AT MAY 10, 2000
--------------------- ---------------------------
$.10 PAR VALUE 35,555,617
<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,
March 31, 2000 and December 31, 1999 4
Consolidated Statements of Operations,
Three Months ended March 31, 2000 and 1999 6
Consolidated Statements of Cash Flows,
Three Months ended March 31, 2000 and 1999 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>
<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>
March 31, December 31,
2000 1999
------------- -----------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,848 $ 12,510
Accounts receivable 49,334 53,646
Inventories 894 828
Other 1,295 1,625
-------- --------
Total current assets 58,371 68,609
-------- --------
Property and equipment, at cost:
Oil and gas properties, based on the successful
efforts accounting method 483,490 470,461
Gas gathering and processing and other plant 72,086 71,657
Other equipment 24,156 23,027
-------- --------
Total property and equipment 579,732 565,145
Less: Accumulated depreciation, depletion and amortization 144,752 133,342
-------- --------
Net property and equipment 434,980 431,803
-------- --------
Other Assets:
Deferred income taxes, net 24,054 28,625
Other assets, net 6,938 7,262
-------- --------
Total other assets 30,992 35,887
-------- --------
$524,343 $536,299
======== ========
</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,
2000 1999
--------- ------------
(Unaudited)
<S> <C> <C>
Current liabilities:
Accounts payable $ 32,404 $ 39,489
Accrued expenses 4,189 9,763
-------- --------
Total current liabilities 36,593 49,252
-------- --------
Bank debt 74,000 81,000
-------- --------
Other non-current liabilities 3,665 3,950
-------- --------
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 35,377,322 shares and
35,308,489 shares respectively 3,538 3,531
Additional paid-in capital 496,527 495,817
Accumulated deficit (90,080) (97,351)
-------- --------
Total stockholders' equity 410,085 402,097
-------- --------
$524,343 $536,299
======== ========
</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,
--------------------------------
2000 1999
-------- --------
(Unaudited)
<S> <C> <C>
Revenues:
Gas and oil sales $36,744 $17,579
Marketing, gathering and processing 33,999 12,473
Drilling 3,402 1,056
Interest income and other 13 405
------- -------
Total revenues 74,158 31,513
------- -------
Costs and expenses:
Gas and oil production 6,516 3,930
Taxes on gas and oil production 3,772 1,766
Cost of gas sold 30,503 11,962
Drilling operations 2,799 997
Exploration costs 1,839 1,989
Impairments of leasehold costs 900 900
General and administrative 2,477 1,471
Depreciation, depletion and amortization 11,253 10,656
Interest expense and other 1,369 1,445
------- -------
Total costs and expenses 61,428 35,116
------ ------
Income (loss) before income taxes 12,730 (3,603)
Income tax benefit (provision)
Current (450) (248)
Deferred (4,571) 1,318
------- -------
Net income (loss) 7,709 (2,533)
Preferred stock dividend (438) (438)
------- -------
Net income (loss) attributable to common stock 7,271 $(2,971)
======= =======
Weighted average number of common
shares outstanding
Basic 35,314 29,260
====== ======
Diluted 35,627 29,260
====== ======
Net income (loss) per common share
Basic $ .21 $ (.10)
====== ======
Diluted $ .20 $ (.10)
====== ======
</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,
-------------------------
2000 1999
--------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 7,709 $(2,533)
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Depreciation, depletion and amortization 11,253 10,656
Gain on sales of assets - (24)
Exploration costs 1,839 1,989
Impairments of leasehold costs 900 900
Deferred taxes 4,571 (1,318)
------- -------
26,272 9,670
Changes in operating assets and liabilities:
Decrease in accounts receivable 4,453 5,940
Increase in inventories (66) (46)
(Increase) decrease in other current assets 17 (205)
Decrease in accounts
payable and accrued expenses (13,528) (3,310)
(Increase) decrease in other assets, net 39 (169)
Advances from gas purchasers - (5,770)
--------- -------
Net cash provided by operating activities $ 17,187 $ 6,110
--------- -------
</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,
---------------------------------
2000 1999
--------- --------
<S> <C> <C>
Cash flows from investing activities:
Capital and exploration expenditures $ (17,311) $ (9,778)
Changes in accounts payable and accrued
expenses for oil and gas expenditures 869 (2,540)
Proceeds from sales of assets - 27
--------- --------
Net cash used in investing activities (16,442) (12,291)
------ --------
Cash flows from financing activities:
Repayments of long-term bank debt (7,000) -
Borrowings of long-term bank debt - 8,000
Preferred stock dividends (438) (438)
Proceeds from exercise of stock options 1,031 -
------- --------
Net cash provided by financing activities (6,407) 7,562
------- --------
Net increase (decrease) in cash and cash
equivalents (5,662) 1,381
------- --------
Cash and cash equivalents at beginning
of period 12,510 2,670
------ --------
Cash and cash equivalents at end of period $ 6,848 $ 4,051
======= ========
Cash paid during the period for:
Interest $ 1,785 $ 923
Taxes - 248
</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, 1999 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) 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 "Credit Facility") that matures in April 2001. In October 1998, the Company
amended the Credit Facility by increasing the total commitment to $100 million.
The borrowing base increased from $130 million to $190 million in October, 1999,
as a result of the regular June 30 review. The increase was primarily due to the
Unocal Acquisition which was completed in July 1999. 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, 2000, a redetermination had not
yet been made.
Borrowings under the Credit Facility are unsecured and bear interest, at
the election of the Company, at a rate equal to (i) the greater of the agent
bank's prime rate or the federal funds effective rate plus an applicable margin
or (ii) the agent bank's Eurodollar rate plus an applicable margin. Interest on
amounts outstanding under the Credit Facility is due on the last day of each
month in the case of loans bearing interest at the prime rate or federal funds
rate and, in the case of loans bearing interest at the Eurodollar rate, interest
payments are due on the last day of each applicable interest period of one, two,
three or six months, as selected by the Company at the time of borrowing. At
March 31, 2000, the outstanding balance was $74.0 million at an average interest
rate of 7.4% and $26.0 million was available for borrowing under the Credit
Facility.
The Credit Facility contains certain financial covenants and other
restrictions including a limitation on the Company's ability to pay dividends to
other than the Company's Preferred Stockholders. Financial covenants of the
Credit Facility 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 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.
9
<PAGE> 10
TOM BROWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(3) 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,
2000 1999
-------- ------------
<S> <C> <C>
(in thousands)
Net operating loss carryforwards $20,982 $25,607
Gas and oil acquisition, exploration and development
costs deducted for tax purposes over book (3,894) (3,662)
AMT credit carryforwards 4,749 4,499
Investment tax credit carryforwards 195 195
Option plan compensation 1,559 1,559
Other 2,416 2,380
------ -------
Net deferred tax asset 26,007 30,578
Valuation allowance (1,953) (1,953)
------- -------
Recognized net deferred tax asset $24,054 $28,625
======= =======
</TABLE>
Net deferred tax assets are comprised of the following (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
-------- ------
(in thousands)
<S> <C> <C>
Current $ - $ -
Long-term 24,054 28,625
------ ------
$24,054 $28,625
====== ======
</TABLE>
A valuation allowance of approximately $2.0 million at March 31, 2000
and December 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 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, 2000, the Company had investment tax credit carryforwards
of approximately $.2 million and net
10
<PAGE> 11
TOM BROWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
operating loss carryforwards of approximately $59.9 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: $4.3 million in 2000, $7.8 million in 2001, $.7 million in 2002,
$2.9 million in 2003, $2.3 million in 2004, and $41.9 million in 2019.
Additionally, the Company has approximately $6.3 million of statutory depletion
carryforwards and $4.7 million of AMT credit carryforwards that may be carried
forward until utilized.
(4) 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, 2000
------------------------------------------------------------------
Gas & Oil Marketing,
Exploration & Gathering & Total
Development Processing Drilling Segments
------------- ----------- -------- --------
<S> <C> <C> <C> <C>
Revenues from external purchasers $ 28,482 $ 41,029 $3,404 $ 72,915
Intersegment revenues 8,354 - 502 8,856
Segment profit (loss) 11,420 2,402 248 14,070
</TABLE>
<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,
----------------------------------
2000 1999
----------- ---------
<S> <C> <C>
Revenues
Revenues from external purchasers $ 72,915 $ 29,446
Intersegment revenues 8,856 4,813
Intercompany eliminations (7,613) (2,746)
-------- --------
Total consolidated revenues $ 74,158 $ 31,513
======== ========
Profit or (loss)
Total reportable segment income (loss) $ 14,070 $ (1,933)
Interest expense (1,369) (1,445)
Elimination and other 29 (225)
-------- --------
Income (loss) before income taxes $ 12,730 $ (3,603)
======== ========
</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
The Company's results of operations were favorably impacted in the first
quarter of 2000 due to an acquisition of properties and a cryogenic natural gas
processing plant from Unocal ("the Unocal Acquisition") in July 1999, and due to
increased production and higher commodity prices.
Revenues
During the three month period ended March 31, 2000, revenues from gas, oil
and natural gas liquids production increased 109% to $36.7 million compared to
the same period in 1999. Such increase was the result of an increase in (i)
average gas prices received by the Company from $1.63 per Mcf to $2.34 per Mcf
which increased revenues by approximately $6.5 million, (ii) average crude oil
sales prices received from $10.46 to $27.59 per barrel which increased revenues
$4.3 million, (iii) gas sales volumes of 26% to 11.5 Bcf which increased
revenues by approximately $5.5 million, and (iv) natural gas liquids revenues of
$4.3 million as a result of a natural gas processing plant acquired in the
Unocal Acquisition. Oil volumes decreased 20% to 198 thousand barrels which
decreased revenues $1.4 million.
Marketing, gathering and processing revenues increased $21.5 million to
$34.0 million for the three month period ended March 31, 2000 compared to the
prior year's quarter as a result of increased activity in the Company's natural
gas marketing operations and due to the assignment of 100% of the marketing
operations effective September 1, 1999 from Wildhorse Energy Partners, LLC.
("Wildhorse") (owned 45% by the Company) to Retex, Inc., the Company's
wholly-owned marketing subsidiary. The gross margin from these activities
increased due primarily to a reduction in the rate on one of the pipelines
utilized by Retex to transport its gas.
Drilling revenues compared to cost of drilling netted a gross margin for
the three months ended March 31, 2000 and 1999 of approximately $.6 million and
$.1 million, respectively. The increase was due to a higher rig utilization
rate and lower costs in the first quarter of 2000.
12
<PAGE> 13
<TABLE>
<CAPTION>
Selected Operating Data
Three Months ended
March 31,
----------------------------------
2000 1999
-------- --------
<S> <C> <C>
Revenues (in thousands):
Natural gas sales $26,981 $14,959
Crude oil sales 5,462 2,594
NGL sales 4,301 26
Marketing, gathering and processing 33,999 12,473
Drilling 3,402 1,056
Other 13 405
------- -------
Total revenues $74,158 $31,513
======= =======
Net income (loss) attributable to common
stock (in thousands) $ 7,271 $(2,971)
======= =======
Natural gas production (MMcf) 11,515 9,172
Crude oil production (MBbls) 198 248
NGL production (MBbls) 275 3
Average natural gas sales price ($/Mcf) $ 2.34 $ 1.63
Average crude oil sales price ($/Bbl) $ 27.59 $ 10.46
Average NGL sales price ($/Bbl) $ 15.64 $ 8.50
</TABLE>
Costs and Expenses
Costs and expenses for the three months ended March 31, 2000 increased
approximately 75% to $61.4 million as compared to the same period in 1999. Gas
and oil production expenses increased to $.45/Mcfe compared to $.37/ Mcfe due to
the Unocal Acquisition and higher than normal workover expenses. Taxes on gas
and oil production increased 114% but remained approximately 10% of gas and oil
sales. Cost of gas sold increased 155% to $30.5 million due to the assignment of
100% of the marketing operations effective September 1, 1999 from Wildhorse
(owned 45% by the Company) to Retex, Inc. These increases were partially offset
by a reduction in transportation charges accrued pursuant to a FERC rate ruling
relative to one of the pipelines utilized by Retex to transport its gas.
Exploration costs decreased slightly due to a lesser amount of exploratory
drilling activity in the first quarter of 2000. General and administrative
expenses increased $1.0 million due to additional personnel added since the
first quarter of 1999 and a reduction in professional fees in the first quarter
of 1999. Depreciation, depletion and amortization increased $.6 million from
first quarter 1999 to first quarter 2000, but decreased substantially on an Mcfe
basis from $1.00 to $.78 due to lower finding and development costs associated
with 1999 reserve additions.
A valuation allowance of approximately $2.0 million at March 31, 2000 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.
13
<PAGE> 14
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
period ended March 31, 2000 was approximately $18.2 million as compared to $9.8
million in the same period in 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, 2000, net cash provided by operating activities was
$17.2 million as compared to $6.1 million for the same period of 1999.
Bank Credit Facility
The Company's Credit Facility provides for a $100 million revolving line
of credit with a current borrowing base of $190 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, 2000 had not yet been made.
At March 31, 2000, the aggregate outstanding balance under the Credit
Facility was $74 million, bearing interest at approximately 7.4% per annum. The
amount available for borrowing under the Credit Facility at March 31, 2000 was
$26 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 all
covenants contained in the Credit Facility at March 31, 2000. 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 the federal funds
effective rate, plus an applicable margin or (ii) the agent bank's Eurodollar
rate, plus an applicable margin.
Markets and Prices
Wildhorse Energy Partners, L.L.C. ("Wildhorse") provides gathering,
processing and storage to Rocky Mountain gas and oil producers. The Company (45
percent) and Kinder Morgan, Inc. ("KMI") (55 percent) jointly own Wildhorse.
Wildhorse is operated by KMI under the direction of an operating team with equal
representation from KMI and the Company. During the three months ended March 31,
2000, the Company's share of Wildhorse's investments was approximately $0.1
million for gas gathering and processing assets.
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 three
months of 2000, the average prices received for gas, oil and natural gas liquids
by the Company were $2.34 per Mcf, $27.59 per barrel and $15.64 per barrel,
respectively, as compared to $1.63 Mcf , $10.46 per barrel and $8.50 per barrel,
respectively, for the same period in 1999.
14
<PAGE> 15
Year 2000
The Company previously performed a review of its internal informational
systems for year 2000 ("Y2K") automation compliance through a Company-wide
effort to address Y2K system issues. Such review included verification of Y2K
readiness of the Company's key vendors and purchasers. The Company has not
encountered any material Y2K compliance problems regarding the above. Costs
incurred to become Y2K compliant were minimal.
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 all fiscal
quarters of fiscal years beginning after June 15, 2000 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.
Interest Rate Risk
At March 31, 2000, the Company had $74 million outstanding under its
credit facility at an average interest rate of 7.4%. 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 2000 will
fluctuate based on short-term interest rates. Assuming no change in the amount
outstanding during 2000, the impact on interest expense of a ten- percent change
in the average interest rate would be approximately $183,000. 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.
555 Seventeenth Street, Suite 1850
Denver, Colorado 80202
--------------------------
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)
/s/ Daniel G. Blanchard
--------------------------------
Daniel G. Blanchard
Vice President and Chief
Financial Officer
May 10, 2000 /s/ R. Kim Harris
Date --------------------------------
R. Kim Harris
Vice President of Finance
and Controller
19
<PAGE> 20
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
----------- -----------
27 -- Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 6,848
<SECURITIES> 0
<RECEIVABLES> 49,334
<ALLOWANCES> 0
<INVENTORY> 902
<CURRENT-ASSETS> 58,371
<PP&E> 579,732
<DEPRECIATION> 144,752
<TOTAL-ASSETS> 524,343
<CURRENT-LIABILITIES> 36,593
<BONDS> 74,000
3,538
0
<COMMON> 100
<OTHER-SE> 406,447
<TOTAL-LIABILITY-AND-EQUITY> 524,343
<SALES> 36,744
<TOTAL-REVENUES> 74,158
<CGS> 43,590
<TOTAL-COSTS> 61,428
<OTHER-EXPENSES> 2,477
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,369
<INCOME-PRETAX> 12,730
<INCOME-TAX> (5,021)
<INCOME-CONTINUING> 7,271
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,271
<EPS-BASIC> .21
<EPS-DILUTED> .20
</TABLE>
