<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 August 10, 2000.
Class of Common Stock Outstanding at August 10, 2000
--------------------- ------------------------------
$.10 par value 37,397,859
<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,
June 30, 2000 and December 31, 1999 4
Consolidated Statements of Operations,
Three and Six Months ended June 30, 2000 and 1999 6
Consolidated Statements of Cash Flows,
Six Months ended June 30, 2000 and 1999 7
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 13
Item 3. Quantitative and Qualitative Disclosure about
Market Risk 16
Part II. Other Information:
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 6. Exhibits and Reports on Form 8-K 19
Signature 20
</TABLE>
2
<PAGE> 3
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 I OF TWO PARTS
FINANCIAL INFORMATION
3
<PAGE> 4
TOM BROWN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------- ------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 10,322 $ 12,510
Accounts receivable 53,982 53,646
Inventories 730 828
Other 1,415 1,625
-------- --------
Total current assets 66,449 68,609
-------- --------
PROPERTY AND EQUIPMENT, AT COST:
Oil and gas properties, based on the successful
efforts accounting method 519,751 470,461
Gas gathering and processing and other plant 74,523 71,657
Other equipment 24,548 23,027
-------- --------
Total property and equipment 618,822 565,145
Less: Accumulated depreciation, depletion and amortization 156,868 133,342
-------- --------
Net property and equipment 461,954 431,803
-------- --------
OTHER ASSETS:
Deferred income taxes, net 16,867 28,625
Other assets, net 7,812 7,262
-------- --------
Total other assets 24,679 35,887
-------- --------
$553,082 $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>
June 30, December 31,
2000 1999
----------- ------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 32,310 $ 39,489
Accrued expenses 9,627 9,763
--------- ---------
Total current liabilities 41,937 49,252
--------- ---------
BANK DEBT 80,000 81,000
--------- ---------
OTHER NON-CURRENT LIABILITIES 3,895 3,950
--------- ---------
STOCKHOLDERS' EQUITY:
Convertible preferred stock,
at $.10 par value. Authorized 2,500,000 shares;
1,000,000 outstanding at December 31, 1999
shares with a liquidation
preference of $25,000,000 -- 100
Common stock, at $.10 par value
Authorized 55,000,000 shares;
outstanding 37,394,226 and
35,308,489 shares, respectively 3,739 3,531
Additional paid-in capital 501,426 495,817
Accumulated deficit (77,915) (97,351)
--------- ---------
Total stockholders' equity 427,250 402,097
--------- ---------
$ 553,082 $ 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 Six Months ended
June 30, June 30,
---------------------- ----------------------
2000 1999 2000 1999
--------- --------- --------- ---------
(Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Gas and oil sales $ 44,537 $ 20,838 $ 81,281 $ 38,417
Marketing, gathering and processing 43,051 13,705 77,050 26,178
Drilling 1,996 1,096 5,398 2,152
Interest income and other 129 759 142 1,164
--------- --------- --------- ---------
Total revenues 89,713 36,398 163,871 67,911
--------- --------- --------- ---------
Costs and expenses:
Gas and oil production 5,884 3,493 12,400 7,423
Taxes on gas and oil production 4,582 2,223 8,354 3,989
Cost of gas sold 37,616 13,805 68,119 25,767
Drilling operations 1,729 903 4,528 1,900
Exploration costs 2,024 1,257 3,863 3,246
Impairments of leasehold costs 900 900 1,800 1,800
General and administrative 2,845 2,437 5,322 3,908
Depreciation, depletion and amortization 11,977 10,362 23,230 21,018
Interest expense and other 1,710 1,410 3,079 2,855
--------- --------- --------- ---------
Total costs and expenses 69,267 36,790 130,695 71,906
--------- --------- --------- ---------
Income (loss) before income taxes 20,446 (392) 33,176 (3,995)
Income tax benefit (provision)
Current (657) (247) (1,107) (495)
Deferred (7,187) 80 (11,758) 1,398
--------- --------- --------- ---------
Net income (loss) 12,602 (559) 20,311 (3,092)
Preferred stock dividends (437) (437) (875) (875)
--------- --------- --------- ---------
Net income (loss) attributable to common stock $ 12,165 $ (996) $ 19,436 $ (3,967)
========= ========= ========= =========
Weighted average number of common
shares outstanding
Basic 35,811 29,274 35,562 29,267
========= ========= ========= =========
Diluted 37,207 29,274 36,512 29,267
========= ========= ========= =========
Net income (loss) per common share
Basic $ .34 $ (.03) $ .55 $ (.14)
========= ========= ========= =========
Diluted $ .33 $ (.03) $ .53 $ (.14)
========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE> 7
TOM BROWN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months ended
June 30,
---------------------
2000 1999
-------- ---------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 20,311 $ (3,092)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation, depletion and amortization 23,230 21,018
Gain on sales of assets -- (723)
Exploration costs 3,863 3,246
Impairments of leasehold costs 1,800 1,800
Deferred taxes 11,758 (1,398)
-------- --------
60,962 20,851
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (336) 1,428
(Increase) decrease in inventories 98 (53)
(Increase) decrease in other current assets 170 (488)
Decrease in accounts payable and accrued expenses (7,315) (1,384)
Increase in other assets, net (605) (373)
Advances from gas purchasers -- (11,572)
-------- --------
Net cash provided by operating activities $ 52,974 $ 8,409
-------- --------
</TABLE>
(continued)
See accompanying notes to consolidated financial statements.
7
<PAGE> 8
TOM BROWN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months ended
June 30,
--------------------
2000 1999
-------- --------
(Unaudited)
<S> <C> <C>
Cash flows from investing activities:
Capital and exploration expenditures $(59,044) $(26,662)
Proceeds from sales of assets -- 1,158
-------- --------
Net cash used in investing activities (59,044) (25,504)
Cash flows from financing activities:
Repayments of long-term bank debt (7,000) (5,000)
Borrowings of long-term bank debt 6,000 24,000
Preferred stock dividends (875) (875)
Proceeds from exercise of stock options 5,757 962
-------- --------
Net cash provided by financing activities 3,882 19,087
-------- --------
Net increase (decrease) in cash and cash
equivalents (2,188) 1,992
-------- --------
Cash and cash equivalents at beginning
of period 12,510 2,670
-------- --------
Cash and cash equivalents at end of period $ 10,322 $ 4,662
======== ========
Cash paid during the period for:
Interest $ 3,262 $ 1,947
Taxes 969 495
</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 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
On June 30, 2000, the Company repaid and cancelled its $100 million
revolving credit facility and entered into a new $125 million credit facility
(the "New Credit Facility") that matures in June 2003. Under the terms of the
New Credit Facility, the borrowing base was increased from $190 million to $225
million and the maturity date was extended beyond the April 2001 maturity date
in the cancelled credit facility. The amount of the borrowing base may be
redetermined as of December 31 of each calendar year at the sole discretion of
the lender. The borrowing base may also be redetermined in the event outstanding
borrowings exceed 50% of the borrowing base. At June 30, 2000, the outstanding
balance on the cancelled credit facility prior to the conversion to the New
Credit Facility was $80 million at an average interest rate of 7.3%.
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. Interest on amounts outstanding under the New Credit Facility is due on
the last day of each quarter 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.
The New Credit Facility contains certain financial covenants and other
restrictions similar to the limitations associated with the cancelled credit
facility. The financial covenants of the Credit Facility require the Company to
maintain a minimum consolidated tangible net worth of not less than $325 million
and the Company is required to maintain a ratio of (i) earnings before interest
expense, state and Federal taxes and depreciation, depletion and amortization
expense and exploration 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.
(3) 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.
9
<PAGE> 10
TOM BROWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Temporary differences and carryforwards which gave rise to significant
portions of deferred tax assets (liabilities) are as follows:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------- ------------
(in thousands)
<S> <C> <C>
Net operating loss carryforwards $ 14,719 $ 25,607
Gas and oil acquisition, exploration and development
costs deducted for tax purposes under book (5,194) (3,662)
AMT credit carryforwards 5,089 4,499
Investment tax credit carryforwards 195 195
Option plan compensation 1,559 1,559
Other 2,452 2,380
-------- --------
Net deferred tax asset 18,820 30,578
Valuation allowance (1,953) (1,953)
-------- --------
Recognized net deferred tax asset $ 16,867 $ 28,625
======== ========
</TABLE>
Net deferred tax assets are comprised of the following (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------- ------------
(in thousands)
<S> <C> <C>
Current $ -- $ --
Long-term 16,867 28,625
-------- --------
$ 16,867 $ 28,625
======== ========
</TABLE>
10
<PAGE> 11
TOM BROWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
A valuation allowance of approximately $2.0 million 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 June 30, 2000, the Company had investment tax credit carryforwards of
approximately $.2 million and a net operating loss carryforward of approximately
$42.3 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 million in 2004 and
$41.9 million in 2019. Additionally, the Company has approximately $6.3 million
of statutory depletion carryforwards and $5.1 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>
Six months ended
June 30, 2000
-----------------------------------------------------------------
Gas & Oil Marketing,
Exploration & Gathering & Total
Development Processing Drilling Segments
------------- ----------- -------- --------
<S> <C> <C> <C> <C>
Revenues from external purchasers $ 61,777 $ 94,703 $ 5,398 $161,878
Intersegment revenues 17,511 -- 1,947 19,458
Segment profit 29,799 6,061 608 36,468
</TABLE>
<TABLE>
<CAPTION>
Six months ended
June 30, 1999
-----------------------------------------------------------------
Gas & Oil Marketing,
Exploration & Gathering & Total
Development Processing Drilling Segments
------------- ----------- -------- --------
<S> <C> <C> <C> <C>
Revenues from external purchasers $ 31,249 $ 29,948 $ 2,150 $ 63,347
Intersegment revenues 8,298 -- 2,056 10,354
Segment profit (loss) 984 (1,954) 106 (864)
</TABLE>
11
<PAGE> 12
TOM BROWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
<TABLE>
<CAPTION>
Six months ended
June 30,
------------------------
2000 1999
-------- --------
<S> <C> <C>
Revenues
Revenues from external purchasers $161,878 $ 63,347
Intersegment revenues 19,458 10,354
Intercompany eliminations (17,465) (5,790)
-------- --------
Total consolidated revenues $163,871 $ 67,911
======== ========
Profit or (loss)
Total reportable segment income (loss) $ 36,468 $ (864)
Interest expense (3,079) (2,855)
Elimination and other (213) (276)
-------- ---------
Income (loss) before income taxes $ 33,176 $ (3,995)
======== =========
</TABLE>
(5) PREFERRED STOCK
In January 1996, in connection with the KNPC Acquisition, the Company
issued 1,000,000 shares of its $1.75 Convertible Preferred Stock, Series A (the
"Preferred Stock") to the seller. There are 2,500,00 shares of Preferred Stock
authorized. The holder of the Preferred Stock was entitled to receive cumulative
dividends at the annual rate of $1.75 per share, payable in cash quarterly on
the fifteenth day of March, June, September and December in each year.
The Preferred Stock was exchangeable at the option of the Company on any
dividend payment date on or after March 15, 1999 and prior to March 15, 2001 for
shares of common stock at the exchange rate of 1.666 shares of common stock for
each share of Preferred Stock. This exchange privilege provided that (i) on or
prior to the date of exchange, the Company shall have declared and paid to the
holders of the Preferred Stock all accumulated and unpaid dividends to the date
of exchange, and (ii) the current market price of the common stock is above
$18.375 (the "Threshold Price").
On June 15, 2000, the Company elected to exchange 1,666,000 shares of
its common stock for all 1,000,000 outstanding shares of the Preferred Stock as
the common stock had traded above the Threshold Price. Dividends on the
Preferred Stock were paid through June 14, 2000 and will no longer accrue after
the June 15, 2000 exchange date. The Preferred Stock is no longer outstanding.
(6) ACQUISITION
In June 2000, the Company purchased an additional working interest in a
field operated by the Company in the Wind River Basin in Wyoming. The acquired
interests included an estimated 22.0 Bcfe of proved reserves purchased for total
consideration of $15.2 million net of normal closing adjustments.
12
<PAGE> 13
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
three and six months ended June 30, 2000 by the acquisition of properties and a
cryogenic natural gas processing plant from Unocal (the " Unocal Acquisition")
in July 1999. Increased production and higher commodity prices also contributed
to the improved results.
Revenues
During the three month period ended June 30, 2000, revenue from gas,
oil and natural gas liquids production increased 114% or $23.7 million compared
to the same period in 1999. This increase resulted from (i) an increase in the
average gas prices received by the Company from $1.91 per Mcf to $2.86 per Mcf
which increased revenues by approximately $11.8 million, (ii) an increase in the
average oil prices received from $16.23 per barrel to $26.69 per barrel which
increased oil revenues by $2.0 million, (iii) a 38% increase ( 3.4 Bcf ) in the
quantity of gas sold which contributed incremental revenues of $9.7 million, and
(iv) natural gas liquids revenue of $3.9 million from the Unocal Acquisition
completed in 1999.
For the six months ended June 30, 2000, revenue from gas, oil and
natural gas liquids production increased $42.9 million or 112% compared to the
same period in 1999. This increase resulted from (i) an increase in the average
gas prices received by the Company from $1.77 per Mcf to $2.61 per Mcf which
increased revenues by approximately $20.1 million, (ii) an increase in the
average oil prices received from $13.17 per barrel to $27.18 per barrel which
increased oil revenues by $5.4 million, (iii) an increase in gas sales volumes
of 32% (5.8 Bcf) which increased revenues by $15.0 million, and (iv) natural gas
liquids revenue of $8.2 million from the Unocal Acquisition completed in 1999.
Oil volumes decreased 17% which reduced revenues by $2.3 million.
Marketing, gathering and processing revenue increased $29.3 million and
$50.9 million, respectively, for the three and six month periods ended June 30,
2000. The revenue recognized for the same periods in 1999 reflected the
Company's 45% share of such revenues generated by the Wildhorse Energy Partners,
LLC ("Wildhorse"). Effective September 1, 1999, 100% of the marketing operations
of Wildhorse were transferred to Retex, Inc., the Company's wholly owned
marketing subsidiary. The increased revenue in 2000 is attributable to the Retex
assignment and to increased activity in the Company's natural gas marketing
operations. The revenue has also been impacted by the general increase in 2000
in the commodity price for natural gas which is the basis for marketing contract
settlements.
Drilling operations are conducted through the Company's wholly owned
subsidiary, Sauer Drilling Company. Drilling revenue compared to the cost of
drilling produced a gross margin of $.3 million for the three months ended June
30, 2000 compared to a gross margin of $.2 million for the same period in 1999.
For the six month period ended June 30, 2000, the gross margin was $.9 million
as compared to a $.3 gross margin in 1999. The increases in 2000 were
attributable to a higher rig utilization rate and lower costs in this period.
13
<PAGE> 14
Selected Operating Data
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues (in thousands):
Natural gas sales $ 35,578 $ 17,292 $ 62,559 $ 32,251
Crude oil sales 5,051 3,534 10,513 6,128
NGL Sales 3,908 12 8,209 38
Marketing, gathering and processing 43,051 13,705 77,050 26,178
Drilling 1,996 1,096 5,398 2,152
Other 129 759 _ 142 1,164
-------- -------- -------- --------
Total revenues $ 89,713 $ 36,398 $163,871 $ 67,911
======== ======== ======== ========
Net income (loss) attributable to common
stock (in thousands) $ 12,165 $ (996) $ 19,436 $ (3,967)
======== ======== ======== ========
Natural gas production (MMcf) 12,452 9,046 23,967 18,218
Crude oil production (MBbls) 189 217 387 465
NGL production (MBbls) 269 3 544 5
Average natural gas sales price ($/Mcf) $ 2.86 $ 1.91 $ 2.61 $ 1.77
Average crude oil sales price ($/Bbl) $ 26.69 $ 16.23 $ 27.18 $ 13.17
Average natural gas liquids price ($/Bbl) $ 15.64 $ 8.50 $ 15.64 $ 8.50
</TABLE>
Costs and Expenses
Costs and expenses for the three months ended June 30, 2000 increased
approximately 88% to $69.3 million as compared to the same period in 1999. Cost
of gas sold increased $23.8 million as a result of the assignment of 100% of the
marketing operations effective September 1, 1999 from Wildhorse (owned 45% by
the Company) to Retex, Inc., increased activity in the Company's natural gas
marketing operations and higher commodity prices. Gas and oil production
expenses increased 68% ($2.4 million) due primarily to the Unocal Acquisition.
Taxes on gas and oil production increased by $2.3 million which was directly
related to the increased revenue from gas and oil sales during the period.
Depreciation, depletion and amortization increased $1.6 million for the three
months ended June 30, 1999 compared to the same period in 1999. Lower finding
and development costs associated with the 1999 reserve additions effectively
reduced the unit rate for depreciation, depletion and amortization in the June
2000 period. Thus although production increased by 47% on an Mcfe basis for the
June 2000 period, the lower effective depletion rate resulted in an increase in
the depreciation, depletion and amortization expense of only 18% for the period.
Costs and expenses for the six months ended June 30, 2000 increased
approximately 82% to $130.7 million as compared to the same period in 1999. Cost
of gas sold increased $42.4 million as a result of the Wildhorse assignment
effective September 1, 1999, increased activity in the Company's natural gas
marketing operations and higher commodity prices. Gas and oil production
expenses increased 67% ($5.0 million) due primarily to the Unocal Acquisition.
Taxes on gas and oil production increased by $4.4 million in conjunction with
the increased revenue from gas and oil sales during the period. Depreciation,
depletion and amortization increased by 11% to $23.2 million as compared to the
same period in 1999. With a production increase of 42% on an Mcfe basis, lower
finding and development costs associated with the 1999 reserve additions
effectively reduced the unit rate for depreciation, depletion and amortization
in the June 2000 period.
A valuation allowance of approximately $2.0 million at June 30, 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
14
<PAGE> 15
carryforwards. Based on its expected levels of future earnings, the Company
believes it will, more likely than not, generate sufficient taxable income to
realize the benefit attributable to the net operating loss carryforwards for
which valuation allowances were not provided.
CAPITAL RESOURCES AND LIQUIDITY
Growth and Acquisitions
Most of the growth of the Company has resulted from recent acquisitions
and, to a lesser extent, from the Company's successful development drilling. The
Company continues to pursue opportunities which will add value by increasing its
reserve base and presence in significant natural gas areas, and further
developing the Company's ability to control and market the production of natural
gas. As the Company continues to evaluate potential acquisitions and property
development opportunities, it will benefit from its financing flexibility and
the leverage potential of the Company's overall capital structure.
Capital Expenditures
The Company's capital and exploration expenditures for the three and six
month periods ended June 30, 2000 were approximately $41.7 million and $59.0
million as compared to $16.9 million and $26.7 million in the same periods in
1999. In June 2000, the Company acquired an additional interest in certain
properties located within the Wind River Basin in Wyoming for $15.2 million. The
Company has also increased its development drilling programs in 2000.
The Company has historically funded capital expenditures and working
capital requirements with internally generated cash and borrowings. During the
six months ended June 30, 2000, net cash provided by operating activities was
$53.0 million as compared to $8.4 million for the same period of 1999. The
increase in 2000 was due to higher commodity prices, increased production and
the impact of the Unocal Acquisition in 1999.
Bank Credit Facility
The Company's New Credit Facility provides for a $125 million revolving
line of credit with a current borrowing base of $225 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 June 30, 2000, the aggregate outstanding balance under the New Credit
Facility was $80 million. The amount available for borrowing under the New
Credit Facility at June 30, 2000 was $45 million. The New Credit Facility
contains certain financial covenants which require the Company to maintain a
minimum consolidated tangible net worth as well as certain financial ratios. The
Company was in compliance with the covenants contained in the New Credit
Facility, at June 30, 2000. Borrowings under the New Credit Facility are
unsecured and bear interest, at the election of the Company, at (i) the greater
of the agent bank's prime rate or the federal funds effective rate, plus 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.
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
15
<PAGE> 16
prices. Substantially all of the Company's gas and oil production is currently
market sensitive. During the first six months of 2000, the average prices
received for gas, oil and natural gas liquids by the company were $2.61 per Mcf,
$27.18 per barrel and $15.64 per barrel, respectively, as compared to $1.77 Mcf,
$13.17 per barrel and $8.50 per barrel, respectively, for the same period in
1999.
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 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.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
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.
The Company entered into two short-term oil hedging contracts in 2000
covering approximately one third of
16
<PAGE> 17
its estimated daily net production. The contracts were based on the March
through August NYMEX contract periods and involved 20,000 barrels per month in
total. The settlement prices in these swap transactions have not been
significantly different than the actual closing NYMEX contracts and thus these
transactions have not had a material impact on the operational results in this
period. The Company has not entered into any hedging arrangements on its gas
production.
Interest Rate Risk
At June 30, 2000, the Company had $80 million outstanding under its
credit facility at an average interest rate of 7.3%. 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 $.3 million. As the interest
rate is variable and is reflective of current market conditions, the carrying
value approximates the fair value.
17
<PAGE> 18
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
18
<PAGE> 19
TOM BROWN, INC. AND SUBSIDIARIES
OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company's annual meeting of stockholders was held on May 18, 2000. At
the meeting, the following persons were elected to serve as Directors of the
Company until the 2001 annual meeting of stockholders and until their respective
successors are duly qualified and elected: (1) Thomas C. Brown, (2) Donald L.
Evans, (3) Henry Groppe, (4) Edward W. LeBaron, Jr. (5) James B. Wallace, (6)
Robert H. Whilden, Jr., (7) David M. Carmichael, (8) James D. Lightner and (9)
Kenneth B. Butler.
Set forth below is a tabulation of votes with respect to each nominee for
Director:
<TABLE>
<CAPTION>
Votes Votes Broker
Cast for Witheld Non-votes
---------- --------- ---------
<S> <C> <C> <C>
Thomas C. Brown 26,296,005 180,394 -0-
Kenneth B. Butler 26,293,907 182,492 -0-
David M. Carmichael 26,293,757 182,642 -0-
Donald L. Evans 25,286,426 1,189,973 -0-
Henry Groppe 26,296,017 180,382 -0-
Edward W. LeBaron, Jr. 26,296,117 180,282 -0-
James D. Lightner 25,285,001 1,191,398 -0-
Robert H. Whilden, Jr. 26,296,117 180,282 -0-
James B. Wallace 26,296,017 180,382 -0-
</TABLE>
Item 6. Exhibits and Reports on Form 8-K and Form 8-K/A
(a) Exhibit No. Description
----------- -----------
10.1 * CREDIT AGREEMENT dated June 30, 2000.
27 * Financial Data Schedule
----------
* Filed herewith
(b) Reports on Form 8-K
None
19
<PAGE> 20
TOM BROWN, INC. AND SUBSIDIARIES
OTHER INFORMATION
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TOM BROWN, INC.
------------------------------
(Registrant)
/s/ Daniel G. Blanchard
------------------------------
Daniel G. Blanchard
Vice President and Chief
Financial Officer
(Principal Financial Officer)
August 11, 2000 /s/ Richard L. Satre
----------------------- -------------------------------
Date Richard L.Satre
Controller
(Chief Accounting Officer)
20
<PAGE> 21
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.1 * CREDIT AGREEMENT dated June 30, 2000.
27 * Financial Data Schedule
</TABLE>
* Filed herewith
