-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TwuLHC95O2ewa4W6BHVqg7j5Y9Av5oiATuPbDJHQ7lEwAxkvlD1O33ObmKIWX0MD negnp3JiYhJW8WrQO9LrDQ== 0000950129-99-005040.txt : 19991117 0000950129-99-005040.hdr.sgml : 19991117 ACCESSION NUMBER: 0000950129-99-005040 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BROWN TOM INC /DE CENTRAL INDEX KEY: 0000014803 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 951949781 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-03880 FILM NUMBER: 99754362 BUSINESS ADDRESS: STREET 1: 508 W WALL STREET 2: STE 500 CITY: MIDLAND STATE: TX ZIP: 79701 BUSINESS PHONE: 9156829715 FORMER COMPANY: FORMER CONFORMED NAME: BROWN TOM DRILLING CO INC DATE OF NAME CHANGE: 19710915 10-Q 1 TOM BROWN, INC. - DATED 09/30/99 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 0-3880 TOM BROWN, INC. --------------- (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 95-1949781 ------------------------------- ------------------- (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 555 SEVENTEENTH STREET, SUITE 1850 DENVER, CO 80202-3918 ---------------------------------------- ---------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) 303- 260-5000 ------------- (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) NOT APPLICABLE -------------- (FORMER ADDRESS) 508 W. WALL, SUITE 500 MIDLAND, TX 79701 915-682-9715 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of November 12, 1999. CLASS OF COMMON STOCK OUTSTANDING AT NOVEMBER 12, 1999 --------------------- -------------------------------- $.10 PAR VALUE 35,149,489 2 TOM BROWN, INC. AND SUBSIDIARIES QUARTERLY REPORT FORM 10-Q INDEX
Page No. Part I. Item 1. Financial Information (Unaudited): Consolidated Balance Sheets, September 30, 1999 and December 31, 1998 4 Consolidated Statements of Operations, Three and Nine Months ended September 30, 1999 and 1998 6 Consolidated Statements of Cash Flows, Nine Months ended September 30, 1999 and 1998 7 Notes to Consolidated Financial Statements 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14 Item 3. Quantitative and Qualitative Disclosure about Market Risk 19 Part II. Other Information: Item 6. Exhibits and Reports on Form 8-K 21 Signature 22
2 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 4 TOM BROWN, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS (IN THOUSANDS)
September 30, December 31, 1999 1998 ------------- ------------ (Unaudited) CURRENT ASSETS: Cash and cash equivalents $ 7,708 $ 2,670 Accounts receivable 40,941 32,390 Inventories 902 532 Marketable securities 1,175 -- Deferred income taxes 2,400 8,585 Other 717 260 -------- -------- Total current assets 53,843 44,437 -------- -------- PROPERTY AND EQUIPMENT, AT COST: Oil and gas properties, based on the successful efforts accounting method 461,409 387,336 Gas gathering and processing and other plant 75,082 51,561 Other equipment 21,855 20,340 -------- -------- Total property and equipment 558,346 459,237 Less: Accumulated depreciation, depletion and amortization 124,862 92,232 -------- -------- Net property and equipment 433,484 367,005 -------- -------- OTHER ASSETS: Deferred income taxes, net 28,935 23,429 Other assets, net 6,480 7,011 -------- -------- Total other assets 35,415 30,440 -------- -------- $522,742 $441,882 ======== ========
(continued) See accompanying notes to consolidated financial statements. 4 5 TOM BROWN, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS LIABILITIES AND STOCKHOLDERS' EQUITY (IN THOUSANDS)
September 30, December 31, 1999 1998 --------- --------- (Unaudited) CURRENT LIABILITIES: Accounts payable $ 30,957 $ 23,124 Accrued expenses 5,229 4,754 Advances from gas purchasers 6,857 24,529 --------- --------- Total current liabilities 43,043 52,407 --------- --------- BANK DEBT 81,000 55,000 --------- --------- OTHER NON-CURRENT LIABILITIES 2,719 2,725 --------- --------- STOCKHOLDERS' EQUITY: Convertible preferred stock, at $.10 par value. Authorized 2,500,000 shares; Outstanding 1,000,000 shares with a liquidation preference of $25,000,000 100 100 Common stock, at $.10 par value Authorized 55,000,000 shares; Outstanding 35,149,489 and 29,259,989 shares, respectively 3,515 2,926 Additional paid-in capital 495,010 431,082 Accumulated deficit (103,164) (102,358) Unrealized gain on marketable securities 519 -- --------- --------- Total stockholders' equity 395,980 331,750 --------- --------- $ 522,742 $ 441,882 ========= =========
See accompanying notes to consolidated financial statements. 5 6 TOM BROWN, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three Months ended Nine Months ended September 30, September 30, ------------------------ ------------------------ 1999 1998 1999 1998 --------- --------- --------- --------- (Unaudited) Revenues: Gas and oil sales $ 31,197 $ 18,756 $ 69,614 $ 59,448 Marketing, gathering and processing 24,260 11,163 50,438 32,809 Drilling 1,477 1,465 3,629 3,301 Interest income and other 187 11 1,351 441 --------- --------- --------- --------- Total revenues 57,121 31,395 125,032 95,999 --------- --------- --------- --------- Costs and expenses: Gas and oil production 5,604 3,891 13,027 10,949 Taxes on gas and oil production 2,741 1,652 6,730 5,917 Cost of gas sold 23,258 11,951 49,025 32,383 Drilling operations 1,366 1,539 3,266 3,022 Exploration costs 2,238 4,599 5,484 12,277 Impairments of leasehold costs 900 750 2,700 2,465 General and administrative 1,893 1,586 5,801 5,468 Depreciation, depletion and amortization 11,642 11,489 32,660 32,187 Interest expense and other 1,543 1,061 4,398 2,842 --------- --------- --------- --------- Total costs and expenses 51,185 38,518 123,091 107,510 --------- --------- --------- --------- Income (loss) before income taxes 5,936 (7,123) 1,941 (11,511) Income tax benefit (provision) Current (260) (93) (755) (575) Deferred (2,077) 2,432 (679) 3,944 --------- --------- --------- --------- Net income (loss) 3,599 (4,784) 507 (8,142) Preferred stock dividend (438) (438) (1,313) (1,313) --------- --------- --------- --------- Net income (loss) attributable to common stock $ 3,161 $ (5,222) $ (806) $ (9,455) ========= ========= ========= ========= Weighted average number of common shares outstanding Basic 35,084 29,260 31,227 29,248 ========= ========= ========= ========= Diluted 35,575 29,260 31,227 29,248 ========= ========= ========= ========= Net income (loss) per common share Basic $ .09 $ (.18) $ (.03) $ (.32) ========= ========= ========= ========= Diluted $ .09 $ (.18) $ (.03) $ (.32) ========= ========= ========= =========
See accompanying notes to consolidated financial statements. 6 7 TOM BROWN, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
Nine Months ended September 30, 1999 1998 -------- -------- (Unaudited) Cash flows from operating activities: Net income (loss) $ 507 $ (8,142) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation, depletion and amortization 32,660 32,187 Gain on sales of assets (758) (2) Exploration costs 5,484 8,508 Impairments of leasehold costs 2,700 2,465 Deferred taxes 679 (3,944) -------- -------- 41,272 31,072 Changes in operating assets and liabilities: (Increase) decrease in accounts receivable (9,207) 13,786 Increase in inventories (370) (168) Increase in other current assets (457) (201) Increase in accounts payable and accrued expenses 12,334 328 Increase (decrease) in other assets, net 525 (6,387) Advances from gas purchasers (17,672) -- -------- -------- Net cash provided by operating activities $ 26,425 $ 38,430 -------- --------
(continued) See accompanying notes to consolidated financial statements. 7 8 TOM BROWN, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
Nine Months ended September 30, ------------------------ 1999 1998 --------- --------- (Unaudited) Cash flows from investing activities: Capital and exploration expenditures $ (44,399) $ (70,896) Changes in accounts payable and accrued expenses for oil and gas expenditures (4,002) (7,117) Proceeds from sales of assets 1,324 2,404 --------- --------- Net cash used in investing activities (47,077) (75,609) --------- --------- Cash flows from financing activities: Repayments of long-term bank debt (10,000) (53,500) Repayments of note payable, current -- (5,168) Borrowings of long-term bank debt 36,000 101,000 Preferred stock dividends (1,313) (1,313) Proceeds from exercise of stock options 1,003 585 --------- --------- Net cash provided by financing activities 25,690 41,604 --------- --------- Net increase in cash and cash equivalents 5,038 4,425 --------- --------- Cash and cash equivalents at beginning of period 2,670 6,537 --------- --------- Cash and cash equivalents at end of period $ 7,708 $ 10,962 ========= ========= Cash paid during the period for: Interest $ 3,231 $ 2,204 Taxes 716 575 Noncash investing and financing activities: Issuance of common stock for acquisition of Unocal properties $ 63,490 $ -- Receipt of marketable securities for settlement of trade receivable 1,175 --
See accompanying notes to consolidated financial statements. 8 9 TOM BROWN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The condensed consolidated financial statements included herein have been prepared by Tom Brown, Inc. (the "Company") and are unaudited, except for the balance sheet at December 31, 1998 which has been prepared from the audited financial statements at that date. The financial statements reflect necessary adjustments, all of which were of a recurring nature, and are, in the opinion of management, necessary for a fair presentation. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The Company believes that the disclosures presented are adequate to allow the information presented not to be misleading. Users of financial information produced for interim periods are encouraged to refer to the footnotes contained in the Annual Report to Stockholders when reviewing interim financial results. Certain reclassifications have been made to amounts reported in previous periods to conform to the current presentation. (2) ACQUISITIONS AND DIVESTITURES Acquisition of Sauer Drilling Company In January 1998, the Company completed the acquisition of W. E. Sauer Companies L.L.C. of Casper, Wyoming for approximately $8.1 million. The assets purchased include five drilling rigs, tubular goods, a yard and related assets. The Company operates the assets under the name Sauer Drilling Company and serves the drilling needs of operators in the central Rocky Mountain region in addition to drilling for the Company. Acquisition of Unocal Corporation Rocky Mountain Assets In July 1999, the Company completed the acquisition of most of the Rocky Mountain gas and oil assets of Spirit Energy 76 ("Unocal"), Unocal Corporation's lower 48 exploration and production unit for a consideration of 5.8 million shares of the Company's common stock and $5 million. The effective date of the transaction was January 1, 1999. The purchase price was adjusted for the net operating results of the acquired properties since the effective date, which resulted in a net cash payment to the Company. Included in the acquisition is the Lisbon Plant, a modern sophisticated cryogenic (60 million cubic feet per day capacity) natural gas processing plant that extracts natural gas liquids and merchantable helium and separates carbon dioxide, hydrogen sulfide and nitrogen from the raw gas stream. The average net sales from the acquired properties for 1998 was approximately 18 million cubic feet per day of natural gas, 290 barrels of oil per day and 92,000 gallons of gas plant liquids per day, or approximately 33 million cubic feet equivalent per day (assuming gas plant liquids and oil converted at 6:1). The net proved reserves of these acquired properties are estimated to be 89 billion cubic feet equivalent of gas as of the acquisition effective date. Approximately 65,000 net undeveloped acres were also acquired. 9 10 TOM BROWN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Pro-Forma Information The following table presents the unaudited pro forma revenues, net income (loss) and net income (loss) per share of the Company for the nine months ended September 30, 1999 and 1998, assuming that the Unocal acquisition occurred on January 1, 1998.
Nine Months ended September 30, ------------------------------- 1999 1998 --------- --------- (in thousands, except for per share amounts) Revenues $ 136,323 $ 112,876 ========= ========= Net income (loss) 3,091 (5,712) ========= ========= Net income (loss) attributable to common stock 1,778 (7,025) ========= ========= Net income (loss) per common share: Basic $ .05 $ (.20) ========= ========= Diluted $ .05 $ (.20) ========= =========
(3) MARKETABLE SECURITIES During the third quarter of 1999, the Company received 410,700 shares of common stock from an unrelated party as part of a negotiated settlement of an outstanding trade receivable. This stock is not transferable until May 27, 2000 and is classified by the Company as available-for-sale. Accordingly, the adjustment to fair value of approximately $519,000 is shown as a component of stockholders' equity and has no effect on the statement of operations. (4) DEBT In April 1998, the Company repaid and cancelled its $125 million revolving credit facility and entered into a new $75 million credit facility (the New Credit Facility) that matures in April 2001. In October 1998, the Company amended the New Credit Facility by increasing the total commitment to $100 million. The New Credit Facility has a current borrowing base of $130 million. The amount of the borrowing base may be redetermined as of December 31 and June 30 of each calendar year at the sole discretion of the lender. 10 11 TOM BROWN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Borrowings under the New Credit Facility are unsecured and bear interest, at the election of the Company, at a rate equal to (i) the greater of the agent bank's prime rate or the federal funds effective rate plus an applicable margin or (ii) the agent bank's Eurodollar rate plus an applicable margin. The New Credit Facility contains certain financial covenants among other restrictions. At September 30, 1999, the outstanding balance was $81 million at an average interest rate of 6.6% and $19 million was available for borrowing under the New Credit Facility. At September 30, 1999, standby letters of credit of approximately $532,000 had been issued as security by a surety company for two oil and gas performance bonds issued to agencies of the U.S. Government. The bonds will remain in place until released by the government agencies. Another agreement and the related letter of credit of approximately $1,656,000 expired on April 1, 1999. (5) INCOME TAXES The Company has not paid Federal income taxes due to its net operating loss carryforward, but is required to pay alternative minimum tax ("AMT"). This tax can be partially offset by an AMT net operating loss carryforward. Temporary differences and carryforwards which gave rise to significant portions of deferred tax assets (liabilities) are as follows:
September 30, December 31, 1999 1998 ------------- ------------ (in thousands) Net operating loss carryforwards $ 22,944 $ 10,950 Gas and oil acquisition, exploration and development costs deducted for tax purposes under book (652) 6,254 Advances from gas purchasers 2,400 8,585 AMT credit carryforwards 4,499 4,119 Investment tax credit carryforwards 489 857 Option plan compensation 1,559 1,559 Other 2,304 2,265 -------- -------- Net deferred tax asset 33,543 34,589 Valuation allowance (2,207) (2,575) -------- -------- Recognized net deferred tax asset $ 31,336 $ 32,014 ======== ========
Net deferred tax assets are comprised of the following (in thousands):
September 30, December 31, 1999 1998 ------------- ----------- (in thousands) Current $ 2,400 $ 8,585 Long-term 28,936 23,429 ------- ------- $31,336 $32,014 ======= =======
11 12 TOM BROWN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) A valuation allowance of approximately $2.2 million and $2.6 million at September 30, 1999 and December 31, 1998, respectively, has been provided against the Company's net deferred tax assets based on management's estimate of the recoverability of future tax benefits. The Company evaluated all appropriate factors to determine the proper valuation allowance for carryforwards, including any limitations concerning their use, the year the carryforward expires and the levels of taxable income necessary for utilization and tax planning. In this regard, full valuation allowances were provided for investment tax credit carryforwards and option plan compensation. Based on its recent operating results and its expected levels of future earnings, the Company believes it will, more likely than not, generate sufficient taxable income to realize the benefit attributable to the net operating loss carryforward and other deferred tax assets for which valuation allowances were not provided. At September 30, 1999, the Company had investment tax credit carryforwards of approximately $.5 million and net operating loss carryforwards of approximately $65.6 million. The Company has no current liability for Federal income taxes because of these net operating loss and investment tax credit carryforwards. Realization of the benefits of these carryforwards is dependent upon the Company's ability to generate taxable earnings in future periods. In addition, the availability of these carryforwards is subject to various limitations. The net operating loss carryforwards expire as follows: $17.6 million in 2000, $7.8 million in 2001, $.7 million in 2002, $2.9 million in 2003, $2.3 million in 2004, and $34.3 million in 2020. Additionally, the Company has approximately $6.1 million of statutory depletion carryforwards and $4.5 million of AMT credit carryforwards that may be carried forward until utilized. (6) SEGMENT INFORMATION The Company operates in three reportable segments: (i) gas and oil exploration and development, (ii) marketing, gathering and processing and (iii) drilling. The following tables present information related to these segments.
Nine months ended September 30, 1999 --------------------------------------------------- Gas & Oil Marketing, Exploration & Gathering & Total Development Processing Drilling Segments ------------- ----------- -------- -------- Revenues from external purchasers $ 56,202 $ 58,297 $ 3,627 $118,126 Intersegment revenues 14,640 -- 3,127 17,767 Segment profit (loss) 8,487 (1,866) 154 6,775
Nine months ended September 30, 1999 --------------------------------------------------- Gas & Oil Marketing, Exploration & Gathering & Total Development Processing Drilling Segments ------------- ----------- -------- -------- Revenues from external purchasers $ 48,063 $ 38,188 $ 3,301 $ 89,552 Intersegment revenues 11,722 -- 3,722 15,444 Segment profit (loss) (6,975) (1,651) (159) (8,785)
12 13 TOM BROWN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Nine months ended September 30, 1999 1998 --------- --------- Revenues Revenues from external purchasers $ 118,126 $ 89,552 Intersegment revenues 17,767 15,444 Intercompany eliminations (10,861) (8,997) --------- --------- Total consolidated revenues $ 125,032 $ 95,999 ========= ========= Income or (loss) Total reportable segment income (loss) $ 6,775 $ (8,785) Interest expense (4,398) (2,842) Elimination and other 116 --------- --------- (436) Income (loss) before income taxes $ 1,941 $ (11,511) ========= =========
13 14 TOM BROWN, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Revenues During the three month period ended September 30, 1999, revenues from gas production increased 49% to $23.7 million while revenues from oil production increased 60% to $4.4 million. Such increase in gas revenues was the result of an increase in (i) natural gas sales volumes of 15% which increased revenues by approximately $3.1 million and (ii) average natural gas sales prices received by the Company from $1.71 to $2.21 per Mcf which increased revenues by approximately $4.7 million. Revenues from oil production increased as a result of an increase in average crude oil sales prices from $11.22 to $19.69 per barrel which increased revenues by approximately $2.1 million. However, this increase was partially offset by a reduction in oil sales volumes of 9% which decreased revenues by approximately $.4 million. Revenues from natural gas liquid production increased as a result of the acquisition of the Unocal properties. Prior to this quarter, natural gas liquids revenues were insignificant and combined into oil revenues. During the nine month period ended September 30, 1999, revenues from natural gas, oil and natural gas liquids production increased $10.2 million to $69.6 million compared to the same period in 1998. Such increase in gas and oil revenue was the result of an increase in (i) average natural gas sales prices received by the Company from $1.86 to $1.93 per Mcf which increased revenues by approximately $1.9 million, (ii) natural gas sales volumes of 8% which increased revenues by approximately $3.9 million and (iii) average crude oil sales prices from $11.98 to $15.31 per barrel which increased revenues by approximately $2.6 million. These increases were partially offset by a decrease in oil sales volumes of 10% which decreased revenues by approximately $1.2 million. Revenues from natural gas liquid production increased as a result of the acquisition of the Unocal properties. Prior to this quarter, natural gas liquids revenues were insignificant and combined into oil revenues. Marketing, gathering and processing revenues increased $13.1 million and $17.6 million, respectively, for the three and nine month periods ended September 30, 1999. The increase was a result of increased activity in the Company's natural gas marketing operations. The gross margin from these activities increased during these periods, due to higher natural gas liquids prices and the revenues associated with helium generated from the acquisition of the Unocal properties. Drilling operations are conducted through Sauer Drilling Company, which was acquired by the Company in January 1998. Drilling revenues increased $.3 million for the nine month period ended September 30, 1999 as a result of increased utilization of the Company's rigs. Drilling revenues compared to cost of drilling operations netted a gross margin for the three and nine months ended September 30, 1999 of approximately $.1 million and $.4 million, respectively. 14 15 Selected Operating Data
Three Months ended Nine Months ended September 30, September 30, 1999 1998 1999 1998 ------- --------- ------- -------- Revenues (in thousands): Natural gas sales $23,692 $ 15,935 $ 55,943 $50,089 Crude oil sales 4,449 2,782 10,576 9,197 Natural gas liquids sales 3,056 39 3,095 162 Marketing, gathering and processing 24,260 11,163 50,438 32,809 Drilling 1,477 1,465 3,629 3,301 Other 187 11 1,351 441 ------- -------- -------- ------- Total revenues $57,121 $ 31,395 $125,032 $95,999 ======= ======== ======== ======= Net income (loss) attributable to common stock, (in thousands) $ 3,161 $ (5,222) $ (806) $(9,455) ======= ======== ======== ======= Natural gas production (MMcf) 10,743 9,342 28,961 26,930 Crude oil production (MBbls) 226 248 691 768 Natural gas liquids production (MBbls) 249 4 254 14 Average natural gas sales price ($/Mcf) $ 2.21 $ 1.71 $ 1.93 $ 1.86 Average crude oil sales price ($/Bbl) $ 19.69 $ 11.22 $ 15.31 $ 11.98 Average natural gas liquids sale price ($/Bbl) $ 12.27 $ 9.75 $ 12.19 $ 11.57
Costs and Expenses Costs and expenses for the three months ended September 30, 1999 increased approximately 33% to $51.2 million as compared to the same period in 1998. Gas and oil production increased $1.7 million as a result of the operating cost associated with the acquisition of the Unocal properties. Taxes on gas and oil production increased $1.1 million due to higher prices being received during the third quarter of 1999 and to a lesser extent, the higher volumes produced as a result of the Unocal property acquisition. Cost of gas sold increased $11.3 million as a result of increased activity in the Company's natural gas marketing operations. Exploration costs decreased $2.4 million due to a lesser amount of exploratory drilling in the third quarter of 1999. Interest expense increased $.5 million due to activity associated with prepaid gas contracts entered into in the fourth quarter of 1998 and higher debt levels in the third quarter of 1999. Cost and expenses for the nine months ended September 30, 1999, increased 15% to $123.1 million as compared to the same period in 1998. Gas and oil production increased $2.1 million as a result of the acquisition of the operating cost associated with the Unocal properties. Taxes on gas and oil production increased $.8 million due to the higher prices being received during the first nine months of 1999 and to a lesser extent, the higher volumes produced as a result of the Unocal property acquisition. Cost of gas sold increased $16.6 million as a result of increased activity in the Company's natural gas marketing operations. Exploration costs decreased $6.8 million due to a lesser amount of exploratory drilling and seismic activity during 1999. Depreciation, depletion and amortization increased $.5 million due to higher gas volumes produced in 1999 as a result of the acquisition of the Unocal properties. Interest expense increased $1.6 million due to activity associated with prepaid gas contracts entered into in the fourth quarter of 1998 and higher debt levels for 1999. A valuation allowance of approximately $2.2 million at September 30, 1999 has been provided against the Company's net deferred tax assets based on management's estimate of the recoverability of future tax benefits. The Company evaluated all appropriate factors to determine the proper valuation allowance for these carryforwards, including any limitations concerning their use, the year the carryforwards expire and the levels of taxable income necessary for utilization and tax planning. In this regard, full valuation allowances were provided for investment tax credit carryforwards. Based on its expected levels of future earnings, the Company believes it will, more likely than not, generate sufficient taxable income to realize the benefit attributable to the net operating loss carryforwards for which valuation allowances were not provided. 15 16 CAPITAL RESOURCES AND LIQUIDITY Growth and Acquisitions Most of the growth of the Company has resulted from recent acquisitions and, to a lesser extent, from the Company's successful development drilling. The Company continues to pursue opportunities which will add value by increasing its reserve base and presence in significant natural gas areas, and further developing the Company's ability to control and market the production of natural gas. As the Company continues to evaluate potential acquisitions and property development opportunities, it will benefit from its financing flexibility and the leverage potential of the Company's overall capital structure. Capital Expenditures The Company's capital and exploration expenditures for the three and nine month periods ended September 30, 1999 were approximately $21.0 million and $44.4 million as compared to $14.6 million and $70.9 million in the same period in 1998. The Company acquired Sauer Drilling Company for $8.1 million in 1998 and reduced its drilling and seismic programs for 1999. In July 1999, the Company completed the acquisition of the Rocky Mountain gas and oil assets of Unocal for a consideration of 5.8 million shares of the Company's common stock and $5 million. The effective date of the transaction was January 1, 1999. The purchase price was adjusted for the net operating results of the acquired properties since the effective date, which resulted in a net cash payment to the Company. The Company has historically funded capital expenditures and working capital requirements with internally generated cash and borrowings. During the nine months ended September 30, 1999, net cash provided by operating activities was $26.4 million as compared to $38.4 million for the same period of 1998. The decrease in 1999 was due primarily to the decrease in advances from gas purchasers. Bank Credit Facility The Company's Credit Facility provides for a $100 million revolving line of credit with a current borrowing base of $130 million. The amount of the borrowing base may be redetermined as of December 31 and June 30 of each calendar year at the sole discretion of the lender. At September 30, 1999, the aggregate outstanding balance under the Credit Facility was $81 million, bearing interest at approximately 6.6% per annum. The amount available for borrowing under the Credit Facility at September 30, 1999 was $19 million. The Credit Facility contains certain financial covenants which require the Company to maintain a minimum consolidated tangible net worth as well as certain financial ratios. The Company was in compliance with the covenants contained in the Credit Facility, as amended, at September 30, 1999. Markets and Prices Wildhorse Energy Partners, L.L.C. ("Wildhorse"), which was created to provide gathering, processing, marketing, storage and field services to Rocky Mountain gas and oil producers, will continue to pursue the construction or acquisition of gathering, processing and storage areas of the Rocky Mountain region. Wildhorse is operated by KNE under the direction of an operating team with equal representation from KNE and the Company. During the nine months ended September 30,1999, the Company's share of Wildhorse's investments was approximately $1.9 million for gas gathering and processing assets. Effective September 1, 1999, Wildhorse distributed the marketing assets 45% to Retex, a wholly owned subsidiary of the Company, and 55% to KNE. Retex began as of that date to market all of the Company's natural gas. The Company continues to hold its 45% interest In Wildhorse's gathering and processing operations. 16 17 The Company has dedicated significant amounts of its Rocky Mountain gas production to Wildhorse for gathering and processing. The Company's revenues and associated cash flows are significantly impacted by changes in gas and oil prices. Substantially all of the Company's gas and oil production is currently market sensitive. During the first nine months of 1999, the average prices received for gas and oil by the Company were $1.93 per Mcf and $15.31 per barrel, respectively, as compared to $1.86 Mcf and $11.97 per barrel for the same period in 1998. Year 2000 Year 2000 Issue. Many computer software systems were structured to use a two-digit date field meaning that they will not be able to properly recognize dates in the Year 2000. As a result, computer systems and software may need to be upgraded to comply with such "Year 2000" requirements. Significant uncertainty exists concerning the potential effects associated with such compliance as systems that do not properly recognize such information could generate erroneous data or cause a system to fail. Compliance Program. In order to address the Year 2000 issue, the Company appointed the Computer Information Systems department to assure that key automated systems and related processors would remain functional through year 2000. The department addressed the project by reviewing the information technology ("IT") and non-information technology systems to determine whether they were Year 2000 compliant. Also, the department prepared a formal questionnaire for all significant suppliers, customers, and service providers to determine the extent to which the Company was vulnerable to those third parties' failure to remediate the Year 2000 problem. Company State of Readiness. A review and assessment of the information technology and non-information technology systems was completed as of December 31, 1998 and did not identify any material systems which are not Year 2000 compliant. In addition, the Company has received written assurances of Year 2000 compliance from approximately 81% of its operators and purchasers and 65% of its vendors. The operators and purchasers who responded as being Year 2000 compliant represented 96% of the total dollar amount from that source to the Company and the vendors who responded as being Year 2000 compliant represent 70%. The third party confirmation process is still ongoing. The Company believes that any disruption caused from a third party's inability to be Year 2000 compliant will not be material to its operations, although there can be no assurances. Cost to Address Year 2000 Compliance Issues. The Company believes that it will not be required to make any material expenditures to address the Year 2000 problem as it relates to its existing systems. To date, costs incurred to address Year 2000 compliance have been internal in nature and have been charged to expense as incurred. Such costs have been funded from cash provided by operating activities. However, uncertainty exists concerning the potential costs and effects associated with any Year 2000 compliance, and the Company intends to continue to make efforts to ensure that third parties with whom it has relationships are Year 2000 compliant. The Computer Information Systems department is not aware of any IT projects that have been delayed due to the Year 2000 compliance program. Risk of Non-Compliance and Contingency Plan. The goal of the Year 2000 project has been to ensure that all of the critical systems and processes which are under the direct control of the Company remain functional. However, because certain systems and processes may be interrelated with systems outside of the control of the Company, there can be no assurance that all implementations will be successful. The principal area of risk to the Company is thought to be gas measurement control systems of pipeline volumes provided by third parties. A likely worst case scenario is that despite the Company's efforts, there could be failures of such systems which might cause disruption to the natural gas delivery process. However, the Company believes that the risk of such occurrence is low based upon its review and confirmation efforts concerning Year 2000 compliance with third party pipelines. Accordingly, as part of the Year 2000 project, contingency plans will be developed to respond to any potential failures as they may be identified. Therefore, there can be no assurance that unexpected Year 2000 compliance problems of either the Company or its vendors, customers and service providers would not materially and adversely affect the Company's business, financial condition or operating results. The Company will continue throughout 1999 to consider the likelihood of a material business interruption due to the Year 2000 issue. 17 18 Forward-Looking Statements and Risk Certain statements in this report, including statements of the future plans, objectives, and expected performance of the Company, are forward-looking statements that are dependent on certain events, risks and uncertainties that may be outside the Company's control which could cause actual results to differ materially from those anticipated. Some of these include, but are not limited to, economic and competitive conditions, inflation rates, legislative and regulatory changes, financial market conditions, political and economic uncertainties, future business decisions, and other uncertainties, all of which are difficult to predict. There are numerous uncertainties inherent in estimating quantities of proven gas and oil reserves and in projecting future rates of production and timing of development expenditures. The total amount or timing of actual future production may vary significantly from reserves and production estimates. The drilling of exploratory wells can involve significant risks including those related to timing, success rates and cost overruns. Lease and rig availability, complex geology and other factors can affect these risks. Future gas and oil prices also could affect results of operations and cash flows. Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The Statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The Statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. SFAS No. 133 is effective for fiscal years beginning after June 15, 2000, as amended by SFAS No. 137, and cannot be applied retroactively. SFAS No. 133 must be applied to derivative instruments that were issued, acquired, or substantially modified after December 31, 1997. The Company is evaluating SFAS No. 133 and has not yet quantified the impact adopting the Statement will have on its financial statements. However, SFAS No. 133 could increase volatility in earnings and other comprehensive income (stockholders' equity) should the Company enter into transactions covered by the pronouncement. In March 1998, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use". The SOP provides guidance with respect to accounting for the various types of costs incurred for computer software developed or obtained for the Company's use. The Company adopted SOP 98-1 in the first quarter of 1999. The adoption did not have a significant effect on the Company's consolidated financial statements. 18 19 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company utilizes various financial instruments which inherently have some degree of market risk. The primary sources of market risk include fluctuations in commodity prices and interest rate fluctuations. Price Fluctuations The Company's results of operations are highly dependent upon the prices received for oil and natural gas production. Accordingly, in order to increase the financial flexibility and to protect the Company against commodity price fluctuations, the Company may, from time to time in the ordinary course of business, enter into non-speculative hedge arrangements, commodity swap agreements, forward sale contracts, commodity futures, options and other similar agreements relating to natural gas and crude oil. In 1998, in connection with advance payments for future natural gas deliveries, the Company entered into three gas price swap contracts with third parties under which the Company became a fixed price payor for 35,000 Mmbtu per day for a twelve month period commencing January 1999 at a weighted average price of $2.02 per Mmbtu. At September 30, 1999, the estimated fair value of the open gas price swap contracts was an unrealized gain of approximately $1,884,000. Interest Rate Risk At September 30, 1999, the Company had $81 million outstanding under its credit facility at an average interest rate of 6.6%. Borrowings under the Company's credit facility bear interest, at the election of the Company, at (i) the greater of the agent bank's prime rate or the federal funds effective rate, plus an applicable margin or (ii) the agent bank's Eurodollar rate, plus an applicable margin. As a result, the Company's annual interest cost in 1999 will fluctuate based on short-term interest rates. Assuming no change in the amount outstanding during 1999, the impact on interest expense of a ten percent change in the average interest rate would be approximately $535,000. As the interest rate is variable and is reflective of current market conditions, the carrying value approximates the fair value. 19 20 TOM BROWN, INC. 555 Seventeenth Street, Suite 1850 Denver, CO 80202-3918 -------------------------- QUARTERLY REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 FORM 10-Q -------------------------- PART II OF TWO PARTS OTHER INFORMATION 20 21 TOM BROWN, INC. AND SUBSIDIARIES OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K and Form 8-K/A (a) Exhibit No. Description 27 * Financial Data Schedule ---------------- * Filed herewith (b) Reports on Form 8-K In its Form 8-K Report dated July 2, 1999 the Company reported under Item 2., Acquisition or Disposition of Assets that it completed the acquisition from Union Oil Company of California ("Unocal") certain oil and gas interests and properties located in the states of Colorado, Wyoming, North Dakota and Utah, a gas processing plant in San Juan County, Utah and an approximate 66 mile 10 inch pipeline from the gas processing plant to Aneth, Utah. Approximately 65,000 net undeveloped acres located primarily in the states of Colorado, Wyoming and Utah were also acquired. The consideration for the properties was paid in the form of 5,800,000 shares of the Company's common stock and $5 million in cash. The effective date of the transaction was January 1, 1999, which resulted in a net cash payment to the Company, reflecting the net operating results of the Unocal properties since the effective date. 21 22 TOM BROWN, INC. AND SUBSIDIARIES OTHER INFORMATION Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TOM BROWN, INC. -------------------- (Registrant) /s/ Daniel G. Blanchard --------------------------------- Daniel G. Blanchard Chief Financial Officer November 12, 1999 /s/ R. Kim Harris - ----------------- --------------------------------- Date R. Kim Harris Vice President of Finance and Controller 22 23 INDEX TO EXHIBITS Exhibit Number Description - ------- ----------- 27 Financial Data Schedule
EX-27.1 2 FINANCIAL DATA SCHEDULE
5 9-MOS DEC-31-1999 SEP-30-1999 7,708 0 40,941 0 902 53,843 558,346 124,862 522,742 43,043 81,000 3,515 0 100 392,365 522,742 69,614 125,032 72,048 123,091 6,801 0 4,398 1,941 (1,434) (806) 0 0 0 (806) (.03) (.03)
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