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, 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 November 7, 2000.
CLASS OF COMMON STOCK OUTSTANDING AT NOVEMBER 7, 2000
--------------------- -------------------------------
$.10 PAR VALUE 37,897,692
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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, 2000 and December 31, 1999 4
Consolidated Statements of Operations,
Three and Nine months ended September 30, 2000 and 1999 6
Consolidated Statements of Cash Flows,
Nine months ended September 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
2
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
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4
TOM BROWN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
(IN THOUSANDS)
September 30, December 31,
2000 1999
------------- ------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 14,364 $ 12,510
Accounts receivable 63,883 53,646
Inventories 624 828
Other 1,303 1,625
-------- --------
Total current assets 80,174 68,609
-------- --------
PROPERTY AND EQUIPMENT, AT COST:
Oil and gas properties, based on the successful
efforts accounting method 542,167 470,461
Gas gathering and processing and other plant 75,083 71,657
Other equipment 27,194 23,027
-------- --------
Total property and equipment 644,444 565,145
Less: Accumulated depreciation, depletion and amortization 169,945 133,342
-------- --------
Net property and equipment 474,499 431,803
-------- --------
OTHER ASSETS:
Deferred income taxes, net 9,584 28,625
Other assets, net 8,831 7,262
-------- --------
Total other assets 18,415 35,887
-------- --------
$573,088 $536,299
======== ========
(continued)
See accompanying notes to consolidated financial statements.
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5
TOM BROWN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
September 30, December 31,
2000 1999
------------- ------------
(Unaudited)
CURRENT LIABILITIES:
Accounts payable $ 40,816 $ 39,489
Accrued expenses 12,001 9,763
--------- ---------
Total current liabilities 52,817 49,252
--------- ---------
BANK DEBT 67,000 81,000
--------- ---------
OTHER NON-CURRENT LIABILITIES 3,862 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 37,771,525 and
35,308,489 shares, respectively 3,777 3,531
Additional paid-in capital 506,444 495,817
Accumulated deficit (60,812) (97,351)
--------- ---------
Total stockholders' equity 449,409 402,097
--------- ---------
$ 573,088 $ 536,299
========= =========
See accompanying notes to consolidated financial statements.
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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,
-------------------------- --------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
(Unaudited)
Revenues:
Gas and oil sales $ 56,680 $ 31,197 $ 137,961 $ 69,614
Marketing, gathering and processing 41,920 24,260 118,970 50,438
Drilling 2,979 1,477 8,377 3,629
Interest income and other 133 187 275 1,351
--------- --------- --------- ---------
Total revenues 101,712 57,121 265,583 125,032
--------- --------- --------- ---------
Costs and expenses:
Gas and oil production 6,519 5,604 18,919 13,027
Taxes on gas and oil production 5,802 2,741 14,156 6,730
Cost of gas sold 38,094 23,258 106,213 49,025
Drilling operations 2,581 1,366 7,109 3,266
Exploration costs 2,869 2,238 6,732 5,484
Impairments of leasehold costs 900 900 2,700 2,700
General and administrative 2,777 1,893 8,099 5,801
Depreciation, depletion and amortization 13,784 11,642 37,014 32,660
Interest expense and other 1,625 1,543 4,704 4,398
--------- --------- --------- ---------
Total costs and expenses 74,951 51,185 205,646 123,091
--------- --------- --------- ---------
Income before income taxes 26,761 5,936 59,937 1,941
Income tax provision
Current (419) (260) (1,526) (755)
Deferred (9,239) (2,077) (20,997) (679)
--------- --------- --------- ---------
Net income 17,103 3,599 37,414 507
Preferred stock dividends -- (438) (875) (1,313)
--------- --------- --------- ---------
Net income (loss) attributable to common stock $ 17,103 $ 3,161 $ 36,539 $ (806)
========= ========= ========= =========
Weighted average number of common shares
outstanding
Basic 37,545 35,084 36,228 31,227
========= ========= ========= =========
Diluted 38,880 35,575 38,196 31,227
========= ========= ========= =========
Net income (loss) per common share
Basic $ .46 $ .09 $ 1.01 $ (.03)
========= ========= ========= =========
Diluted $ .44 $ .09 $ .98 $ (.03)
========= ========= ========= =========
See accompanying notes to consolidated financial statements.
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7
TOM BROWN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Nine Months ended
September 30,
--------------------------
2000 1999
--------- ---------
(Unaudited)
Cash flows from operating activities:
Net income $ 37,414 $ 507
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation, depletion and amortization 37,014 32,660
Gain on sales of assets -- (758)
Exploration costs 6,732 5,484
Impairments of leasehold costs 2,700 2,700
Deferred taxes 20,997 679
--------- ---------
104,857 41,272
Changes in operating assets and liabilities:
Increase in accounts receivable (10,237) (9,207)
(Increase) decrease in inventories 204 (370)
Increase in other current assets (307) (457)
Increase in accounts payable and accrued expenses 3,565 12,334
(Increase) decrease in other assets, net (1,657) 525
Advances from gas purchasers -- (17,672)
--------- ---------
Net cash provided by operating activities $ 96,425 $ 26,425
--------- ---------
(continued)
See accompanying notes to consolidated financial statements.
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8
TOM BROWN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Nine months ended
September 30,
------------------------
2000 1999
-------- --------
(Unaudited)
Cash flows from investing activities:
Capital and exploration expenditures $(89,895) $(48,401)
Proceeds from sales of assets 1,164 1,324
-------- --------
Net cash used in investing activities (88,731) (47,077)
Cash flows from financing activities:
Repayments of long-term bank debt (20,000) (10,000)
Borrowings of long-term bank debt 6,000 36,000
Preferred stock dividends (875) (1,313)
Proceeds from exercise of stock options 9,035 1,003
-------- --------
Net cash (used in) provided by financing activities (5,840) 25,690
-------- --------
Net increase in cash and cash equivalents 1,854 5,038
-------- --------
Cash and cash equivalents at beginning of period 12,510 2,670
-------- --------
Cash and cash equivalents at end of period $ 14,364 $ 7,708
======== ========
Cash paid during the period for:
Interest $ 4,733 $ 3,231
Taxes 1,318 716
Non-cash 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.
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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 September 30, 2000, the
outstanding balance on the New Credit Facility was $67 million at an average
interest rate of 8.0%.
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 New 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.
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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:
September 30, December 31,
2000 1999
------------ -------------
(in thousands)
Net operating loss carryforwards $ -- $ 18,211
Gas and oil acquisition, exploration and development
costs deductible for tax purposes 2,203 3,734
AMT credit carryforwards 5,339 4,499
Investment tax credit carryforwards 195 195
Option plan compensation 1,559 1,559
Other 2,241 2,380
-------- --------
Net deferred tax asset 11,537 30,578
Valuation allowance (1,953) (1,953)
-------- --------
Recognized net deferred tax asset $ 9,584 $ 28,625
======== ========
Net deferred tax assets are comprised of the following (in thousands):
September 30, December 31,
2000 1999
------------ -------------
(in thousands)
Current $ -- $ --
Long-term 9,584 28,625
------- -------
$ 9,584 $28,625
======= =======
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 other deferred tax assets for which valuation
allowances were not provided.
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TOM BROWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
At September 30, 2000, the Company had capitalized intangible drilling
costs of approximately $149 million which will be amortized for tax purposes
over a five year period. Additionally, the Company had a $52 million net
operating loss carryforward available to offset taxable earnings in 2000. The
Company has no current liability for Federal income taxes because of this
operating loss carryforward and the amortization of the capitalized intangible
drilling costs. The Company also has approximately $6.2 million of statutory
depletion carryforwards and $5.3 million of AMT credit carryforwards that may be
carried forward until utilized. Realization of the benefits is dependent upon
the Company's ability to generate taxable earnings in future periods.
(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:
Nine months ended
September 30, 2000
-------------------------------------------------------
Gas & Oil Marketing,
Exploration & Gathering & Total
Development Processing Drilling Segments
------------- ----------- -------- --------
Revenues from external purchasers $102,159 $149,761 $ 8,377 $260,297
Intersegment revenues 30,516 -- 3,790 34,306
Segment profit 53,133 10,868 1,049 65,050
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
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12
TOM BROWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Nine months ended
September 30,
--------------------------
2000 1999
--------- ---------
Revenues
Revenues from external purchasers $ 260,297 $ 118,126
Intersegment revenues 34,306 17,767
Intercompany eliminations (29,020) (10,861)
--------- ---------
Total consolidated revenues $ 265,583 $ 125,032
========= =========
Profit or (loss)
Total reportable segment income $ 65,050 $ 6,775
Interest expense (4,704) (4,398)
Elimination and other (409) (436)
--------- ---------
Income before income taxes $ 59,937 $ 1,941
========= =========
(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 2,500,000 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.
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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 nine months ended September 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 September 30, 2000, revenue from gas,
oil and natural gas liquids production increased 82% or $25.5 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 $2.21 per Mcf to $3.54 per Mcf
which increased revenues by approximately $17.7 million, (ii) an increase in the
average oil prices received from $19.69 per barrel to $29.47 per barrel which
increased oil revenues by $1.1 million, (iii) a 24% increase ( 2.5 Bcf ) in the
quantity of gas sold which contributed incremental revenues of $5.6 million, and
(iv) an increase in natural gas liquids revenue of $1.1 million as a result of a
35% increase in the natural gas liquids price.
For the nine months ended September 30, 2000, revenue from gas, oil and
natural gas liquids production increased $68.3 million or 98% compared to the
same period in 1999. This increase resulted from (i) an increase in the average
gas prices received by the Company from $1.93 per Mcf to $2.94 per Mcf which
increased revenues by approximately $37.6 million, (ii) an increase in the
average oil prices received from $15.31 per barrel to $27.93 per barrel which
increased oil revenues by $7.3 million, (iii) an increase in gas sales volumes
of 29% (8.3 Bcf) which increased revenues by $16.0 million, and (iv) an increase
in natural gas liquids revenue of $9.3 million as a result of a full nine months
of natural gas liquid production in 2000, from the Unocal Acquisition completed
in 1999. Oil volumes decreased 17% which reduced revenues by $1.7 million.
Marketing, gathering and processing revenue increased $17.7 million and
$68.5 million, respectively, for the three and nine month periods ended
September 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 $.4 million for the three months ended
September 30, 2000 compared to a gross margin of $.1 million for the same period
in 1999. For the nine month period ended September 30, 2000, the gross margin
was $1.3 million as compared to a $.4 million gross margin in 1999. The
increases in 2000 were attributable to a higher rig utilization rate and lower
costs in this period.
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Selected Operating Data
Three months ended Nine months ended
September 30, September 30,
------------------------- -------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
Revenues (in thousands):
Natural gas sales $ 46,964 $ 23,692 $ 109,523 $ 55,943
Crude oil sales 5,550 4,449 16,063 10,576
NGL sales 4,166 3,056 12,375 3,095
Marketing, gathering and processing 41,920 24,260 118,970 50,438
Drilling 2,979 1,477 8,377 3,629
Other 133 187 275 1,351
--------- --------- --------- ---------
Total revenues $ 101,712 $ 57,121 $ 265,583 $ 125,032
========= ========= ========= =========
Net income (loss) attributable to common
stock (in thousands) $ 17,103 $ 3,161 $ 36,539 $ (806)
========= ========= ========= =========
Natural gas production (MMcf) 13,270 10,743 37,237 28,961
Crude oil production (MBbls) 188 226 575 691
NGL production (MBbls) 252 249 796 254
Average natural gas sales price ($/Mcf) $ 3.54 $ 2.21 $ 2.94 $ 1.93
Average crude oil sales price ($/Bbl) $ 29.47 $ 19.69 $ 27.93 $ 15.31
Average natural gas liquids price ($/Bbl) $ 16.56 $ 12.27 $ 15.56 $ 12.19
Costs and Expenses
Costs and expenses for the three months ended September 30, 2000 increased
approximately 46% to $75.0 million as compared to the same period in 1999. Cost
of gas sold increased $14.8 million as a result of the assignment of 100% of the
marketing operations effective September 1, 1999 from Wildhorse (owned 45% by
the Company) to Retex, Inc., increased activity in the Company's natural gas
marketing operations and higher commodity prices. Gas and oil production
expenses increased 16% ($.9 million) due primarily to the Unocal Acquisition.
Taxes on gas and oil production increased by $3.1 million which was directly
related to the increased revenue from gas and oil sales during the period.
Depreciation, depletion and amortization increased $2.1 million for the three
months ended September 30, 2000 compared to the same period in 1999. Production
increased by 17% on an Mcfe basis for the September 2000 period which resulted
in an increase in the depreciation, depletion and amortization expense for the
period.
Costs and expenses for the nine months ended September 30, 2000 increased
approximately 67% to $205.6 million as compared to the same period in 1999. Cost
of gas sold increased $57.2 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 45% ($5.9 million) due primarily to the Unocal Acquisition.
Taxes on gas and oil production increased by $7.4 million in conjunction with
the increased revenue from gas and oil sales during the period. Depreciation,
depletion and amortization increased by 13% to $37.0 million as compared to the
same period in 1999. With a production increase of 31% 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 September 2000 period.
14
15
A valuation allowance of approximately $2.0 million at September 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 carryforwards and option plan compensation.
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 deferred tax assets 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 nine
month periods ended September 30, 2000 were approximately $30.9 million and
$89.9 million as compared to $21.0 million and $44.4 million in the same periods
in 1999.
The Company has historically funded capital expenditures and working
capital requirements with internally generated cash and borrowings. During the
nine months ended September 30, 2000, net cash provided by operating activities
was $96.4 million as compared to $26.4 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 re-determined as of December 31 of each calendar year at
the sole discretion of the lender.
At September 30, 2000, the aggregate outstanding balance under the New
Credit Facility was $67 million. The amount available for borrowing under the
New Credit Facility at September 30, 2000 was $58 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 September 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 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.
15
16
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 2000,
the average prices received for gas, oil and natural gas liquids by the Company
were $2.94 per Mcf, $27.93 per barrel and $15.56 per barrel, respectively, as
compared to $1.93 Mcf, $15.31 per barrel and $12.19 per barrel, respectively,
for the same period in 1999.
On October 30, 2000, the Company and KMI announced that they entered into a
definitive agreement to distribute all the assets of the Wildhorse joint venture
to the joint owners. Under the agreement, Wildhorse will distribute all of the
gathering and processing assets to the Company, and KMI will receive the storage
facility and a cash payment. This transaction is anticipated to close on or
before November 30, 2000.
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.
16
17
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 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 were not significantly different than the actual closing NYMEX
contracts and thus these transactions did not have 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 September 30, 2000, the Company had $67 million outstanding under its
New Credit Facility at an average interest rate of 8.0%. Borrowings under the
Company's New 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 $.5 million. As the
interest rate is variable and is reflective of current market conditions, the
carrying value approximates the fair value.
17
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
19
TOM BROWN, INC. AND SUBSIDIARIES
OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
None
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
None
19
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)
November 11, 2000 /s/ Richard L. Satre
- ----------------- ---------------------------------------
Date Richard L. Satre
Controller
(Chief Accounting Officer)
20
21
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
27 Financial Data Schedule