<PAGE> 1
===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
--------- ---------
Commission File Number 000-22433
BRIGHAM EXPLORATION COMPANY
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 1311 75-2692967
(State of other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
6300 BRIDGE POINT PARKWAY
BLDG. 2, SUITE 500
AUSTIN, TEXAS 78730
(512) 427-3300
(Name, address, including zip code, and telephone number, including area code,
of Registrant's principal executive offices)
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 twelve months (or 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 .
--- ---
As of April 30, 1999, 14,309,071 shares of Common Stock, $.01 per share, were
outstanding.
===============================================================================
<PAGE> 2
BRIGHAM EXPLORATION COMPANY
INDEX
<TABLE>
<CAPTION>
PAGE
PART I. FINANCIAL INFORMATION: NUMBER
------
<S> <C>
Item 1. Unaudited Financial Statements
Condensed Consolidated Financial Statements of Brigham Exploration Company
Balance Sheets - December 31, 1998 and March 31, 1999............................1
Statements of Operations - Three months ended
March 31, 1998 and 1999........................................................2
Statements of Cash Flows - Three months ended
March 31, 1998 and 1999........................................................3
Statement of Changes in Stockholders' Equity - March 31, 1999....................4
Notes to Condensed Consolidated Financial Statements...........................5 - 6
Condensed Financial Statements of Brigham Exploration Company Subsidiaries
Balance Sheets - March 31, 1999..................................................7
Balance Sheets - December 31, 1998...............................................8
Statements of Operations - Three months ended March 31, 1999.....................9
Statements of Operations - Three months ended March 31, 1998....................10
Statements of Cash Flows - Three months ended March 31, 1999....................11
Statements of Cash Flows - Three months ended March 31, 1998....................12
Statements of Changes in Equity - March 31, 1999................................13
Statements of Changes in Equity - March 31, 1998................................14
Notes to Condensed Financial Statements........................................15-16
As all Brigham Exploration Company subsidiaries fully and
unconditionally guarantee the Senior Subordinated Secured Notes and
the Company has no significant assets other than its investments in
its subsidiaries, the consolidated financial statements are
substantially the same as the financial statements of the subsidiary
guarantors and separate financial statements have been omitted as
they would not be meaningful to investors.
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition................................................17 - 23
PART II. OTHER INFORMATION:
Item 2. Changes in Securities...................................................................24
Item 6. Exhibits and Reports on Form 8-K........................................................24
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
BRIGHAM EXPLORATION COMPANY
CONDENSED CONSOLIUDATED
BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
December 31, March 31,
1998 1999
------------ ---------
(unaudited)
ASSETS
<S> <C> <C>
Currennt assets:
Cash and cash equivalents $ 2,569 $ 7,018
Accounts receivable 7,938 4,599
Prepaid expenses 290 257
------------ ---------
Total current assets 10,797 11,874
------------ ---------
Natural gas and oil properties, at cost, net 134,317 133,283
Other property and equipment, at cost, net 2,014 1,953
Drilling advances paid 230 310
Deferred loan fees 3,146 3,632
Other noncurrent assets 12 181
------------ ---------
$ 150,516 $ 151,233
============ =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 19,883 $ 19,660
Accrued drilling costs 1,219 2,012
Participant advances received 764 661
Other current liabilities 1,647 1,505
------------ ---------
Total current liabilities 23,513 23,838
------------ ---------
Notes payable 59,000 59,000
Senior subordianted notes, net 35,786 36,699
Other noncurrent liabilities 7,536 5,573
Stockholders' equity:
Preferred stock, $.01 par value, 10 million shares
authorized, none issued and outstanding -- --
Common stock, $.01 par value, 30 million shares
authorized, 13,306,206 and 14,309,071 issued and outstanding at 133 143
December 31, 1998 and March 31, 1999, respectively
Additional paid-in capital 58,838 62,817
Unearned stock compensation (890) (768)
Accumulated deficit (33,400) (36,069)
------------ ---------
Total stockholders' equity 24,681 26,123
------------ ---------
$ 150,516 $ 151,233
============ =========
</TABLE>
See accompanying notes to the condensed consolitdated financial statements.
1
<PAGE> 4
BRIGHAM EXPLORATION COMPANY
CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
------------------------
1998 1999
------- --------
<S> <C> <C>
Revenues:
Natural gas and oil sales $ 3,143 $ 3,191
Workstation revenue 114 90
------- --------
3,257 3,281
------- --------
Costs and expenses:
Lease operating 414 535
Production taxes 188 169
General and administrative 1,154 918
Depletion of natural gas and oil properties 1,270 1,350
Depreciation and amortization 83 127
Amortization of stock compensation 117 58
------- --------
3,226 3,157
------- --------
Operating income (loss) 31 124
------- --------
Other income (expense):
Interest income 37 24
Interest expense (1,022) (2,817)
------- --------
(985) (2,793)
------- --------
Net loss before income taxes (954) (2,669)
Income tax benefit 322 --
------- --------
Net loss $ (632) $ (2,669)
======= ========
Net loss per share:
Basic / Diluted $ (0.05) $ (0.20)
Weighted average common shares outstanding:
Basic / Diluted 12,254 13,317
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
2
<PAGE> 5
BRIGHAM EXPLORATION COMPANY
CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Three
Months Ended Months Ended
March 31, March 31,
1998 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (632) $ (2,669)
Adjustments to reconcile net loss to cash (used)
provided by operating activities:
Depletion of natural gas and oil properties 1,270 1,350
Depreciation and amortization 83 127
Amortization of stock compensation 117 58
Interest paid through issuance of additional senior subordinated notes -- 1,300
Amortization of deferred loan fees 106 262
Amortization of discount on senior subordinated notes -- 92
Changes in deferred income tax liability (322) --
Changes in working capital and other items:
(Increase) decrease in accounts receivable (601) 3,339
Decrease in prepaid expenses 13 33
Increase (decrease) in accounts payable (6,073) 2,543
Increase (decrease) in participant advances received 2,621 (103)
Increase (decrease) in other current liabilities 648 (150)
Other noncurrent assets 4 (169)
Other noncurrent liabilities (30) (1,649)
----------- -----------
Net cash (used) provided by operating activities (2,796) 4,364
----------- -----------
Cash flows from investing activities:
Additions to natural gas and oil properties (12,993) (9,459)
Proceeds from sale of natural gas and oil properties -- 10,000
Additions to other property and equipment (159) (15)
(Increase) decrease in drilling advances paid 16 (80)
----------- -----------
Net cash (used) provided by investing activities (13,136) 446
----------- -----------
Cash flows from financing activities:
Increase in notes payable 52,800 --
Repayment of notes payable (34,800) --
Principal payments on capital lease obligations (58) (63)
Deferred loan fees paid (1,911) (298)
----------- -----------
Net cash (used) provided by financing activities 16,031 (361)
----------- -----------
Net increase in cash and cash equivalents 99 4,449
Cash and cash equivalents, beginning of period 1,701 2,569
----------- -----------
Cash and cash equivalents, end of period $ 1,800 $ 7,018
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 475 $ 1,174
=========== ===========
Supplemental disclosure of noncash investing and financing activities:
Capital lease asset additions $ 59 $ 51
=========== ===========
Decrease in accounts payable and other noncurrent liabilities in exchange
for issuance of common stock $ -- $ 3,510
=========== ===========
Increase in accounts payable for deferred loan fees to be
paid in future periods $ -- $ 450
=========== ===========
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
3
<PAGE> 6
BRIGHAM EXPLORATION COMPANY
CONDENSED CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Common Stock Additional Unearned
--------------------- Paid-in Stock Accum.
Shares Amounts Capital Compensation Deficit Total
---------- ------- ---------- ------------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 13,306,206 $ 133 $ 58,838 $ (890) $ (33,400) $ 24,681
Net loss for the period
ended March 31, 1999 -- -- -- -- (2,669) (2,669)
Issuance of common stock 1,002,865 10 3,500 -- -- 3,510
Revision in terms of
warrants -- -- 479 -- -- 479
Amortization of unearned
stock compensation -- -- -- 122 -- 122
---------- ------ ---------- ---------- ---------- --------
Balance, March 31, 1999 14,309,071 $ 143 $ 62,817 $ (768) $ (36,069) $ 26,123
========== ====== ========== ========== ========== ========
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
4
<PAGE> 7
BRIGHAM EXPLORATION COMPANY
NOTES TO THE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Organization and Nature of Operations
Brigham Exploration Company (the "Company") is a Delaware corporation
formed on February 25, 1997 for the purpose of exchanging its common
stock for the common stock of Brigham, Inc. and the partnership
interests of Brigham Oil & Gas, L.P. (the "Partnership"). Brigham, Inc.
is a Nevada corporation whose only asset is its ownership interest in
the Partnership. The Partnership was formed in May 1992 to explore and
develop onshore domestic natural gas and oil properties using 3-D
seismic imaging and other advanced technologies. Since its inception,
the Partnership has focused its exploration and development of natural
gas and oil properties primarily in West Texas, the Anadarko Basin and
the onshore Gulf Coast.
Pursuant to an exchange agreement dated February 26, 1997 (the "Exchange
Agreement") and upon the initial filing on February 27, 1997 of a
registration statement with the Securities and Exchange Commission (the
"SEC") for the public offering of common stock (the "Offering"), the
shareholders of Brigham, Inc. transferred all of the outstanding stock
of Brigham, Inc. to the Company in exchange for 3,859,821 shares of
common stock of the Company. Pursuant to the Exchange Agreement, the
Partnership's other general partner and the limited partners also
transferred all of their partnership interests to the Company in
exchange for 3,314,286 shares of common stock of the Company.
Furthermore, the holders of the Partnership's subordinated convertible
notes transferred these notes to the Company in exchange for 1,754,464
shares of common stock. These transactions are referred to as the
"Exchange." In completing the Exchange, the Company issued 8,928,571
shares of common stock to the stockholders of Brigham, Inc., the
partners of the Partnership and the holder of the Partnership's
subordinated notes payable. As a result of the Exchange, the Company now
owns all the partnership interests in the Partnership. In May 1997, the
Company sold 3,325,000 shares of its common stock in the Offering at a
price of $8.00 per share.
2. BASIS OF PRESENTATION
The accompanying financial statements include the accounts of the
Company and its wholly-owned subsidiaries, and its proportionate share
of assets, liabilities and income and expenses of the limited
partnerships in which the Company, or any of its subsidiaries has a
participating interest. All significant intercompany accounts and
transactions have been eliminated.
The accompanying condensed consolidated financial statements are
unaudited, and in the opinion of management, reflect all adjustments
that are necessary for a fair presentation of the financial position and
results of operations for the periods presented. All such adjustments
are of a normal and recurring nature. The results of operations for the
periods presented are not necessarily indicative of the results to be
expected for the entire year. The unaudited condensed consolidated
financial statements should be read in conjunction with the Company's
1998 Annual Report on Form 10-K pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934.
5
<PAGE> 8
BRIGHAM EXPLORATION COMPANY
NOTES TO THE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
3. SALE OF NATURAL GAS AND OIL PROPERTIES
In February 1999, the Company entered into a project financing
arrangement with Duke Energy Financial Services, Inc. ("Duke") to fund
the continued exploration of five projects covered by approximately 200
square miles of 3-D seismic data acquired in 1998. In this transaction,
the Company conveyed 100% of its working interest in land and seismic in
these project areas to a newly formed limited liability company (the
"Duke LLC") for a total consideration of $10 million. The Company is the
managing member of the Duke LLC with a 1% interest, and Duke is the sole
remaining member with a 99% interest. Pursuant to the terms of the Duke
LLC agreement, the Company pays 100% of the drilling and completion
costs for all wells drilled by the Duke LLC in exchange for a 70%
working interest in the wells and their associated drilling and spacing
units and allocable seismic data. Upon 100% project payout, the Company
has certain rights to back-in for up to a 94% effective working interest
in the Duke LLC properties.
4. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the Financial Accounting Standards Board (the "FASB")
issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 requires that all derivative instruments be
recorded on the balance sheet at fair value. Changes in the fair value
of derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as
part of a hedge transaction and, if it is, depending on the type of
hedge transaction. For fair value hedge transactions in which the
Company is hedging changes in an asset's, liability's, or firm
commitment's fair value, changes in the fair value of the derivative
instrument will generally be offset in the income statement by changes
in the hedged item's fair value. For cash flow hedge transactions in
which the Company is hedging the variability of cash flows related to a
variable-rate asset, liability, or a forecasted transaction, changes in
the fair value of the derivative instrument will be reported in other
comprehensive income. The gains and losses on the derivative instrument
that are reported in other comprehensive income will be reclassified as
earnings in the periods in which earnings are impacted by the
variability of the cash flows of the hedged item. The ineffective
portion of all hedges will be recognized in current period earnings. The
Company must adopt SFAS No. 133 effective January 1, 2000. The Company
is in the process of analyzing the potential impact of this standard on
its financial statement presentations.
6
<PAGE> 9
BRIGHAM EXPLORATION COMPANY SUBSIDIARIES
CONDENSED BALANCE SHEETS
AS OF MARCH 31, 1999
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
BRIGHAM BRIGHAM BRIGHAM
OIL & BRIGHAM, HOLDINGS HOLDINGS
GAS, L.P. INC. I, LLC II, LLC
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,998 $ 7,013 $ 5 $ 6
Accounts receivable 4,599 4,599 -- --
Prepaid expenses 257 257 -- --
-------- --------- ------- -------
Total current assets 11,854 11,869 5 6
-------- --------- ------- -------
Natural gas and oil properties, at cost, net 133,283 133,283 -- --
Other property and equipment, at cost, net 1,953 1,953 -- --
Investment in subsidiaries
and intercompany advances 25 16 12,417 48,543
Drilling advances paid 310 310 -- --
Deferred loan fees 1,978 1,978 -- --
Other noncurrent assets 181 181 -- --
-------- --------- ------- -------
$149,584 $ 149,590 $12,422 $48,549
======== ========= ======= =======
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable $ 19,660 $ 19,660 $ -- $ --
Accrued drilling costs 2,012 2,012 -- --
Participant advances received 661 661 -- --
Other current liabilities 1,488 1,488 -- --
-------- --------- ------- -------
Total current liabilities 23,821 23,821 -- --
-------- --------- ------- -------
Notes payable 59,000 59,000 -- --
Other noncurrent liabilities 5,573 5,573 -- --
Intercompany accounts payable 1,740 1,757 -- 1,724
Intercompany notes payable 41,300 41,300 -- 41,300
Minority interest -- 12,433 -- --
Equity
Partners' capital 18,150 -- 12,422 5,525
Common stock, $1.00 par value, 1,000 shares
authorized, issued and outstanding -- 1 -- --
Additional paid-in capital -- 17,215 -- --
Accumulated deficit -- (11,510) -- --
-------- --------- ------- -------
Total equity 18,150 5,706 12,422 5,525
-------- --------- ------- -------
$149,584 $ 149,590 $12,422 $48,549
======== ========= ======= =======
</TABLE>
Natural gas and oil properties are accounted for using the full cost method.
See accompanying notes to the condensed financial statements.
7
<PAGE> 10
BRIGHAM EXPLORATION COMPANY SUBSIDIARIES
CONDENSED BALANCE SHEETS
AS OF DECEMBER 31, 1998
(in thousands)
<TABLE>
<CAPTION>
BRIGHAM BRIGHAM BRIGHAM
OIL & BRIGHAM, HOLDINGS HOLDINGS
GAS, L.P. INC. I, LLC II, LLC
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,549 $ 2,563 $ 5 $ 6
Accounts receivable 7,938 7,938 -- --
Prepaid expenses 290 290 -- --
-------- --------- ------- -------
Total current assets 10,777 10,791 5 6
-------- --------- ------- -------
Natural gas and oil properties, at cost, net 134,317 134,317 -- --
Other property and equipment, at cost, net 2,014 2,014 -- --
Investment in subsidiaries
and intercompany advances 115 16 11,714 46,913
Drilling advances paid 231 231 -- --
Deferred loan fees 1,397 1,397 -- --
Other noncurrent assets 12 12 -- --
-------- --------- ------- -------
$148,863 $ 148,778 $11,719 $46,919
======== ========= ======= =======
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable $ 19,883 $ 19,883 $ -- $ --
Accrued drilling costs 1,219 1,219 -- --
Participant advances received 764 764 -- --
Other current liabilities 1,647 1,647 -- --
-------- --------- ------- -------
Total current liabilities 23,513 23,513 -- --
-------- --------- ------- -------
Notes payable 59,000 59,000 -- --
Other noncurrent liabilities 7,536 7,536 -- --
Intercompany accounts payable 1,690 1,616 -- 1,707
Intercompany notes payable 40,000 40,000 -- 40,000
Minority interest -- 11,730 -- --
Equity
Partners' capital 17,124 -- 11,719 5,212
Common stock, $1.00 par value, 1,000 shares
authorized, issued and outstanding -- 1 -- --
Additional paid-in capital -- 16,109 -- --
Accumulated deficit -- (10,727) -- --
-------- --------- ------- -------
Total equity 17,124 5,383 11,719 5,212
-------- --------- ------- -------
$148,863 $ 148,778 $11,719 $46,919
======== ========= ======= =======
</TABLE>
Natural gas and oil properties are accounted for using the full cost method.
See accompanying notes to the condensed financial statements.
8
<PAGE> 11
BRIGHAM EXPLORATION COMPANY SUBSIDIARIES
CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
BRIGHAM BRIGHAM BRIGHAM
OIL & BRIGHAM, HOLDINGS HOLDINGS
GAS, L.P. INC. I, LLC II, LLC
<S> <C> <C> <C> <C>
Revenues:
Natural gas and oil sales $ 3,191 $ 3,191 $ -- $ --
Workstation revenue 90 90 -- --
------- ------- ------- -------
3,281 3,281 -- --
------- ------- ------- -------
Costs and expenses:
Lease operating 535 535 -- --
Production taxes 169 169 -- --
General and administrative 918 918 -- --
Depletion of natural gas and oil properties 1,350 1,350 -- --
Depreciation and amortization 127 127 -- --
Amortization of stock compensation 58 58 -- --
------- ------- ------- -------
3,157 3,157 -- --
------- ------- ------- -------
Operating income 124 124 -- --
------- ------- ------- -------
Other income (expense):
Interest income 24 24 -- --
Interest expense (1,315) (1,315) -- --
Interest expense - intercompany (1,317) (1,317) -- (1,317)
------- ------- ------- -------
(2,608) (2,608) -- (1,317)
------- ------- ------- -------
Minority interest in net loss -- (1,701) -- --
------- ------- ------- -------
Net loss before income taxes (2,484) (783) -- (1,317)
Equity in net income (loss) of investee -- -- (1,701) 559
------- ------- ------- -------
Net loss $(2,484) $ (783) $(1,701) $ (758)
======= ======= ======= =======
</TABLE>
See accompanying notes to the condensed financial statements.
9
<PAGE> 12
BRIGHAM EXPLORATION COMPANY SUBSIDIARIES
CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
BRIGHAM BRIGHAM BRIGHAM
OIL & BRIGHAM, HOLDINGS HOLDINGS
GAS, L.P. INC. I, LLC II, LLC
<S> <C> <C> <C> <C>
Revenues:
Natural gas and oil sales $ 3,143 $ 3,143 $-- $--
Workstation revenue 114 114 -- --
------- ------- ----- -----
3,257 3,257 -- --
------- ------- ----- -----
Costs and expenses:
Lease operating 414 414 -- --
Production taxes 188 188 -- --
General and administrative 1,154 1,154 -- --
Depletion of natural gas and oil properties 1,270 1,270 -- --
Depreciation and amortization 83 83 -- --
Amortization of stock compensation 117 117 -- --
------- ------- ----- -----
3,226 3,226 -- --
------- ------- ----- -----
Operating income 31 31 -- --
------- ------- ----- -----
Other income (expense):
Interest income 37 37 -- --
Interest expense (1,022) (1,022) -- --
------- ------- ----- -----
(985) (985) -- --
------- ------- ----- -----
Minority interest in net loss -- (653) -- --
------- ------- ----- -----
Net loss before income taxes (954) (301) -- --
Income tax benefit -- 94 -- --
Equity in net loss of investee -- -- (653) (291)
------- ------- ----- -----
Net loss $ (954) $ (207) $(653) $(291)
======= ======= ===== =====
</TABLE>
See accompanying notes to the condensed financial statements.
10
<PAGE> 13
BRIGHAM EXPLORATION COMPANY SUBSIDIARIES
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
BRIGHAM BRIGHAM BRIGHAM
OIL & BRIGHAM, HOLDINGS HOLDINGS
GAS, L.P. INC. I, LLC II, LLC
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (2,484) $ (783) $(1,701) $ (758)
Adjustments to reconcile net loss to cash
provided by operating activities:
Depletion of natural gas and oil properties 1,350 1,350 -- --
Depreciation and amortization 127 127 -- --
Amortization of stock compensation 58 58 -- --
Amortization of deferred loan fees and debt issuance costs 168 168 -- --
Minority interest in net loss -- (1,701) -- --
Equity in net (income) loss of investee -- -- 1,701 (559)
Changes in working capital and other items:
Decrease in accounts receivable 3,339 3,339 -- --
Decrease in prepaid expenses 33 33 -- --
Increase in accounts payable 2,543 2,543 -- --
Decrease in participant advances received (103) (103) -- --
Decrease in other current liabilities (167) (167) -- --
Increase in intercompany accounts payable 17 18 -- 17
Other noncurrent assets (169) (169) -- --
Other noncurrent liabilities (1,649) (1,649) -- --
-------- -------- ------- -------
3,063 3,064 -- (1,300)
-------- -------- ------- -------
Cash flows from investing activities:
Additions to natural gas and oil properties (9,459) (9,459) -- --
Proceeds from sale of natural gas and oil properties 10,000 10,000 -- --
Additions to other property and equipment (15) (15) -- --
Change in drilling advances paid (79) (79) -- --
-------- -------- ------- -------
447 447 -- --
-------- -------- ------- -------
Cash flows from financing activities:
Increase in intercompany notes payable 1,300 1,300 -- 1,300
Principal payments on capital lease obligations (63) (63) -- --
Deferred loan fees (298) (298) -- --
-------- -------- ------- -------
939 939 -- 1,300
-------- -------- ------- -------
Net increase in cash and cash equivalents 4,449 4,450 -- --
Cash and cash equivalents, beginning of period 2,549 2,563 5 6
-------- -------- ------- -------
Cash and cash equivalents, end of period $ 6,998 7,013 $ 5 $ 6
======== ======== ======= =======
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 1,343 $ 1,343 $ -- $ --
Supplemental disclosure of noncash investing and
financing activities:
Capital lease asset additions $ 51 $ 51 $ -- $ --
Increase in accounts payable for deferred loan fees to be
paid in future periods $ 450 $ 450 $ -- $ --
Capital contribution received in exchange for accounts
payable and other noncurrent liabilities $ 3,510 $ -- $ -- $ --
Intercompany capital contributions $ -- $ 1,106 $ 2,404 $ 1,071
</TABLE>
See accompanying notes to the condensed financial statements.
11
<PAGE> 14
BRIGHAM EXPLORATION COMPANY SUBSIDIARIES
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
BRIGHAM BRIGHAM BRIGHAM
OIL & BRIGHAM, HOLDINGS HOLDINGS
GAS, L.P. INC. I, LLC II, LLC
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (954) $ (207) $ (653) $ (291)
Adjustments to reconcile net loss to cash
provided by operating activities:
Depletion of natural gas and oil properties 1,270 1,270 -- --
Depreciation and amortization 83 83 -- --
Amortization of stock compensation 117 117 -- --
Amortization of deferred loan fees and debt issuance costs 106 106 -- --
Minority interest in net loss -- (653) -- --
Equity in net loss of investee -- -- 653 291
Changes in working capital and other items:
Increase in accounts receivable (601) (601) -- --
Decrease in prepaid expenses 13 13 -- --
Decrease in accounts payable (6,073) (6,073) -- --
Increase in participant advances received 2,621 2,621 -- --
Increase in other current liabilities 648 648 -- --
Decrease in deferred income tax liability -- (94) -- --
Other noncurrent assets 3 3 -- --
Other noncurrent liabilities (29) (29) -- --
-------- -------- -------- --------
(2,796) (2,796) -- --
-------- -------- -------- --------
Cash flows from investing activities:
Additions to natural gas and oil properties (12,993) (12,993) -- --
Additions to other property and equipment (159) (159) -- --
Change in drilling advances paid 16 16 -- --
-------- -------- -------- --------
(13,136) (13,136) -- --
-------- -------- -------- --------
Cash flows from financing activities:
Increase in notes payable 52,800 52,800 -- --
Repayment of notes payable (34,800) (34,800) -- --
Principal payments on capital lease obligations (58) (58) -- --
Deferred loan fees (1,911) (1,911) -- --
-------- -------- -------- --------
16,031 16,031 -- --
-------- -------- -------- --------
Net increase in cash and cash equivalents 99 99 -- --
Cash and cash equivalents, beginning of period 1,701 1,701 -- --
-------- -------- -------- --------
Cash and cash equivalents, end of period $ 1,800 $ 1,800 $ -- $ --
======== ======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 475 $ 475 $ -- $ --
Supplemental disclosure of noncash investing and
financing activities:
Capital lease asset additions $ 51 $ 51 $ -- $ --
Intercompany capital contributions $ -- $ -- $ 29,911 $ 13,318
</TABLE>
See accompanying notes to the condensed financial statements.
12
<PAGE> 15
BRIGHAM EXPLORATION COMPANY SUBSIDIARIES
CONDENSED STATEMENTS OF CHANGES IN EQUITY
(in thousands, except shares)
(unaudited)
<TABLE>
<CAPTION>
Retained
Common Stock Additional Earnings/
----------------------- Paid-in Accumulated Partners'
Shares Amounts Capital Deficit Capital Total
------------ --------- ----------- ------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
BRIGHAM OIL & GAS, L.P.
Balance,
December 31, 1998 - $ - $ - $ - $ 17,124 $ 17,124
Capital contribution - - - - 3,510 3,510
Net loss - - - - (2,484) (2,484)
------------ --------- ----------- ------------- ----------- ----------
Balance,
March 31, 1999 - $ - $ - $ - $ 18,150 $ 18,150
============ ========= =========== ============= =========== ==========
BRIGHAM INC.
Balance,
December 31, 1998 1,000 $ 1 $ 16,109 $ (10,727) $ - $ 5,383
Capital contribution - - 1,106 - - 1,106
Net loss - - - (783) - (783)
------------ --------- ----------- ------------- ----------- ----------
Balance,
March 31, 1999 1,000 $ 1 $ 17,215 $ (11,510) $ - $ 5,706
============ ========= =========== ============= =========== ==========
BRIGHAM HOLDING I, LLC
Balance,
December 31, 1998 - $ - $ - $ - $ 11,719 $ 11,719
Capital contribution - - - - 2,404 2,404
Net loss - - - - (1,701) (1,701)
------------ --------- ----------- ------------- ----------- ----------
Balance,
March 31, 1999 - $ - $ - $ - $ 12,422 $ 12,422
============ ========= =========== ============= =========== ==========
BRIGHAM HOLDINGS II, LLC
Balance,
December 31, 1998 - $ - $ - $ - $ 5,212 $ 5,212
Capital contribution - - - - 1,071 1,071
Net loss - - - - (758) (758)
------------ --------- ----------- ------------- ----------- ----------
Balance,
March 31, 1999 - $ - $ - $ - $ 5,525 $ 5,525
============ ========= =========== ============= =========== ==========
</TABLE>
See accompanying notes to the condensed financial statements.
13
<PAGE> 16
BRIGHAM EXPLORATION COMPANY SUBSIDIARIES
CONDENSED STATEMENTS OF CHANGES IN EQUITY
(in thousands, except shares)
(unaudited)
<TABLE>
<CAPTION>
Retained
Common Stock Additional Earnings/
-------------------------- Paid-in Accumulated Partners'
Shares Amounts Capital Deficit Capital Total
------------- ---------- ----------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
BRIGHAM OIL & GAS, L.P.
Balance,
December 31, 1997 - $ - $ - $ - $ 43,665 $ 43,665
Net loss - - - - (954) (954)
------------- ---------- ----------- ------------- ------------ ------------
Balance,
March 31, 1998 - $ - $ - $ - $ 42,711 $ 42,711
============= ========== =========== ============= ============ ============
BRIGHAM INC.
Balance,
December 31, 1997 1,000 $ 1 $ 13,732 $ (5,066) $ - $ 8,667
Net loss - - - (207) - (207)
------------- ---------- ----------- ------------- ------------ ------------
Balance,
March 31, 1998 1,000 $ 1 $ 13,732 $ (5,273) $ - $ 8,460
============= ========== =========== ============= ============ ============
BRIGHAM HOLDING I, LLC
Balance,
December 31, 1997 - $ - $ - $ - $ - $ -
Partnership interest
contributed - - - - 29,911 29,911
Net loss - - - - (653) (653)
------------- ---------- ----------- ------------- ------------ ------------
Balance,
March 31, 1998 - $ - $ - $ - $ 29,258 $ 29,258
============= ========== =========== ============= ============ ============
BRIGHAM HOLDINGS II, LLC
Balance,
December 31, 1997 - $ - $ - $ - $ - $ -
Partnership interest
contributed - - - - 13,318 13,318
Net loss - - - - (291) (291)
------------- ---------- ----------- ------------- ------------ ------------
Balance,
March 31, 1998 - $ - $ - $ - $ 13,027 $ 13,027
============= ========== =========== ============= ============ ============
</TABLE>
See accompanying notes to the condensed financial statements.
14
<PAGE> 17
BRIGHAM EXPLORATION COMPANY
NOTES TO THE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. ORGANIZATION AND BACKGROUND
In August 1998, upon the filing of a registration statement with the
SEC, Brigham Exploration Company, a Delaware corporation, (the
"Company") issued $50 million of debt and equity securities to two
affiliated institutional investors. The financing transaction consisted
of the issuance of $40 million of senior subordinated secured notes (the
"Notes"). The Notes are fully and unconditionally guaranteed, on a joint
and several basis, by each of the Company's directly or indirectly
wholly-owned subsidiaries which are Brigham Oil & Gas, L.P. (the
"Partnership"), Brigham Inc., Brigham Holdings I LLC ("Holdings I"), and
Brigham Holdings II LLC ("Holdings II"). Furthermore, these subsidiaries
have pledged their respective stock and partnership interests as
collateral for the Notes. These financial statements include the
financial statements for the wholly owned subsidiaries whose securities
and partnership interests comprise substantially all of the collateral
pledged for the Notes.
The Partnership was formed in May 1992 to explore and develop onshore
domestic natural gas and oil properties using 3-D seismic imaging and
other advanced technologies. Since its inception, the Partnership has
focused its exploration and development of natural gas and oil
properties primarily in West Texas, the Anadarko Basin and the
onshore Gulf Coast. Brigham, Inc. is a Nevada corporation whose only
asset prior to the Exchange was its less than 1% ownership interest
in the Partnership. Brigham, Inc. is the managing general partner of
the Partnership.
On February 25, 1997, the Company was formed for the purpose of
exchanging its common stock for the common stock of Brigham, Inc. and
the partnership interests of the Partnership.
Pursuant to an exchange agreement dated February 26, 1997 (the "Exchange
Agreement") and upon the initial filing on February 27, 1997 of a
registration statement with the Securities and Exchange Commission (the
"SEC") for the public offering of common stock (the "Offering"), the
shareholders of Brigham, Inc. transferred all of the outstanding stock
of Brigham, Inc. to the Company in exchange for 3,859,821 shares of
common stock of the Company. Pursuant to the Exchange Agreement, the
Partnership's other general partner and the limited partners also
transferred all of their partnership interests to the Company in
exchange for 3,314,286 shares of common stock of the Company.
Furthermore, the holders of the Partnership's subordinated convertible
notes transferred these notes to the Company in exchange for 1,754,464
shares of common stock. These transactions are referred to as "the
Exchange." In completing the Exchange, the Company issued 8,928,571
shares of common stock to the stockholders of Brigham, Inc., the
partners of the Partnership and the holder of the Partnership's
subordinated notes payable. In May 1997, the Company sold 3,325,000
shares of its common stock in the Offering at a price of $8.00 per
share. As a result of the Exchange and the Offering, the Company owns a
68.5% partnership interest in the Partnership and all of the outstanding
shares of Brigham, Inc. Brigham, Inc. owns the remainder of the
Partnership interest in the Partnership. The proceeds of the Offering
were contributed to the Partnership by the Company.
Subsequent to the Exchange and the Offering, the Company owned a 68.5%
interest in the Partnership and Brigham, Inc. owned a 31.50% interest in
the Partnership. Effective January 1, 1998, Brigham, Inc. contributed
30.5% of its 31.5% interest in the Partnership to Holdings II, a newly
formed Nevada LLC and wholly owned subsidiary of Brigham, Inc., whose
only asset is its investment in the Partnership. Also effective January
1, 1998 the Company contributed its 68.5% interest in the Partnership to
Brigham Holdings I, a newly formed Nevada LLC and wholly owned
subsidiary of the Company whose only asset is its investment in the
Partnership.
15
<PAGE> 18
BRIGHAM EXPLORATION COMPANY SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unauditied)
2. BASIS OF PRESENTATION
The accompanying financial condensed financial statements are unaudited,
and in the opinion of management, reflect all adjustments that are
necessary for a fair presentation of the financial position and results
of operations for the periods presented. All such adjustments are of a
normal and recurring nature. The results of operations for the periods
presented are not necessarily indicative of the results to be expected
for the entire year. The unaudited condensed financial statements should
be read in conjunction with the Company's 1998 Annual Report on Form
10-K pursuant to Section 13 or 15(d) of the Securities and Exchange Act
of 1934.
3. SALE OF NATURAL GAS AND OIL PROPERTIES
In February 1999, the Partnership entered into a project financing
arrangement with Duke Energy Financial Services, Inc. ("Duke") to fund
the continued exploration of five projects covered by approximately 200
square miles of 3-D seismic data acquired in 1998. In this transaction,
the Partnership conveyed 100% of its working interest in land and
seismic in these project areas to a newly formed limited liability
company (the "Duke LLC") for a total consideration of $10 million. The
Partnership is the managing member of the Duke LLC with a 1% interest,
and Duke is the sole remaining member with a 99% interest. Pursuant to
the terms of the Duke LLC agreement, the Partnership pays 100% of the
drilling and completion costs for all wells drilled by the Duke LLC in
exchange for a 70% working interest in the wells and their associated
drilling and spacing units and allocable seismic data. Upon 100% project
payout, the Partnership has certain rights to back-in for up to a 94%
effective working interest in the Duke LLC properties.
4. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the Financial Accounting Standards Board (the "FASB")
issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 requires that all derivative instruments be
recorded on the balance sheet at fair value. Changes in the fair value
of derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as
part of a hedge transaction and, if it is, depending on the type of
hedge transaction. For fair value hedge transactions in which the
Partnership is hedging changes in an asset's, liability's, or firm
commitment's fair value, changes in the fair value of the derivative
instrument will generally be offset in the income statement by changes
in the hedged item's fair value. For cash flow hedge transactions in
which the Partnership is hedging the variability of cash flows related
to a variable-rate asset, liability, or a forecasted transaction,
changes in the fair value of the derivative instrument will be reported
in other comprehensive income. The gains and losses on the derivative
instrument that are reported in other comprehensive income will be
reclassified as earnings in the periods in which earnings are impacted
by the variability of the cash flows of the hedged item. The ineffective
portion of all hedges will be recognized in current period earnings. The
Partnership must adopt SFAS No. 133 effective January 1, 2000. The
Partnership is in the process of analyzing the potential impact of this
standard on its financial statement presentations.
16
<PAGE> 19
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
RESULTS OF OPERATIONS
Comparison of three month periods ended March 31, 1998 and March 31, 1999
Natural gas and oil sales. Natural gas and oil sales increased 2% from
$3.1 million in the first quarter of 1998 to $3.2 million in the first quarter
of 1999. Of this net increase, $249,000 was attributable to an increase in
production, offset by $201,000 attributable to a decrease in the average sales
price for natural gas and oil. Production volumes for natural gas increased 42%
from 740 MMcf in the first quarter of 1998 to 1,047 MMcf in the first quarter
of 1999. The average price received for natural gas increased 2% from $2.05 per
Mcf in the first quarter of 1998 to $2.09 per Mcf in the first quarter of 1999.
Production volumes for oil decreased 24% from 115 MBbls in the first quarter of
1998 to 88 MBbls in the first quarter of 1999. This decrease in net oil
production volumes was primarily due to the natural decline of existing
producing oil wells coupled with the Company's strategic decision to reduce its
drilling for oil prospects during 1998 and the curtailment of certain producing
oil wells, both in response to low oil prices. The average price received for
oil decreased 20% from $14.15 per Bbl in the first quarter of 1998 to $11.39
per Bbl in the first quarter of 1999. Natural gas and oil sales were increased
by production from wells completed since the end of the first quarter of 1998,
partially offset by the natural decline of existing producing wells. As a
result of hedging activities, natural gas revenues increased $559,220, or $0.53
per Mcf, in the first quarter of 1999.
Workstation revenue. Workstation revenue decreased 21% from $114,000 in
the first quarter of 1998 to $90,000 in the first quarter of 1999. Brigham
recognizes workstation revenue as industry participants in the Company's
seismic programs are charged an hourly rate for the work performed by Brigham
on its 3-D seismic interpretation workstations. This decrease is primarily
attributable to the Company's increased working interests in its recently
acquired 3-D seismic data, which reduces the amount of workstation
interpretation costs that Brigham can bill to its project participants. The
Company expects workstation revenue to continue to decline in 1999 due to the
Company's increased working interests in the square miles of 3-D seismic it
acquired in 1997 and 1998.
Lease operating expenses. Lease operating expenses increased 29% from
$414,000 for the first quarter of 1998 to $535,000 for the first quarter of
1999, while, on a per unit of production basis, lease operating expenses for
the same periods increased 17% from $0.29 per Mcfe to $0.34 per Mcfe. The
increase in lease operating expenses was primarily due to an increase in the
number of producing wells in the first quarter of 1999 as compared with the
same period in 1998.
Production taxes. Production taxes decreased 10% from $188,000 ($0.13 per
Mcfe) for the first quarter of 1998 to $169,000 ($0.11 per Mcfe) for the first
quarter of 1999, primarily as a result of reduced average natural gas and oil
sales prices. The effective average production tax rate increased from 6.0% of
natural gas and oil sales revenues (before the effect of hedging activities) to
6.4% for the first quarters of 1998 and 1999, respectively, due to the increase
in natural gas production as a percentage of total equivalent production as
natural gas is typically burdened with higher production tax rates than oil
production.
General and administrative expenses. General and administrative expenses
decreased 20% from $1.2 million for the first quarter of 1998 to $918,000 for
the first quarter of 1999 primarily due to an increase in overhead fees billed
to working interest participants on Company-operated wells and the reduction of
various administrative costs. On a per unit of production basis, general and
administrative expenses decreased 28% from $0.81 per Mcfe for the first quarter
of 1998 to $0.58 per Mcfe for the first quarter of 1999.
17
<PAGE> 20
Depletion of natural gas and oil properties. Depletion of natural gas and
oil properties increased 6% from $1.3 million ($0.89 per Mcfe) in the first
quarter of 1998 to $1.4 million ($0.86 per Mcfe) in the first quarter of 1999.
Of this net increase, $124,000 was due to the increase in production volumes,
which was offset in part by $43,000 due to a 3% decrease in the depletion rate
per unit of production.
Interest expense. Net interest expense increased 184% from $985,000 in
the first quarter of 1998 to $2.8 million in the first quarter of 1999. This
increase was primarily due to a higher average debt balance with a higher
average interest rate in the first quarter of 1999 as compared with the first
quarter of 1998 resulting from increased capital expenditures related to the
Company's exploration activities during the twelve months ended March 31, 1999.
The weighted average outstanding debt balance increased from $42.8 million in
the first quarter of 1998 to $99.6 million in the first quarter of 1999. The
average effective annual interest rate on borrowings outstanding during the
first quarter 1999 was 11.4% as compared to 9.5% for the first quarter 1998.
Interest expense in the first quarter of 1999 included $1.7 million of non-cash
charges, including (i) $1.3 million of interest expense related to the
Subordinated Notes that was paid through the issuance of additional
Subordinated Notes (or "paid-in-kind"), (ii) $262,000 for amortization of
deferred financing fees, and (iii) $91,000 for amortization of debt discounts
related to the issuance of the Subordinated Notes. In connection with issuance
of the Subordinated Notes in August 1998, the Company recorded the Subordinated
Notes at a discount of $4.5 million to reflect the estimated value of the
warrants to purchase common stock that were issued in connection with the
issuance of the Subordinated Notes. This discount was increased by $478,697 in
March 1999 to adjust the estimated value of the warrants based on the amendment
of certain terms of the warrants, including a decrease in the exercise price
per share and an increase in the term of the warrants. The Company amortizes
this debt discount over the five-year term of the Subordinated Notes based on
the interest method of amortization and includes such amortization in interest
expense.
LIQUIDITY
Despite the Company's success in building its inventory of 3-D seismic
data and potential drilling locations, a number of key factors have contributed
to significantly limit the Company's capital resources available to fund its
continued long-term growth-oriented exploration strategy. Management believes
these principal factors include: (i) lower commodity sales prices, which
reduced revenues and cash flow from the Company's production volumes, (ii)
reduced access to public, private and industry sources of capital on
cost-effective terms due to the continuing low commodity price environment and
outlook, (iii) less than anticipated success in placing working interests with
industry or financial participants in certain of its high equity interest
projects, resulting in lower levels of project cost recoupment than budgeted,
(iv) high levels of expenditures for 3-D seismic and land activities that do
not generate proved reserves and cash flow until the drilling stage of the
project cycle, (v) the utilization of high levels of debt to fund its
accelerating exploration expenditures, and (vi) disappointing drilling results
during 1998 on a number of high equity interest exploratory and development
wells, several of which were completed and subsequently plugged and abandoned
or otherwise performed below expectations.
As a result of these limiting factors and an expectation for continuing
difficult industry and capital markets conditions, Brigham has substantially
reduced its planned capital budget for 1999 and has undertaken a number of
strategic initiatives in an effort to improve and preserve its capital
liquidity in the current environment. While the Company remains focused on its
long-term growth objectives and the continuation of its established business
model for 3-D seismic-based exploration, Brigham has adapted its business
strategy in the near-term in an effort to maximize value for its shareholders
on a long-term basis through the implementation of the following principal
strategic initiatives: (i) focusing all of the Company's planned exploration
efforts in 1999 toward the drilling of its highest-grade 3-D prospects
identified in its Anadarko
18
<PAGE> 21
Basin and Gulf Coast projects, concentrated primarily in trends where Brigham
has achieved exploration success, (ii) eliminating substantially all planned
seismic and land expenditures for new projects until its capital resources can
support such additional activity, (iii) seeking to divest certain producing
natural gas and oil properties in an effort to raise capital to reduce debt
borrowings and to redirect capital to drilling projects that have the potential
to generate higher investment returns, (iv) restructuring its outstanding
senior and subordinated debt agreements to provide the Company with flexibility
needed to preserve cash flow to fund its expected near-term exploration
activities, (v) implementing an overhead reduction plan to reduce general and
administrative expenses, and (vi) evaluating opportunities to raise additional
equity capital either through the sales of interests in certain of its seismic
projects or the issuance of equity securities. The Company believes that the
successful execution of these strategic initiatives will provide Brigham with
sufficient capital resources to execute its planned 1999 exploration program
and position the Company to realize the significant value it believes it has
captured in its inventory of 3-D seismic projects and delineated drilling
locations. While the Company has initiated each of these strategic directives
in late 1998 and early 1999, and has effected certain of them to date, the
successful completion of any or all of these efforts to improve the Company's
capital availability within the expected timeframe is uncertain and will likely
have a material impact on the Company's near-term capital expenditure levels
and growth profile.
On March 30, 1999, the Company entered into an agreement with Veritas DGC
Land, Inc. ("Veritas") to exchange 1,002,865 shares of newly issued Brigham
common stock valued at $3.50 per share for approximately $3.5 million of
payment obligations due to Veritas in 1999 for certain seismic acquisition and
processing services previously performed. In addition, this agreement provides
for the payment by Brigham of up to $1 million in future seismic processing
services to be performed by Veritas in newly issued shares of Brigham common
stock valued at $3.50 per share, in the event that the Company does not elect
to pay for such services in cash. The settlement of these future seismic
processing services will be determined on a quarterly basis through December
31, 1999. Brigham considers this arrangement to be beneficial as it will enable
the Company to reduce its working capital commitments and preserve additional
cash flow and capital availability to fund its 1999 drilling program.
CAPITAL RESOURCES
The Company's primary sources of capital have been revolving credit
facility and other debt borrowings, public and private equity financings, the
sale of interests in projects and funds generated by operations. The Company's
primary capital requirements are 3-D seismic acquisition, processing and
interpretation costs, land acquisition costs and drilling expenditures. During
May 1997, the Company completed an initial public offering of common stock of
the Company that generated proceeds of approximately $24 million, net of
offering costs, that were used to repay all outstanding debt ($13.3 million)
under the Company's then existing revolving credit facility and to fund capital
expenditures. In January 1998, the Company entered into a new revolving credit
facility that provided for borrowing availability of $75 million that was used
to repay its then outstanding borrowings under its previous credit facility and
to fund capital expenditures. In August 1998, the Company issued $50 million of
debt and equity securities, including $40 million of Subordinated Notes, that
generated proceeds of approximately $47.5 million, net of offering costs, that
were used to repay a portion of then outstanding borrowings under the Credit
Facility, thereby increasing the Company's borrowing availability under its
Credit Facility to fund capital expenditures.
Cash Flow Analysis
In the first three months of 1999, cash flow provided by operations was
$4.4 million primarily as a result of the combined effects of increased natural
gas and oil revenues, net of lease operating expenses, production
19
<PAGE> 22
taxes and general and administrative expenses, and increases in interest paid
and working capital components. Cash flow provided by investing activities was
$446,000 in the first three months of 1999 primarily as a net result of $9.5
million of capital expenditures related to exploration activities and $10
million of proceeds received from the sale of interests in certain seismic
projects. Cash flow used in financing activities was $361,000 in the first
three months of 1999 resulting from the payment of deferred loan fees and
principal payments made on capital lease obligations.
Revolving Credit Facility
In January 1998, the Company entered into a revolving credit agreement
(the "Credit Facility"), which provided for borrowing availability of $75
million. The Company used a portion of the funds available under the Credit
Facility to repay the $32 million in borrowings outstanding at December 31,
1997 under its previous commercial bank credit facility. Principal outstanding
under the Credit Facility is due at maturity on January 26, 2001 with interest
due monthly for base rate tranches or periodically as LIBOR tranches mature.
The annual interest rate for borrowings under the Credit Facility was initially
either the lender's base rate or LIBOR plus 2.25%, at the Company's option. The
Credit Facility's borrowing availability was subsequently reduced from $75
million to $65 million upon the Company's issuance of the Subordinated Notes in
August 1998.
In March 1999, the Company and its lenders entered into an amendment to
the Credit Facility. Pursuant to this amendment, the borrowing availability
under the Credit Facility will remain at $65 million until June 1, 1999, when
the borrowing availability will be redetermined by the lenders based on the
Company's then proved reserve value and cash flows. In addition, certain
financial covenants of the Credit Facility have been amended, additional
covenants have been included that place significant restrictions on the
Company's ability to incur certain capital expenditures, the annual interest
rate for borrowings under the Credit Facility has been amended to the lender's
base rate or LIBOR plus 3.00%, and the Company will pay the lenders a $500,000
transaction fee over a ten month period. The Company's obligations under the
Credit Facility are secured by substantially all of the natural gas and oil
properties and other tangible assets of the Company. At May 13, 1999, the
Company had $61 million in borrowings outstanding under the Credit Facility,
which bear interest at an annual rate of 8.34%.
The Credit Facility has certain financial covenants including current and
interest coverage ratios, as defined. The Company and its lenders effected the
recent amendment to the Credit Facility to enable the Company to comply with
certain financial covenants of the Credit Facility, including the minimum
current ratio, minimum interest coverage ratio and the limitation on capital
expenditures related to seismic and land activities. The Company believes this
most recent amendment is indicative of its lenders' cooperation in the current
oil and natural gas pricing environment. If this pricing environment continues
or deteriorates further beyond the date of redetermination of borrowing
availability, the Company believes its lenders will expect the Company to
substantially reduce its level of borrowing under the Credit Facility. With
this in mind, the Company has initiated the business strategy noted above.
Should the Company be unable to comply with certain of the financial covenants,
its lenders may be unwilling to waive compliance or amend the covenants in the
future. In such instance, the Company's liquidity may be adversely affected,
which could in turn have an adverse impact on the Company's future financial
position and results of operations.
Subordinated Notes
In August 1998, the Company issued $50 million of debt and equity
securities to affiliates of Enron Corp. ("Enron"). Securities issued by the
Company in connection with this financing transaction included: (i) $40 million
of Subordinated Notes, (ii) warrants to purchase 1,000,000 shares of the
Company's common stock
20
<PAGE> 23
at a price of $10.45 per share (the "Warrants"), and (iii) 1,052,632 shares of
the Company's common stock at a price of $9.50 per share. The approximate $47.5
million in net proceeds received by the Company from this financing transaction
were used to repay a portion of outstanding borrowings under its Credit
Facility, which increased the Company's borrowing availability under its Credit
Facility to fund capital expenditures.
Principal outstanding under the Subordinated Notes is due at maturity on
August 20, 2003. Interest on the Subordinated Notes is payable quarterly at
rates that vary depending upon whether accrued interest is paid in cash or "in
kind" through the issuance of additional Subordinated Notes ("PIK Interest").
Interest shall be paid in cash at interest rates of 12%, 13% and 14% per annum
during years one through three, year four and year five, respectively, of the
term of the Subordinated Notes; provided, however, that the Company may pay PIK
Interest for a cumulative total of six quarterly interest payments at interest
rates of 13%, 14% and 15% per annum during years one through three, year four
and year five, respectively, of the term of the Notes.
The Subordinated Notes rank subordinate in right of payment to Senior
Indebtedness (as defined) and senior to all other financings (other than any
allowed capital leases and purchase money financings) of the Company. The
Subordinated Notes are secured by a second lien against substantially all of
the natural gas and oil properties and other tangible assets of the Company.
The Subordinated Notes may be prepaid at any time, in whole or in part, without
premium or penalty, provided that all partial prepayments must be pro rata to
the various holders of the Subordinated Notes. The Subordinated Notes were
issued pursuant to an indenture (the "Indenture") that contains certain
covenants that, among other things, limit the ability of the Company and its
subsidiaries to incur additional indebtedness, pay dividends, make
distributions, enter into certain sale and leaseback transactions, enter into
certain transactions with affiliates, dispose of certain assets, incur liens,
and engage in mergers and consolidations.
In March 1999, the Company and Chase Bank of Texas, National Association,
as trustee (the "Trustee") for the holders of the Subordinated Notes, entered
into an amendment to the Indenture. This amendment provides the Company with
the option to pay interest due on the Subordinated Notes in kind, for any
reason, through the second quarter of 2000. In addition, certain financial and
other covenants were amended. The amendment also provides for a reduction in
the exercise price per share of the Warrants from $10.45 per share to $3.50 per
share and extended the term of the Warrants from seven to ten years.
The Indenture governing the Subordinated Notes has certain financial
covenants including current and interest coverage ratios, as defined. The
Company and the holders of the Subordinated Notes effected the recent amendment
to the Indenture to enable the Company to comply with certain financial
covenants of the Indenture that parallel those of the Credit Facility,
including the minimum current ratio and the minimum interest coverage ratio.
Should the Company be unable to comply with certain of the financial covenants,
the holders of the Subordinated Notes may be unwilling to waive compliance or
amend the covenants in the future. In such instance, the Company's liquidity
may be adversely affected, which could in turn have an adverse impact on the
Company's future financial position and results of operations.
Capital Expenditures
As a result of the Company's limited available capital resources, Brigham
has significantly reduced its planned capital expenditure budget for 1999 from
the Company's previously anticipated levels in an effort to match the its
current and expected future capital resources. The Company's current 1999
capital budget is estimated to be $17.5 million, or approximately 21% of 1998
expenditures. The Company's budgeted 1999 capital expenditures consist of
approximately $10 million to drill an estimated 20 to 25 gross wells, $3.5
million for seismic and land costs, consisting primarily of previous year
commitments and obligations to
21
<PAGE> 24
acquire 3-D data and acreage, and $4 million for capitalized general and
administrative expenses and other fixed asset expenditures. Brigham expects
that its 1999 drilling expenditures will be allocated approximately 50% to its
Anadarko Basin province and 50% to its Gulf Coast province, and such
expenditures will be devoted to the drilling of the highest grade prospects in
the Company's inventory of identified potential drilling locations. The Company
intends to fund these budgeted capital expenditures through a combination of
cash flow from operations, available borrowings under its Credit Facility and
the sales of certain assets and equity interests (including the potential
divestitures of certain producing property packages from among its Anadarko
Basin properties and interests in certain 3-D seismic projects). In addition to
these sources of capital, the Company is also evaluating opportunities to raise
additional capital to enable it to increase its planned capital expenditures
for drilling in 1999. However, since the Company's capital availability during
1999 will depend to a large extent on the Company's success raising additional
financing through its planned and potential strategic initiatives, the
Company's actual 1999 capital expenditures may differ from its current
estimates. In the event additional financing is not available in the amounts or
timing needed, the Company may be required to curtail its planned exploration
activities in 1999 and take further measures to reduce the size and scope of
its business.
OTHER MATTERS
Year 2000 Issues
Many computer software systems, as well as certain hardware and equipment
using date-sensitive data, were structured to use a two-digit date field
meaning that they may not be able to properly recognize dates in the year 2000.
The Company has developed a plan to address this issue and is taking steps to
review its information technology systems, such as computer hardware and
software, as well as non information technology systems, including computer
controlled equipment and electronic devices used to operate equipment involved
in processing and interpreting 3-D seismic data.
The Company has completed the initial phases of its plan by identifying
all computerized systems and substantially completing an inventory of its
equipment and component parts. Both information technology and non information
technology systems may contain embedded technology, which complicates the
Company's Year 2000 identification, assessment, remediation and testing
efforts. The Company continues to inventory its equipment and facilities to
determine if they contain embedded date-sensitive technology. The Company is
currently reviewing all of its systems to determine which are not Year 2000
compliant and will need to be replaced or modified. This current phase includes
comparisons of inventory to manufacturer's information and/or performance
testing. If problems are identified, the Company will undertake remediation,
replacement or alternative procedures for non-compliant equipment or facilities
on a business priority basis. The Company's identification and assessment
efforts to date have not identified any computer equipment or software it
currently uses which will require replacement or modification, except that one
of the word processing software programs the Company uses may be non-compliant
and may need to be discontinued or upgraded. In addition, in the ordinary
course of replacing computer equipment and software, the Company attempts to
obtain replacements that are Year 2000 compliant. The Company currently
anticipates that its identification, assessment, remediation and testing
efforts will continue and, depending upon the results of the assessment
efforts, be completed by September 30, 1999.
As of March 31, 1999, all costs incurred by the Company in connection
with its Year 2000 compliance efforts were included within the Company's normal
general and administrative expenses (for example, regular maintenance of
software programs). The Company is currently expensing as incurred all costs
related to the assessment and remediation of the Year 2000 issue, and these
costs are being funded through operating cash
22
<PAGE> 25
flow. However, in certain instances the Company may determine that replacing
existing equipment may be appropriate and may capitalize such replacements. The
Company is unable currently to estimate the amount of its total out-of-pocket
costs to become Year 2000 compliant, but the Company currently expects that
such costs will not have a material adverse effect on the Company's financial
condition, operations or liquidity.
The foregoing timetable and assessment of costs to become Year 2000
compliant reflect management's current best estimates. These estimates are
based on many assumptions, including assumptions about the cost, availability
and ability of resources to locate, remediate and modify affected systems,
equipment and facilities. Based upon its activities to date, the Company does
not currently believe that these factors will cause results to differ
significantly from those estimated. However, the Company cannot reasonably
estimate the potential impact on its financial condition and operations if key
third parties including, among others, suppliers, contractors, joint venture
participants, financial institutions, customers and governments do not become
Year 2000 compliant on a timely basis. The Company is currently identifying
third parties whose business significantly impacts the Company, has contacted
some significant third parties to determine the extent to which interfaces with
such entities are vulnerable to Year 2000 issues, and will contact others as it
completes the identification phase.
In the event that the Company is unable to complete the remediation or
replacement of its critical systems, facilities and equipment, establish
alternative procedures in a timely manner, or if those with whom the Company
conducts business are unsuccessful in implementing timely solutions, Year 2000
issues could have a material adverse effect on the Company's liquidity and
results of operations. At this time, the potential effect in the event the
Company and/or third parties are unable to timely resolve their Year 2000
problems is not determinable. A contingency plan has not been developed for
dealing with the most reasonably likely worst case scenario, and such scenario
has not yet been clearly identified. However, the Company currently believes
that it will be able to resolve its own Year 2000 issues in a timely manner.
The disclosure set forth in this section is provided pursuant to
Securities Act Release No. 33-7558. As such it is protected as a
forward-looking statement under the Private Securities Litigation Reform Act of
1995. See "Forward-Looking Information." This disclosure is also subject to
protection under the Year 2000 Information and Readiness Disclosure Act of
1998, Public Law 105-271, as a "Year 2000 Statement" and "Year 2000 Readiness
Disclosure" as defined therein.
Forward Looking Information
The Company may make forward looking statements, oral or written,
including statements in this report, press releases and other filings with the
SEC, relating to the Company's drilling plans, its potential drilling
locations, capital expenditures, use of offering proceeds, the ability of
expected sources of liquidity to support working capital and capital
expenditure requirements and the Company's financial position, business
strategy and other plans and objectives for future operations. Such statements
involve risks and uncertainties, including those relating to the Company's
dependence on exploratory drilling activities, the volatility of natural gas
and oil prices, the risks associated with growth (including the risk of reduced
availability of seismic gathering and drilling services in the face of growing
demand), the substantial capital requirements of the Company's exploration and
development projects, operating hazards and uninsured risks and other factors
detailed in the Company's registration statement and other filings with the
SEC. All subsequent oral and written forward looking statements attributable to
the Company are expressly qualified in their entirety by these factors. The
Company assumes no obligation to update these statements.
23
<PAGE> 26
PART II. OTHER INFORMATION:
Item 2. Changes in Securities
On March 30, 1999, the Company entered into an agreement with Veritas
DGC Land, Inc. ("Veritas") to exchange 1,002,865 shares of newly
issued Brigham Exploration Company common stock valued at $3.50 per
share for approximately $3.5 million of payment obligations due to
Veritas in 1999 for certain seismic acquisition and processing
services previously performed. These shares were issued pursuant to
the exemption provided by Section 4(2) of the Securities Act of 1933,
as amended. Veritas represented its intention to acquire the shares
for investment purposes only and not for the purpose of resale or
distribution, and appropriate legends were affixed to the certificate
issued in such transaction. Veritas was given access to information
about the Company.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
SIGNATURES
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, in the City of Austin, State of Texas,
on the 17th day of May, 1999.
BRIGHAM EXPLORATION COMPANY
By: /s/ BEN M. BRIGHAM
--------------------------------------
Ben M. Brigham
Chief Executive Officer, President and
Chairman of the Board
By: /s/ CRAIG M. FLEMING
--------------------------------------
Craig M. Fleming
Chief Financial Officer
24
<PAGE> 27
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27 Financial Data Schedule Tabbed by
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