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, 1998
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)
DELAWARE 1311 75-2692967
(State of other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation Classification Identification
or organization) Code Number) Number)
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, 1998, 12,253,574 shares of Common Stock, $.01 per share, were
outstanding.
================================================================================
2
BRIGHAM EXPLORATION COMPANY
INDEX
PAGE
PART I. FINANCIAL INFORMATION: NUMBER
------
Item 1. Unaudited Condensed Consolidated Financial Statements
a) Balance Sheets - December 31, 1997 and
March 31, 1998 1
b) Statements of Operations - Three months ended
March 31, 1997 and 1998 2
c) Statements of Cash Flows - Three months ended
March 31, 1997 and 1998 3
d) Notes to Consolidated Financial Statements 4 - 6
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 7 - 8
PART II. OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K 9 - 10
3
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
BRIGHAM EXPLORATION COMPANY
CONDENSED CONSOLIDATED
BALANCE SHEETS
(in thousands)
December 31, March 31,
1997 1998
---------- ----------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 1,701 $ 1,800
Accounts receivable 4,909 5,510
Prepaid expenses 280 267
---------- ----------
Total current assets 6,890 7,577
---------- ----------
Natural gas and oil properties, at cost, net 84,176 96,676
Other property and equipment, at cost, net 1,239 1,374
Drilling advances paid 78 62
Deferred loan fees -- 1,805
Other noncurrent assets 18 14
---------- ----------
$ 92,401 $ 107,508
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 11,892 $ 5,819
Accrued drilling costs 2,406 3,071
Participant advances received 489 3,110
Other current liabilities 726 1,374
---------- ----------
Total current liabilities 15,513 13,374
---------- ----------
Notes payable 32,000 50,000
Other noncurrent liabilities 507 478
Deferred income tax liability 1,228 914
Stockholders' equity:
Preferred stock, $.01 par value, 10 million shares
authorized, none issued and outstanding -- --
Common stock, $.01 par value, 30 million shares
authorized, 12,253,574 issued and outstanding 123 123
Additional paid-in capital 44,344 44,344
Unearned stock compensation (1,340) (1,136)
Retained earnings (accumulated deficit) 26 (589)
---------- ----------
Total stockholders' equity 43,153 42,742
---------- ----------
$ 92,401 $ 107,508
========== ==========
See accompanying notes to the condensed consolidated financial statements.
1
4
BRIGHAM EXPLORATION COMPANY
CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
Three Months
Ended March 31,
--------------------------
1997 1998
---------- ----------
Revenues:
Natural gas and oil sales $ 2,136 $ 3,143
Workstation revenue 164 114
---------- ----------
2,300 3,257
---------- ----------
Costs and expenses:
Lease operating 206 414
Production taxes 127 188
General and administrative 702 1,154
Depletion of natural gas and oil properties 687 1,267
Depreciation and amortization 108 83
Amortization of stock compensation 29 95
---------- ----------
1,859 3,201
---------- ----------
Operating income 441 56
---------- ----------
Other income (expense):
Interest income 18 37
Interest expense (216) (1,022)
Interest expense - related party (174) --
---------- ----------
(372) (985)
---------- ----------
Net income (loss) before income taxes 69 (929)
Income tax (expense) benefit (4,964) 314
---------- ----------
Net loss $ (4,895) $ (615)
========== ==========
Net loss per share:
Basic / Diluted $ (0.55) $ (0.05)
Weighted average common shares outstanding:
Basic / Diluted 8,929 12,254
See accompanying notes to the condensed consolidated financial statements.
2
5
BRIGHAM EXPLORATION COMPANY
CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Three
Months Ended Months Ended
March 31, March 31,
1997 1998
---------- ----------
Cash flows from operating activities:
Net loss $ (4,895) $ (615)
Adjustments to reconcile net loss to cash
provided by operating activities:
Depletion of natural gas and oil properties 687 1,267
Depreciation and amortization 108 83
Amortization of stock compensation 29 95
Amortization of deferred loan fees -- 106
Changes in deferred income tax liability 4,964 (314)
Changes in working capital and other items 3,331 (3,418)
---------- ----------
Net cash provided (used) by operating activities 4,224 (2,796)
---------- ----------
Cash flows from investing activities:
Additions to natural gas and oil properties (6,830) (12,993)
Additions to other property and equipment (33) (159)
(Increase) decrease in drilling advanaces paid (321) 16
Increase in exploration advances paid (117) --
---------- ----------
Net cash used by investing activities (7,301) (13,136)
---------- ----------
Cash flows from financing activities:
Increase in notes payable 2,850 52,800
Repayment of notes payable -- (34,800)
Principal payments on capital lease obligations (56) (58)
Deferred loan fees -- (1,911)
---------- ----------
Net cash provided by financing activities 2,794 16,031
---------- ----------
Net (decrease) increase in cash and cash equivalents (283) 99
Cash and cash equivalents, beginning of period 1,447 1,701
---------- ----------
Cash and cash equivalents, end of period $ 1,164 $ 1,800
========== ==========
See accompanying notes to the condensed consolidated financial statements.
3
6
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 Texas
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 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 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. With a portion of the proceeds
from the Offering, the Company repaid the then outstanding borrowings
($13.3 million) under the Company's revolving credit facility.
2. BASIS OF PRESENTATION
The unaudited condensed consolidated balance sheets at December 31, 1997
and March 31, 1998 reflect the consolidated accounts of the Company. The
unaudited condensed consolidated statements of operations and of cash
flows for the three months ended March 31, 1997 and 1998 include the
results of operations and of cash flows of the Partnership for the period
from January 1, 1997 to February 27, 1997 and of the Company for the
period from February 25, 1997, the date of its inception, to March 31,
1997 and for the three months ended March 31, 1998. As the Exchange was
the conversion of a partnership to a corporation, the Exchange was
accounted for by the Company as a reorganization.
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
1997 Annual Report on Form 10-K pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934.
4
7
BRIGHAM EXPLORATION COMPANY
NOTES TO THE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. NOTES PAYABLE
In January 1998, the Company entered into a new reserve based revolving
credit facility (the "Credit Facility"). The Credit Facility provides for
borrowings up to $75 million, all of which is immediately available for
borrowing to fund capital expenditures, until January 31, 1999, at which
time the borrowing availability will be redetermined by the lender based
on the Company's proved reserve value at that time. The Company may
elect, at its option, to have the borrowing availability redetermined
based on the Company's proved reserve value at any time prior to January
31, 1999. Amounts outstanding under the Credit Facility bear interest at
either the lender's Base Rate or LIBOR plus 2.25%, at the Company's
option. The Company's obligations under the Credit Facility are secured
by substantially all of the natural gas and oil properties of the
Company. A portion of the funds borrowed under the Credit Facility were
used to repay in full the debt outstanding under the Company's previous
revolving credit facility.
In connection with the origination of the Credit Facility, certain bank
fees and other expenses totaling approximately $1.9 million were recorded
as deferred costs and will be amortized over the life of the loan which
matures January 26, 2001.
4. INCOME TAXES
Prior to the consummation of the Exchange, the Partnership was not
subject to federal income taxes. Income and losses were passed through to
its partners on the basis of the allocation provisions established by the
partnership agreement. Upon consummation of the Exchange, the
Partnership's net income became subject to federal income taxes through
its ownership by the Company. Also, in conjunction with the Exchange, the
Company recorded a deferred income tax liability of $5 million to
recognize the temporary differences between the financial statement and
tax bases of the assets and liabilities of the Partnership at the
Exchange date, February 27, 1997, given the provisions of enacted tax
laws. Subsequent to this date, the Company elected to record a step-up in
basis of its assets for tax purposes as a result of the Exchange. As a
result of this election, the Company recorded a $3.8 million deferred
income tax benefit in the fourth quarter of 1997, which resulted in a net
$1.2 million non-cash deferred income tax charge for the year ended
December 31, 1997.
5. EARNINGS PER SHARE
Earnings per share have been calculated in accordance with the provisions
of Statement of Financial Accounting Standards ("SFAS") No. 128. The
implementation of this standard has resulted in the presentation of a
basic EPS calculation in the consolidated financial statements as well as
a diluted EPS calculation. Basic EPS is computed by dividing net income
(loss) applicable to common shareholders by the weighted average number
of common shares outstanding during each period. Diluted EPS is computed
by dividing net income (loss) applicable to common shareholders by the
weighted average number of common shares and common share equivalents
outstanding, if dilutive, during each period. The number of common share
equivalents outstanding is computed using the treasury stock method.
Historical earnings per share for the three months ended March 31, 1997
is based on shares of common stock issued upon consummation of the
Exchange (Note 1). At March 31, 1997 and 1998, options to purchase
644,097 and 935,987, respectively, shares of common stock were
outstanding but were not included in the computation of diluted EPS due
to the anti-dilutive effect they would have on EPS if converted.
5
8
BRIGHAM EXPLORATION COMPANY
NOTES TO THE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. REPORTING COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, "Reporting Comprehensive Income." The new standard, which
is effective for financial statements issued for periods ending after
December 15, 1997, established standards for reporting, in addition to
net income, comprehensive income and its components including, as
applicable, foreign currency items, minimum pension liability adjustments
and unrealized gains and losses on certain investments in debt and equity
securities. Upon adoption, the Company is also required to reclassify
financial statements for earlier periods provided for comparative
purposes. The Company adopted this standard in the first quarter of 1998.
There is no difference between the Company's net income as reported and
comprehensive income.
7. SEGMENT REPORTING
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of
an Enterprise and Related Information", which the Company adopted in the
first quarter of 1998. The standard established requirements for
reporting information about operating segments in interim financial
reports issued to shareholders. It also established standards for related
disclosures about products and services, geographic areas and major
customers. Under SFAS No. 131, operating segments are to be determined
consistent with management's organization and evaluation of financial
information internally for making operating decisions and assessing
performance. The disclosure provisions of this standard are not
applicable for interim periods in the year of adoption. The adoption of
this new standard is not expected to have a material impact on the
Company's consolidated balance sheet or statement of operations.
6
9
BRIGHAM EXPLORATION COMPANY
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, 1997 and March 31, 1998
Natural gas and oil sales. Natural gas and oil sales increased 47% from
$2.1 million in the first quarter of 1997 to $3.1 million in the first quarter
of 1998. Of this net increase, $2.8 million was attributable to an increase in
production, offset by $1.8 million attributable to a decrease in the average
sales price for natural gas and oil. Production volumes for natural gas
increased 205% from 243 MMcf in the first quarter of 1997 to 740 MMcf in the
first quarter of 1998. The average price received for natural gas decreased 34%
from $3.10 per Mcf in the first quarter of 1997 to $2.05 per Mcf in the first
quarter of 1998. Production volumes for oil increased 82% from 63 MBbls in the
first quarter of 1997 to 115 MBbls in the first quarter of 1998. The average
price received for oil decreased 35% from $21.82 per Bbl in the first quarter of
1997 to $14.15 per Bbl in the first quarter of 1998. Natural gas and oil sales
were increased by production from wells completed during the first quarter of
1998, partially offset by the natural decline of existing production.
Lease operating expenses. Lease operating expense increased 101% from
$206,000 for the first quarter of 1997 to $414,000 for the first quarter of
1998, while on a per unit of production basis, lease operating expenses for the
same periods decreased 12% from $.33 per Mcfe to $.29 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 1998 as compared with the same period in
1997. The decrease in the per unit rate was primarily due to an increase in gas
production as a percentage of total equivalent production (39% and 52% for the
first quarters of 1997 and 1998, respectively) since a typical gas well produces
with lower average lease operating costs per unit of production than a typical
oil well.
Production taxes. Production taxes increased 47% from $127,000 ($.21
per Mcfe) for the first quarter of 1997 to $188,000 ($.13 per Mcfe) for the
first quarter of 1998 as a direct result of increased production volumes. The
effective average production tax rate remained unchanged at 6% of natural gas
and oil sales revenues for each period.
General and administrative expenses. General and administrative
expenses increased 64% from $702,000 for the first quarter of 1997 to $1.2
million for the first quarter of 1998. This increase was primarily attributable
to the hiring of additional employees to support the Company's increased level
of operational activities. Additionally, office rent, other office expenses and
costs related to the administration of a public corporation increased for the
first quarter of 1998 as compared to the same period for 1997. On a per unit of
production basis, general and administrative expenses decreased 28% from $1.13
per Mcfe for the first quarter of 1997 to $.81 per Mcfe for the first quarter of
1998.
Depletion of natural gas and oil properties. Depletion of natural gas
and oil properties increased 84% from $687,000 ($1.10 per Mcfe) in the first
quarter of 1997 to $1.3 million ($.89 per Mcfe) in the first quarter of 1998. Of
this net increase, $892,000 was due to the increase in production volumes which
was offset by $312,000 due to a 19% decrease in the depletion rate. The
depletion rate per unit of production decreased due to an increase in natural
gas and oil reserves at lower average capital costs.
Interest expense. Net interest expense increased 165% from $372,000 in
the first quarter of 1997 to $985,000 in the first quarter of 1998. This
increase was due to a higher average outstanding debt balance in the first
quarter of 1998 partially offset by a decreased effective interest rate. The
weighted average outstanding debt balance increased 179% from $15.3 million in
the first quarter of 1997 to $42.8 million in the first quarter of 1998. The
7
10
effective annual interest rate decreased 6% from 10% in the first quarter of
1997 to 9.5% in the first quarter of 1998. The increase in the average
outstanding debt balance was primarily a result of increased capital
expenditures related to the Company's exploration activities. At March 31, 1998,
the Company had $50 million in borrowings outstanding under the Credit Facility
which had an annual interest rate of 7.9%. Interest expense increased an
additional $106,000 in the first quarter of 1998 compared to the same period for
1997 due to the amortization of deferred loan fees totaling approximately $1.9
million incurred in connection with the establishment of the Credit Facility in
January 1998. The amortization of these deferred loan fees will continue to be
recognized in the amount of approximately $159,000 per quarter over the term of
the Credit Facility which matures in January 2001.
Liquidity and Capital Resources
The Company's primary sources of capital have been borrowings
(revolving credit facility and private placement debt), working capital, the
sale of interests in projects and sales of equity. During May 1997, as described
in Note 1 to the Condensed Consolidated Financial Statements included herein,
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 the first quarter of 1998, cash flow used by operations was $2.8
million primarily as a result of the net effects of increased natural gas and
oil revenues, net of production taxes, lease operating expenses and general and
administrative expenses, and an increase in working capital components. Cash
flow used in investing activities was $13.1 million in the first quarter of 1998
primarily as a result of capital expenditures related to exploration activities.
Cash flow provided by financing activities was $16 million, net of deferred loan
fees of $1.9 million, in the first three months of 1998 primarily as a result of
an increase in borrowings under the revolving credit facility to fund the
difference between cash flow from operations and cash flow from investing
activities.
The Company believes its cash flow from operations and its borrowing
capacity under the Credit Facility will be sufficient to finance its continuing
exploration and production activities during the remainder of 1998.
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.
8
11
PART II. OTHER INFORMATION:
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 14th day of May, 1998.
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
9
12
SEQUENTIALLY
EXHIBIT NUMBERED
NO. INDEX TO EXHIBITS PAGE
--- ----------------- ----
27 Financial Data Schedule Tabbed by
Exhibit No.
10