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) DELAWARE 1311 75-2692967 (State of other jurisdiction (Primary Standard Industrial (I.R.S. Employer of incorporation or organization) Classification Code Number) Identification 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, 1999, 14,309,071 shares of Common Stock, $.01 per share, were outstanding. =============================================================================== 2 BRIGHAM EXPLORATION COMPANY INDEX PAGE PART I. FINANCIAL INFORMATION: NUMBER ------ 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 3 PART I. FINANCIAL INFORMATION: Item 1. Financial Statements BRIGHAM EXPLORATION COMPANY CONDENSED CONSOLIUDATED BALANCE SHEETS (in thousands) December 31, March 31, 1998 1999 ------------ --------- (unaudited) ASSETS 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 ============ ========= See accompanying notes to the condensed consolitdated financial statements. 1 4 BRIGHAM EXPLORATION COMPANY CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) (unaudited) Three Months Ended March 31, ------------------------ 1998 1999 ------- -------- 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 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, 1998 1999 ----------- ----------- 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 =========== =========== See accompanying notes to the condensed consolidated financial statements. 3 6 BRIGHAM EXPLORATION COMPANY CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (in thousands) (unaudited) Common Stock Additional Unearned --------------------- Paid-in Stock Accum. Shares Amounts Capital Compensation Deficit Total ---------- ------- ---------- ------------- ---------- ------- 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 ========== ====== ========== ========== ========== ======== See accompanying notes to the condensed consolidated financial statements. 4 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 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 9 BRIGHAM EXPLORATION COMPANY SUBSIDIARIES CONDENSED BALANCE SHEETS AS OF MARCH 31, 1999 (in thousands) (unaudited) BRIGHAM BRIGHAM BRIGHAM OIL & BRIGHAM, HOLDINGS HOLDINGS GAS, L.P. INC. I, LLC II, LLC 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 ======== ========= ======= ======= Natural gas and oil properties are accounted for using the full cost method. See accompanying notes to the condensed financial statements. 7 10 BRIGHAM EXPLORATION COMPANY SUBSIDIARIES CONDENSED BALANCE SHEETS AS OF DECEMBER 31, 1998 (in thousands) BRIGHAM BRIGHAM BRIGHAM OIL & BRIGHAM, HOLDINGS HOLDINGS GAS, L.P. INC. I, LLC II, LLC 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 ======== ========= ======= ======= Natural gas and oil properties are accounted for using the full cost method. See accompanying notes to the condensed financial statements. 8 11 BRIGHAM EXPLORATION COMPANY SUBSIDIARIES CONDENSED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1999 (in thousands) (unaudited) BRIGHAM BRIGHAM BRIGHAM OIL & BRIGHAM, HOLDINGS HOLDINGS GAS, L.P. INC. I, LLC II, LLC 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) ======= ======= ======= ======= See accompanying notes to the condensed financial statements. 9 12 BRIGHAM EXPLORATION COMPANY SUBSIDIARIES CONDENSED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1998 (in thousands) (unaudited) BRIGHAM BRIGHAM BRIGHAM OIL & BRIGHAM, HOLDINGS HOLDINGS GAS, L.P. INC. I, LLC II, LLC 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) ======= ======= ===== ===== See accompanying notes to the condensed financial statements. 10 13 BRIGHAM EXPLORATION COMPANY SUBSIDIARIES CONDENSED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 1999 (in thousands) (unaudited) BRIGHAM BRIGHAM BRIGHAM OIL & BRIGHAM, HOLDINGS HOLDINGS GAS, L.P. INC. I, LLC II, LLC 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 See accompanying notes to the condensed financial statements. 11 14 BRIGHAM EXPLORATION COMPANY SUBSIDIARIES CONDENSED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 1998 (in thousands) (unaudited) BRIGHAM BRIGHAM BRIGHAM OIL & BRIGHAM, HOLDINGS HOLDINGS GAS, L.P. INC. I, LLC II, LLC 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 See accompanying notes to the condensed financial statements. 12 15 BRIGHAM EXPLORATION COMPANY SUBSIDIARIES CONDENSED STATEMENTS OF CHANGES IN EQUITY (in thousands, except shares) (unaudited) Retained Common Stock Additional Earnings/ ----------------------- Paid-in Accumulated Partners' Shares Amounts Capital Deficit Capital Total ------------ --------- ----------- ------------- ----------- ---------- 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 ============ ========= =========== ============= =========== ========== See accompanying notes to the condensed financial statements. 13 16 BRIGHAM EXPLORATION COMPANY SUBSIDIARIES CONDENSED STATEMENTS OF CHANGES IN EQUITY (in thousands, except shares) (unaudited) Retained Common Stock Additional Earnings/ -------------------------- Paid-in Accumulated Partners' Shares Amounts Capital Deficit Capital Total ------------- ---------- ----------- ------------- ------------ ------------ 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 ============= ========== =========== ============= ============ ============ See accompanying notes to the condensed financial statements. 14 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 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 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 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 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 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 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 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 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 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 27 SEQUENTIALLY EXHIBIT NUMBERED NO. INDEX TO EXHIBITS PAGE --- ----------------- ---- 27 Financial Data Schedule Tabbed by Exhibit No.