1
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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 September 30, 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 November 1, 1999, 14,517,786 shares of Common Stock, $.01 per share, were
outstanding.
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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 September 30, 1999......................... 1
Statements of Operations - Three and nine months ended
September 30, 1998 and 1999..................................................... 2
Statements of Cash Flows - Nine months ended September 30, 1998 and 1999.......... 3
Statement of Changes in Stockholders' Equity - Nine months ended
September 30, 1999............................................................. 4
Notes to Condensed Consolidated Financial Statements.............................. 5 - 7
Condensed Financial Statements of Brigham Exploration Company Subsidiaries
Balance Sheets - September 30, 1999............................................... 8
Balance Sheets - December 31, 1998................................................ 9
Statements of Operations - Three months ended September 30, 1999.................. 10
Statements of Operations - Three months ended September 30, 1998.................. 11
Statements of Operations - Nine months ended September 30, 1999................... 12
Statements of Operations - Nine months ended September 30, 1998................... 13
Statements of Cash Flows - Nine months ended September 30, 1999................... 14
Statements of Cash Flows - Nine months ended September 30, 1998................... 15
Statements of Changes in Equity - Nine months ended September 30, 1999............ 16
Notes to Condensed Financial Statements........................................... 17-19
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.................................................... 20-29
PART II. OTHER INFORMATION:
Item 2. Changes in Securities..................................................................... 30
Item 6. Exhibits and Reports on Form 8-K.......................................................... 30
3
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
BRIGHAM EXPLORATION COMPANY
CONDENSED CONSOLIDATED
BALANCE SHEETS
(in thousands)
December 31, September 30,
1998 1999
------------ -------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 2,569 $ 3,381
Accounts receivable 7,938 5,627
Prepaid expenses 290 480
------------ -------------
Total current assets 10,797 9,488
------------ -------------
Natural gas and oil properties, at cost, net 134,317 106,498
Other property and equipment, at cost, net 2,014 1,813
Drilling advances paid 230 532
Deferred loan fees 3,146 4,052
Other noncurrent assets 12 101
------------ -------------
$ 150,516 $ 122,484
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 19,883 $ 13,621
Accrued drilling costs 1,219 70
Participant advances received 764 1,804
Other current liabilities 1,647 1,498
------------ -------------
Total current liabilities 23,513 16,993
------------ -------------
Notes payable 59,000 55,000
Senior subordinated notes, net 35,786 39,729
Other noncurrent liabilities 7,536 1,449
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 14,517,786 issued and outstanding at
December 31, 1998 and September 30, 1999, respectively 133 145
Additional paid-in capital 58,838 64,218
Unearned stock compensation (890) (358)
Accumulated deficit (33,400) (54,692)
------------ -------------
Total stockholders' equity 24,681 9,313
------------ -------------
$ 150,516 $ 122,484
============ =============
Natural gas and oil properties are accounted for using the full cost method.
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 Nine Months
Ended September 30, Ended September 30,
--------------------------------------------------------------------
1998 1999 1998 1999
-------------- -------------- -------------- --------------
Revenues:
Natural gas and oil sales $ 4,162 $ 4,109 $ 11,292 $ 10,855
Workstation revenue 75 86 322 247
-------------- -------------- -------------- --------------
4,237 4,195 11,614 11,102
-------------- -------------- -------------- --------------
Costs and expenses:
Lease operating 564 525 1,542 1,679
Production taxes 255 300 705 685
General and administrative 1,069 901 3,362 2,710
Depletion of natural gas and oil properties 1,690 2,839 4,480 5,650
Depreciation and amortization 113 132 288 398
Amortization of stock compensation 65 (123) 298 (10)
-------------- -------------- -------------- --------------
3,756 4,574 10,675 11,112
-------------- -------------- -------------- --------------
Operating income 481 (379) 939 (10)
-------------- -------------- -------------- --------------
Other income (expense):
Interest income 37 40 114 134
Interest expense (1,979) (3,250) (4,411) (9,221)
Loss on sale of natural gas and oil properties -- -- -- (12,195)
-------------- -------------- -------------- --------------
(1,942) (3,210) (4,297) (21,282)
-------------- -------------- -------------- --------------
Net loss before income taxes (1,461) (3,589) (3,358) (21,292)
Income tax benefit 497 -- 1,135 --
-------------- -------------- -------------- --------------
Net loss $ (964) $ (3,589) $ (2,223) $ (21,292)
============== ============== ============== ==============
Net loss per share:
Basic / Diluted $ (0.08) $ (0.25) $ (0.18) $ (1.52)
Weighted average common shares outstanding:
Basic / Diluted 12,677 14,447 12,396 14,028
See accompanying notes to the condensed consolidated financial statements.
2
5
BRIGHAM EXPLORATION COMPANY
CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Nine
Months Ended Months Ended
September 30, September 30,
1998 1999
----------------- -------------
Cash flows from operating activities:
Net loss $ (2,223) $ (21,292)
Adjustments to reconcile net loss to cash provided (used)
by operating activities:
Depletion of natural gas and oil properties 4,480 5,650
Depreciation and amortization 288 398
Amortization of stock compensation 298 (10)
Interest paid through issuance of senior subordinated notes -- 4,028
Amortization of deferred loan fees 463 1,160
Amortization of discount on senior subordinated notes 74 394
Loss on sale of natural gas and oil properties -- 12,195
Changes in deferred income tax liability (1,135) --
Changes in working capital and other items:
(Increase) decrease in accounts receivable (3,198) 2,311
Increase in prepaid expenses (74) (190)
Increase (decrease) in accounts payable 1,759 (2,466)
Decrease in participant advances received 437 1,040
Increase (decrease) in other current liabilities 1,612 (137)
Other noncurrent assets 6 (89)
Other noncurrent liabilities (94) (5,663)
----------------- -------------
Net cash provided (used) by operating activities 2,693 (2,671)
----------------- -------------
Cash flows from investing activities:
Additions to natural gas and oil properties (52,782) (18,310)
Proceeds from sale of natural gas and oil properties -- 27,122
Additions to other property and equipment (511) (146)
Increase in drilling advances paid (326) (302)
----------------- -------------
Net cash provided (used) by investing activities (53,619) 8,364
----------------- -------------
Cash flows from financing activities:
Proceeds from issuance of common stock 9,448 --
Proceeds from issuance of senior subordinated notes 40,000 --
Increase in notes payable 83,800 12,750
Repayment of notes payable (78,800) (16,750)
Principal payments on capital lease obligations (176) (193)
Deferred loan fees paid (3,796) (688)
----------------- -------------
Net cash (used) provided by financing activities 50,476 (4,881)
----------------- -------------
Net increase (decrease) in cash and cash equivalents (450) 812
Cash and cash equivalents, beginning of period 1,701 2,569
----------------- -------------
Cash and cash equivalents, end of period $ 1,251 $ 3,381
================= =============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 3,182 $ 3,739
================= =============
Supplemental disclosure of noncash investing and financing activities:
Capital lease asset additions $ 320 $ 51
================= =============
Decrease in accounts payable and other noncurrent liabilities in exchange
for issuance of common stock $ -- $ 4,240
================= =============
Increase in accounts payable for deferred loan fees to be
paid in future periods $ -- $ 150
================= =============
Increase in deferred loan fees for issuance of warrants $ -- $ 1,228
================= =============
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 Sept. 30, 1999 -- -- -- -- (21,292) (21,292)
Issuance of common stock 1,211,580 12 4,228 -- -- 4,240
Forfeiture of stock options -- -- (555) 555 -- --
Revision in terms
of warrants -- -- 479 -- -- 479
Issuance of warrants -- -- 1,228 -- -- 1,228
Amortization of unearned
stock compensation -- -- -- (23) -- (23)
-------------- ----------- ------------- -------------- -------------- --------------
Balance, September 30, 1999 14,517,786 $ 145 $ 64,218 $ (358) $ (54,692) $ 9,313
============== =========== ============= ============== ============== ==============
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.
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.
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.
In June 1999, the Company sold all of its interests in certain producing
and non-producing natural gas and oil properties for a total sales price
of $17.1 million. Due to the magnitude of the reserve volumes that were
attributable to these properties relative to the Company's remaining net
reserve volumes, the Company recognized as a loss the difference between
the sales price received, after adjustment for transaction costs, and the
$28.9 million basis allocated to the divested properties in accordance
with the full-cost method of accounting for oil and gas properties.
5
8
BRIGHAM EXPLORATION COMPANY
NOTES TO THE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
4. ISSUANCE OF COMMON STOCK
In March 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
through December 31, 1999, 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 seismic
processing services has been determined on a quarterly basis. Subsequent
to March 30, 1999, Brigham issued an additional 208,715 shares of common
stock valued at $3.50 per share to Veritas pursuant to its election to
settle certain seismic processing service obligations incurred during
the second and third quarters of 1999 in common stock instead of cash.
5. AMENDMENT TO REVOLVING CREDIT FACILITY
In July 1999, the Company and its senior lenders entered into an
amendment to the Company's revolving credit facility (the "Credit
Facility"). This amendment provides the Company with borrowing
availability of $56 million principally to fund its planned drilling
activities and anticipated working capital requirements through the end
of 1999. The Company's senior lenders have indicated that the borrowing
availability provided under the amended Credit Facility exceeds that
which would otherwise be made available under a more traditional
conforming borrowing base calculation based on the estimated value of
the Company's current net proved reserves and its cash flow. As
consideration for this amendment to the Credit Facility, in July 1999
the Company issued to its senior lenders one million warrants to
purchase the Company's common stock at an exercise price of $2.25 per
share. The warrants have a seven-year term from the date of issuance and
are exercisable at the holders' option at any time. An estimated value
of $1.2 million was attributed to these warrants by the Company and was
recognized as additional deferred loan fees which will be amortized over
the remaining period to maturity of the Credit Facility borrowings at
January 26, 2001.
6. HEDGING ACTIVITIES
In September 1999, the Company entered into five call options with a
counterparty for certain future oil and natural gas production. Under the
terms of the contracts, for any month where the average index price (WTI
or ANR Pipeline Company - Oklahoma) is greater than the strike price per
the contract, the Company is required to pay to the counterparty the
absolute value of that difference times the production volumes covered
under the contract. If the average index price is less than the strike
price for a given month, no settlement is required. These contracts are
6
9
summarized as follows:
Daily Total Volumes Hedged Average
Call Volumes ------------------------------- Fixed
Options Hedged Monthly Term 2000 2001 2000 Contract Price
----------- ------- -------------- ------ --------- --------- --------------
Contract #1 600 October 1999 - 55,200 54,000 -- $24.00
Bbls March 2000 Bbls Bbls per Bbl
Contract #2 600 April 2000 - 54,600 -- -- $22.00
Bbls June 2000 Bbls per Bbl
Contract #3 10,000 May 2001 - -- 1,840,000 -- $2,665
MMBtu October 2001 MMBtu per MMBtu
Contract #4 10,000 November 2000 - -- 610,000 1,200,000 $2,670
MMBtu April 2002 MMBtu MMBtu per MMBtu
Contract #5 10,000 May 2002 - -- -- 610,000 $2,670
MMBtu June 2002 MMBtu per MMBtu
7. 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, as amended by SFAS No. 137, effective January 1, 2001. The Company
is in the process of analyzing the potential impact of this standard on
its financial statement presentations.
7
10
BRIGHAM EXPLORATION COMPANY SUBSIDIARIES
CONDENSED BALANCE SHEETS
AS OF SEPTEMBER 30, 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 $ 3,175 $ 3,376 $ 5 $ 6
Accounts receivable 5,627 5,627 -- --
Prepaid expenses 480 480 -- --
--------- --------- --------- ---------
Total current assets 9,282 9,483 5 6
--------- --------- --------- ---------
Natural gas and oil properties, at cost, net 106,498 106,498 -- --
Other property and equipment, at cost, net 1,813 1,813 -- --
Investment in subsidiaries
and intercompany advances 329 -- 1,339 46,372
Drilling advances paid 532 532 -- --
Deferred loan fees 2,586 2,586 -- --
Other noncurrent assets 101 101 -- --
--------- --------- --------- ---------
$ 121,141 $ 121,013 $ 1,344 $ 46,378
========= ========= ========= =========
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable $ 13,621 $ 13,621 $ -- $ --
Accrued drilling costs 70 70 -- --
Participant advances received 1,804 1,804 -- --
Other current liabilities 1,444 1,444 -- --
--------- --------- --------- ---------
Total current liabilities 16,939 16,939 -- --
--------- --------- --------- ---------
Notes payable 55,000 55,000 -- --
Other noncurrent liabilities 1,449 1,449 -- --
Intercompany accounts payable 1,739 1,626 -- 1,760
Intercompany notes payable 44,028 44,028 -- 44,028
Minority interest -- 1,361 -- --
Equity
Partners' capital 1,986 -- 1,344 590
Common stock, $1.00 par value, 1,000 shares
authorized, issued and outstanding -- 1 -- --
Additional paid-in capital -- 17,832 -- --
Accumulated deficit -- (17,223) -- --
--------- --------- --------- ---------
Total equity 1,986 610 1,344 590
--------- --------- --------- ---------
$ 121,141 $ 121,013 $ 1,344 $ 46,378
========= ========= ========= =========
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 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.
9
12
BRIGHAM EXPLORATION COMPANY SUBSIDIARIES
CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 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 $ 4,109 $ 4,109 $ -- $ --
Workstation revenue 86 86 -- --
------- ------- ------- -------
4,195 4,195 -- --
------- ------- ------- -------
Costs and expenses:
Lease operating 525 525 -- --
Production taxes 300 300 -- --
General and administrative 901 901 -- --
Depletion of natural gas and oil properties 2,839 2,839 -- --
Depreciation and amortization 132 132 -- --
Amortization of stock compensation (123) (123) -- --
------- ------- ------- -------
4,574 4,574 -- --
------- ------- ------- -------
Operating income (loss) (379) (379) -- --
------- ------- ------- -------
Other income (expense):
Interest income 40 40 -- --
Interest expense (1,586) (1,586) -- --
Interest expense - intercompany (1,404) (1,404) -- (1,404)
Loss on sale of natural gas and oil properties -- 0 -- --
------- ------- ------- -------
(2,950) (2,950) -- (1,404)
------- ------- ------- -------
Minority interest in net loss -- (2,280) -- --
------- ------- ------- -------
Net loss before income taxes (3,329) (1,049) -- (1,404)
Equity in net loss of investee -- -- (2,280) 389
------- ------- ------- -------
Net loss $(3,329) $(1,049) $(2,280) $(1,015)
======= ======= ======= =======
See accompanying notes to the condensed financial statements.
10
13
BRIGHAM EXPLORATION COMPANY SUBSIDIARIES
CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 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 $ 4,162 $ 4,162 $ -- $ --
Workstation revenue 75 75 -- --
------- ------- ------- -------
4,237 4,237 -- --
------- ------- ------- -------
Costs and expenses:
Lease operating 564 564 -- --
Production taxes 255 255 -- --
General and administrative 1,069 1,069 -- --
Depletion of natural gas and oil properties 1,690 1,690 -- --
Depreciation and amortization 113 113 -- --
Amortization of stock compensation 65 65 -- --
------- ------- ------- -------
3,756 3,756 -- --
------- ------- ------- -------
Operating income (loss) 481 481 -- --
------- ------- ------- -------
Other income (expense):
Interest income 37 37 -- --
Interest expense (1,866) (1,866) -- --
------- ------- ------- -------
(1,829) (1,829) -- --
------- ------- ------- -------
Minority interest in net loss -- (923) -- --
------- ------- ------- -------
Net loss before income taxes (1,348) (425) -- --
Income tax benefit -- 145 -- --
Equity in net loss of investee -- -- (923) 96
------- ------- ------- -------
Net loss $(1,348) $ (280) $ (923) $ 96
======= ======= ======= =======
11
14
BRIGHAM EXPLORATION COMPANY SUBSIDIARIES
CONDENSED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 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 $ 10,855 $ 10,855 $ -- $ --
Workstation revenue 247 247 -- --
-------- -------- -------- --------
11,102 11,102 -- --
-------- -------- -------- --------
Costs and expenses:
Lease operating 1,679 1,679 -- --
Production taxes 685 685 -- --
General and administrative 2,700 2,705 5 5
Depletion of natural gas and oil properties 5,650 5,650 -- --
Depreciation and amortization 398 398 -- --
Amortization of stock compensation (10) (10) -- --
-------- -------- -------- --------
11,102 11,107 5 5
-------- -------- -------- --------
Operating income (loss) 0 (5) (5) (5)
-------- -------- -------- --------
Other income (expense):
Interest income 134 134 -- --
Interest expense (4,464) (4,464) -- --
Interest expense - intercompany (4,082) (4,082) -- (4,082)
Loss on sale of natural gas and oil properties (12,195) (12,195) -- --
-------- -------- -------- --------
(20,607) (20,607) -- (4,082)
-------- -------- -------- --------
Minority interest in net loss -- (14,116) -- --
-------- -------- -------- --------
Net loss before income taxes (20,607) (6,496) (5) (4,087)
Equity in net loss of investee -- -- (14,116) (2,203)
-------- -------- -------- --------
Net loss $(20,607) $ (6,496) $(14,121) $ (6,290)
======== ======== ======== ========
See accompanying notes to the condensed financial statements.
12
15
BRIGHAM EXPLORATION COMPANY SUBSIDIARIES
CONDENSED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 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 $ 11,292 $ 11,292 $ -- $ --
Workstation revenue 322 322 -- --
-------- -------- -------- --------
11,614 11,614 -- --
-------- -------- -------- --------
Costs and expenses:
Lease operating 1,542 1,542 -- --
Production taxes 705 705 -- --
General and administrative 3,351 3,357 6 6
Depletion of natural gas and oil properties 4,480 4,480 -- --
Depreciation and amortization 288 288 -- --
Amortization of stock compensation 298 298 -- --
-------- -------- -------- --------
10,664 10,670 6 6
-------- -------- -------- --------
Operating income (loss) 950 944 (6) (6)
-------- -------- -------- --------
Other income (expense):
Interest income 114 114 -- --
Interest expense (4,298) (4,298) -- (507)
-------- -------- -------- --------
(4,184) (4,184) -- (507)
-------- -------- -------- --------
Minority interest in net loss -- (2,215) -- --
-------- -------- -------- --------
Net loss before income taxes (3,234) (1,025) (6) (513)
Income tax benefit -- 337 -- --
Equity in net loss of investee -- -- (2,215) (479)
-------- -------- -------- --------
Net loss $ (3,234) $ (688) $ (2,221) $ (992)
======== ======== ======== ========
See accompanying notes to the condensed financial statements.
13
16
BRIGHAM EXPLORATION COMPANY SUBSIDIARIES
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 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 $(20,607) $ (6,496) $(14,121) $ (6,290)
Adjustments to reconcile net loss to cash
provided by operating activities:
Depletion of natural gas and oil properties 5,650 5,650 -- --
Depreciation and amortization 398 398 -- --
Amortization of stock compensation (10) (10) -- --
Amortization of deferred loan fees and debt issuance costs 878 878 -- --
Loss on sale of natural gas and oil properties 12,195 12,195 -- --
Minority interest in net loss -- (14,116) -- --
Equity in net loss of investee -- -- 14,116 2,203
Changes in working capital and other items:
Decrease in accounts receivable 2,311 2,311 -- --
Increase in prepaid expenses (190) (190) -- --
Decrease in accounts payable (2,466) (2,466) -- --
Increase in participant advances received 1,040 1,040 -- --
Decrease in other current liabilities (203) (203) -- --
Increase in intercompany accounts payable 49 11 -- 53
Other noncurrent assets (76) (76) -- --
Other noncurrent liabilities (5,663) (5,663) -- --
-------- -------- -------- --------
(6,694) (6,737) (5) (4,034)
-------- -------- -------- --------
Cash flows from investing activities:
Additions to natural gas and oil properties (18,310) (18,310) -- --
Proceeds from sale of natural gas and oil properties 27,122 27,122 -- --
Additions to other property and equipment (146) (146) -- --
Change in investment in subsidiaries and intercompany advances (191) 39 5 6
Change in drilling advances paid (302) (302) -- --
-------- -------- -------- --------
8,173 8,403 5 6
-------- -------- -------- --------
Cash flows from financing activities:
Increase in notes payable 12,750 12,750 -- --
Repayment of notes payable (16,750) (16,750) -- --
Increase in intercompany notes payable 4,028 4,028 -- 4,028
Principal payments on capital lease obligations (193) (193) -- --
Deferred loan fees paid (688) (688) -- --
-------- -------- -------- --------
(853) (853) -- 4,028
-------- -------- -------- --------
Net increase in cash and cash equivalents 626 813 -- --
Cash and cash equivalents, beginning of period 2,549 2,563 5 6
-------- -------- -------- --------
Cash and cash equivalents, end of period $ 3,175 $ 3,376 $ 5 $ 6
======== ======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 3,739 $ 3,739 $ -- $ --
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 $ 150 $ 150 $ -- $ --
Capital contribution received in exchange for accounts
payable and other noncurrent liabilities $ 5,469 $ -- $ -- $ --
Intercompany capital contributions $ -- $ 1,723 $ 3,746 $ 1,668
See accompanying notes to the condensed financial statements.
14
17
BRIGHAM EXPLORATION COMPANY SUBSIDIARIES
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 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 $ (3,234) $ (688) $ (2,221) $ (992)
Adjustments to reconcile net loss to cash
used by operating activities:
Depletion of natural gas and oil properties 4,480 4,480 -- --
Depreciation and amortization 288 288 -- --
Amortization of stock compensation 298 298 -- --
Amortization of deferred loan fees and debt issuance costs 425 425 -- --
Minority interest in net loss -- (2,215) -- --
Equity in net loss of investee -- -- 2,215 479
Changes in working capital and other items:
Increase in accounts receivable (3,198) (3,198) -- --
Increase in prepaid expenses (74) (74) -- --
Increase in accounts payable 1,759 1,759 -- --
Increase in participant advances received 437 437 -- --
Increase in other current liabilities 1,612 1,612 -- --
Decrease in deferred income tax liability -- (336) -- --
Other noncurrent assets 6 6 -- --
Other noncurrent liabilities (94) (94) -- --
-------- -------- -------- --------
2,705 2,700 (6) (513)
-------- -------- -------- --------
Cash flows from investing activities:
Additions to natural gas and oil properties (52,782) (52,782) -- --
Additions to other property and equipment (511) (511) -- --
Change in investment in subsidiaries and intercompany advances (408) (13) (5,223) (41,812)
Change in drilling advances paid (326) (326) -- --
-------- -------- -------- --------
(54,027) (53,632) (5,223) (41,812)
-------- -------- -------- --------
Cash flows from financing activities:
Capital contributions received 7,642 7,642 5,235 42,331
Increase in notes payable 83,800 83,800 -- --
Repayment of notes payable (78,800) (78,800) -- --
Increase in intercompany notes payable 40,000 40,000 -- --
Principal payments on capital lease obligations (176) (176) -- --
Deferred loan fees paid (1,990) (1,990) -- --
-------- -------- -------- --------
50,476 50,476 5,235 42,331
-------- -------- -------- --------
Net decrease in cash and cash equivalents (846) (456) 6 6
Cash and cash equivalents, beginning of period 1,701 1,701 -- --
-------- -------- -------- --------
Cash and cash equivalents, end of period $ 855 $ 1,245 $ 6 $ 6
======== ======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 3,182 $ 3,182 $ -- $ --
Supplemental disclosure of noncash investing and financing activities:
Capital lease asset additions $ 320 $ 320 $ -- $ --
Intercompany capital contributions $ -- $ -- $ 29,911 $ 13,318
See accompanying notes to the condensed financial statements.
15
18
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 -- -- -- -- 5,469 5,469
Net loss -- -- -- -- (20,607) (20,607)
---------- ----------- ----------- -------- -------- --------
Balance,
September 30, 1999 -- $ -- $ -- $ -- $ 1,986 $ 1,986
========== =========== =========== ======== ======== ========
Brigham Inc.
Balance,
December 31, 1998 1,000 $ 1 $ 16,109 $(10,727) $ -- $ 5,383
Capital contribution -- -- 1,723 -- -- 1,723
Net loss -- -- -- (6,496) -- (6,496)
---------- ----------- ----------- -------- -------- --------
Balance,
September 30, 1999 1,000 $ 1 $ 17,832 $(17,223) $ -- $ 610
========== =========== =========== ======== ======== ========
Brigham Holding I, LLC
Balance,
December 31, 1998 -- $ -- $ -- $ -- $ 11,719 $ 11,719
Capital contribution -- -- -- -- 3,746 3,746
Net loss -- -- -- -- (14,121) (14,121)
---------- ----------- ----------- -------- -------- --------
Balance,
September 30, 1999 -- $ -- $ -- $ -- $ 1,344 $ 1,344
========== =========== =========== ======== ======== ========
Brigham Holdings II, LLC
Balance,
December 31, 1998 -- $ -- $ -- $ -- $ 5,212 $ 5,212
Capital contribution -- -- -- -- 1,668 1,668
Net loss -- -- -- -- (6,290) (6,290)
---------- ----------- ----------- -------- -------- --------
Balance,
September 30, 1999 -- $ -- $ -- $ -- $ 590 $ 590
========== =========== =========== ======== ======== ========
See accompanying notes to the condensed financial statements.
16
19
BRIGHAM EXPLORATION COMPANY SUBSIDIARIES
NOTES TO THE CONDENSED 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. 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
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
17
20
BRIGHAM EXPLORATION COMPANY SUBSIDIARIES
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
(unaudited)
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.
In June 1999, the Company sold all of its interests in certain producing
and non-producing natural gas and oil properties for a total sales price
of $17.1 million. Due to the magnitude of the reserve volumes that were
attributable to these properties relative to the Company's remaining net
reserve volumes, the Company recognized as a loss the difference between
the sales price received, after adjustment for transaction costs, and the
$28.9 million basis allocated to the divested properties in accordance
with the full-cost method of accounting for oil and gas properties.
4. ISSUANCE OF COMMON STOCK
In March 1999, the Partnership 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 from the
Partnership to Veritas in 1999 for certain seismic acquisition and
processing services previously performed. In addition, this agreement
provides for the payment by the Partnership of up to $1 million in
future seismic processing services to be performed by Veritas through
December 31, 1999, in newly issued shares of the Company's common stock
valued at $3.50 per share, in the event that the Partnership does not
elect to pay for such services in cash. The settlement of these seismic
processing services has been determined on a quarterly basis. Subsequent
to March 30, 1999, the Company issued an additional 208,715 shares of
common stock valued at $3.50 per share to Veritas pursuant to the
Partnership's election to settle certain seismic processing service
obligations incurred during the second and third quarters of 1999 in the
Company's common stock instead of cash.
5. AMENDMENT TO REVOLVING CREDIT FACILITY
In July 1999, the Partnership and its senior lenders entered into an
amendment to the Partnership's revolving credit facility (the "Credit
Facility"). This amendment provides the Partnership with borrowing
availability of $56 million principally to fund its planned drilling
activities and anticipated working capital requirements through the end
of 1999. The Partnership's senior lenders have indicated that the
borrowing availability provided under the amended Credit Facility exceeds
that which would otherwise be made available under a more traditional
conforming borrowing base calculation based on the estimated value of the
Partnership's current net proved reserves and its cash flow. As
consideration for this amendment to the Credit Facility, in July 1999
Brigham Exploration Company issued to the Partnership's senior lenders
one million warrants to purchase the Company's common stock at an
exercise price of $2.25 per share. The warrants have a seven-year term
from the date of issuance and are exercisable at the holders' option at
any time. An estimated value of $1.2 million was attributed to these
warrants by the Partnership and was recognized as additional deferred
loan fees which will be amortized over the remaining period to maturity
of the Credit Facility borrowings at January 26, 2001.
6. HEDGING ACTIVITIES
In September 1999, the Partnership entered into five call options with a
counterparty for certain future oil and natural gas production. Under the
terms of the contracts, for any month where the average index price (WTI
or ANR Pipeline Company - Oklahoma) is greater than the strike price per
the contract, the Partnership is required to pay to the counterparty the
absolute value of that difference times the production volumes covered
under the contract. If the average index price is less than the strike
price for a given month, no settlement is required. These contracts are
18
21
summarized as follows:
Daily Total Volumes Hedged Average
Call Volumes ------------------------- Fixed
Options Hedged Monthly Term 2000 2001 2000 Contract Price
- ------- -------- ------------- ------ ------- ------- --------------
Contract #1 600 October 1999 - 55,200 54,000 - $24.00
Bbls March 2000 Bbls Bbls per Bbl
Contract #2 600 April 2000 - 54,600 - - $22.00
Bbls June 2000 Bbls per Bbl
Contract #3 10,000 May 2001 - - 1,840,000 - $2.665
MMBtu October 2001 MMBtu per MMBtu
Contract #4 10,000 November 2000 - - 610,000 1,200,000 $2.670
MMBtu April 2002 MMBtu MMBtu per MMBtu
Contract #5 10,000 May 2002 - - - 610,000 $2.670
MMBtu June 2002 MMBtu per MMBtu
7. 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, as amended by SFAS No. 137, effective January 1,
2001. The Partnership is in the process of analyzing the potential impact
of this standard on its financial statement presentations.
19
22
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
RESULTS OF OPERATIONS
Comparison of three month periods ended September 30, 1998 and September 30,
1999
Natural gas and oil sales. Natural gas and oil sales decreased 1% from
$4.2 million in the third quarter of 1998 to $4.1 million in the third quarter
of 1999. Of this net decrease, $483,000 was attributable to a decrease in
production volumes, offset in part by $430,000 attributable to an increase in
the average sales price for natural gas and oil. Production volumes for natural
gas decreased 5% from 1,198 MMcf in the third quarter of 1998 to 1,142 MMcf in
the third quarter of 1999. Net natural gas volumes for the third quarter of 1998
included approximately 205 MMcf attributable to properties sold by Brigham in
June 1999. Therefore, after adjusting for the effects of the property
divestitures, net natural gas volumes increased 15% in the third quarter of
1999, compared to the same period in 1998, as a result of the completion of
wells drilled early in 1999 and recompletion and workover projects performed by
the Company on certain producing wells. The average price received for natural
gas decreased 13% from $2.32 per Mcf in the third quarter of 1998 to $2.01 per
Mcf in the third quarter of 1999. As a result of natural gas hedging activities,
losses of $610,000, or $0.53 per Mcf, were realized in the third quarter of
1999, compared to gains of $236,000, or $0.20 per Mcf, in the third quarter of
1998. Production volumes for oil decreased 24% from 114 MBbls in the third
quarter of 1998 to 87 MBbls in the third 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 the previous 12 months in favor of natural gas
projects. Additionally, Brigham's June 1999 property divestitures resulted in a
9 MBbl reduction of net oil production volumes in the third quarter of 1999
compared to the third quarter of 1998. The average price received for oil
increased 71% from $12.14 per Bbl in the third quarter of 1998 to $20.76 per Bbl
in the third quarter of 1999.
Workstation revenue. Workstation revenue increased 15% from $75,000 in the
third quarter of 1998 to $86,000 in the third 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.
Lease operating expenses. Lease operating expenses decreased 7% from
$564,000 for the third quarter of 1998 to $525,000 for the third quarter of 1999
and, on a per unit of production basis, lease operating expenses for the same
periods increased 7% from $0.30 per Mcfe to $0.32 per Mcfe. The decrease in
lease operating expenses was primarily due to a decrease in the number of
producing wells in the third quarter of 1999, as compared with the same period
in 1998, as a result of Brigham's June 1999 property divestitures.
Production taxes. Production taxes increased 18% from $255,000 ($0.14 per
Mcfe) for the third quarter of 1998 to $300,000 ($0.18 per Mcfe) for the third
quarter of 1999, primarily as a result of a 36% increase in the average price
received for natural gas and oil sales before the effects of hedging gains and
losses, partially offset by the 12% decrease in equivalent natural gas and oil
production volumes during the third quarter of 1999.
General and administrative expenses. General and administrative expenses
decreased 16% from $1.1 million for the third quarter of 1998 to $901,000 for
the third quarter of 1999 primarily due to the reduction of various
administrative costs, including the elimination of accrued employee bonuses for
1999, a 10% payroll reduction effective mid-May 1999, and a $66,000 increase in
overhead fees billed to working interest participants on Company-operated wells.
On a per unit of production basis, general and administrative
20
23
expenses decreased from $0.57 per Mcfe for the third quarter of 1998 to $0.54
per Mcfe for the third quarter of 1999.
Depletion of natural gas and oil properties. Depletion of natural gas and
oil properties increased from $1.7 million ($0.90 per Mcfe) in the third quarter
of 1998 to $2.8 million ($1.71 per Mcfe) in the third quarter of 1999. Of this
net increase, $1.4 million was due to an increase in the depletion rate per unit
of production, partially offset by $196,000 due to a 12% decrease in production
volumes. The increased depletion rate reflected the effect of revising the 1999
year to date depletion rate to recognize lower reserve volume estimates
resulting from Brigham's reduced level of drilling activity during 1999 and the
Company's June 1999 property divestitures.
Interest expense. Net interest expense increased 65% from $1.9 million in
the third quarter of 1998 to $3.2 million in the third quarter of 1999. This
increase was due to a higher average debt balance with a higher average interest
rate in the third quarter of 1999 compared with the third quarter of 1998. The
weighted average outstanding debt balance increased from $71.6 million in the
third quarter of 1998 to $94.7 million in the third quarter of 1999. The average
effective annual interest rate on borrowings outstanding during the third
quarter of 1998 was 10.8% compared to 13.4% for the third quarter of 1999.
Interest expense in the third quarter of 1999 included $2.1 million of non-cash
charges, including (i) $1.4 million of interest expense related to the
Subordinated Notes that was paid through the issuance of additional Subordinated
Notes (or "paid-in-kind"), (ii) $533,000 for amortization of deferred financing
fees, and (iii) $166,000 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 $479,000 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. In
connection with the amendment to the Credit Facility executed in July 1999, the
Company issued to its senior lenders one million warrants to purchase the
Company's common stock at an exercise price of $2.25 per share. An estimated
value of $1.2 million was attributed to these warrants by the Company and was
recognized as additional deferred loan fees which will be amortized and included
in interest expense over the remaining period to maturity of the Credit Facility
borrowings at January 26, 2001.
Comparison of nine month periods ended September 30, 1998 and September 30, 1999
Natural gas and oil sales. Natural gas and oil sales decreased 4% from
$11.3 million in the first nine months of 1998 to $10.9 million in the first
nine months of 1999. Of this net decrease, $938,000 was attributable to a
decrease in production volumes, offset in part by $501,000 attributable to an
increase in the average sales price for natural gas and oil. Production volumes
for natural gas increased 2% from 3,145 MMcf in the first nine months of 1998 to
3,194 MMcf in the first nine months of 1999. Net natural gas volumes decreased
in the first nine months of 1999 compared to the first nine months of 1998 by
219 MMcf attributable to the properties sold by Brigham in June 1999. Therefore,
after adjusting for the effects of the property divestitures, net natural gas
volumes for the period increased by 11% as a result of the completion of wells
drilled early in 1999, and recompletion and workover projects performed by the
Company on certain producing wells. The average price received for natural gas
decreased 6% from $2.18 per Mcf in the first nine months of 1998 to $2.06 per
Mcf in the first nine months of 1999. As a result of natural gas hedging
activities, losses
21
24
of $42,000, or $0.01 per Mcf, were realized in the first nine months of 1999,
compared to gains of $275,000, or $0.09 per Mcf in the first nine months of
1998. Production volumes for oil decreased 23% from 346 MBbls in the first nine
months of 1998 to 266 MBbls in the first nine months 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 1999 and the curtailment of certain
producing oil wells in early 1999, both in response to low oil prices.
Additionally, Brigham's June 1999 property divestitures resulted in a 9 MBbl
reduction of net oil production volumes for the first nine months of 1999
compared to the first nine months of 1998. The average price received for oil
increased 26% from $12.82 per Bbl in the first nine months of 1998 to $16.12 per
Bbl in the first nine months of 1999.
Workstation revenue. Workstation revenue decreased 23% from $322,000 in
the first nine months of 1998 to $247,000 in the first nine months 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 most 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 9% from $1.5
million for the first nine months of 1998 to $1.7 million for the first nine
months of 1999, and, on a per unit of production basis, lease operating expenses
for the same periods increased 17% from $0.30 per Mcfe to $0.35 per Mcfe. The
increase in lease operating expenses was primarily attributable to higher costs
incurred related to recompletion and workover projects performed during 1999 on
certain producing wells. This increase was partially offset by a 5% decrease in
lease operating expenses resulting from Brigham's June 1999 property
divestitures.
Production taxes. Production taxes decreased 3% from $705,000 ($0.14 per
Mcfe) for the first nine months of 1998 to $685,000 ($0.14 per Mcfe) for the
first nine months of 1999, primarily as a result of the 8% decrease in
equivalent natural gas and oil production volumes, partially offset by the 5%
increase in the average price received for equivalent natural gas and oil sales
during the first nine months of 1999.
General and administrative expenses. General and administrative expenses
decreased 19% from $3.4 million for the first nine months of 1998 to $2.7
million for the first nine months of 1999 primarily due to the reduction of
various administrative costs, including the elimination of accrued employee
bonuses for 1999, a 10% payroll reduction effective mid-May 1999, and a $331,000
increase in overhead fees billed to working interest participants on
Company-operated wells. On a per unit of production basis, general and
administrative expenses decreased 12% from $0.64 per Mcfe for the first nine
months of 1998 to $0.57 per Mcfe for the first nine months of 1999.
Depletion of natural gas and oil properties. Depletion of natural gas and
oil properties increased from $4.5 million ($0.86 per Mcfe) in the first nine
months of 1998 to $5.7 million ($1.18 per Mcfe) in the first nine months of
1999. Of this net increase, $1.5 million was due to a 37% increase in the
depletion rate per unit of production, which was partially offset by $372,000
due to the decrease in production volumes. The increased depletion rate
reflected the recognition of lower reserve volume estimates as a result of
Brigham's reduced level of drilling activity during 1999 and the Company's June
1999 property divestitures.
Interest expense. Net interest expense increased 115% from $4.3 million in
the first nine months of 1998 to $9.1 million in the first nine months of 1999.
This increase was due to a higher average debt balance with
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a higher average interest rate in the first nine months of 1999 compared with
the first nine months of 1998. The weighted average outstanding debt balance
increased from $58.1 million in the first nine months of 1998 to $99.5 million
in the first nine months of 1999. The average effective annual interest rate on
borrowings outstanding during the first nine months of 1999 was 12.2% compared
to 10% for the first nine months of 1998. Interest expense in the first nine
months of 1999 included $5.6 million of non-cash charges, including (i) $4.1
million of interest expense related to the Subordinated Notes that was paid
through the issuance of additional Subordinated Notes (or "paid-in-kind"), (ii)
$1.2 million for amortization of deferred financing fees, and (iii) $393,000 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 $479,000 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. In connection with the amendment to the
Credit Facility executed in July 1999, the Company issued to its senior lenders
one million warrants to purchase the Company's common stock at an exercise price
of $2.25 per share. An estimated value of $1.2 million was attributed to these
warrants by the Company and was recognized as additional deferred loan fees
which will be amortized and included in interest expense over the remaining
period to maturity of the Credit Facility borrowings at January 26, 2001.
Loss on sale of natural gas and oil properties. In June 1999, the Company
sold all of its interests in certain producing and non-producing natural gas and
oil properties for a total sales price of $17.1 million. Due to the magnitude of
the reserve volumes that were attributable to these properties relative to the
Company's remaining net reserve volumes, the Company recognized as a loss the
difference between the sales price received, after adjustment for transaction
costs, and the $28.9 million basis allocated to the divested properties in
accordance with the full-cost method of accounting for oil and natural gas
properties. No property divestitures occurred during the first nine months of
1998 for which recognition of gain or loss was appropriate.
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 during the
second half of 1998 and the early part of 1999, 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 during the second
half of 1998, resulting in lower levels of project cost recoupment than
budgeted, (iv) high levels of expenditures in 1997 and 1998 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 on a number of high equity interest exploratory and development
wells.
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
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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 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 Basin and Gulf Coast projects, concentrated primarily in trends where
Brigham has achieved exploration success, (ii) elimination of substantially all
planned seismic and land expenditures for new projects until its capital
resources can support such additional activity, (iii) divestitures of certain
producing natural gas and oil properties 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)
implementation of an overhead reduction plan to reduce general and
administrative expenses, and (vi) evaluating opportunities to raise additional
capital either through the sales of project equity interests, further
restructuring of its senior debt or the issuance of equity or equity-linked
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 1999, and has
effected certain of them to date, the successful completion of any or all of
these efforts to improve the Company's liquidity and 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 through December 31, 1999, 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
seismic processing services has been determined on a quarterly basis. Subsequent
to March 30, 1999, Brigham issued an additional 208,715 shares of common stock
valued at $3.50 per share to Veritas pursuant to its election to settle certain
seismic processing service obligations incurred during the second and third
quarters of 1999 in common stock instead of cash. Brigham considers this
arrangement to have been beneficial as it has enabled 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 its revolving credit
facility and other debt borrowings, public and private equity financings, the
sale of interests in projects and properties, 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. In January 1998, the Company entered into a new revolving credit
facility that provided for an initial borrowing availability of $75 million that
was used to repay its then outstanding borrowings under its previous credit
facility and to fund capital expenditures. This Credit Facility has been
subsequently amended, most recently in July 1999, to provide for a borrowing
availability of $56 million. 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
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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. In late June 1999, the Company received $17.1 million ($16.8
million after the adjustment for transaction costs and post-closing adjustments)
from the sale of its interests in producing and non-producing natural gas and
oil properties within two non-operated fields in its Anadarko Basin province.
Cash Flow Analysis
In the first nine months of 1999, cash flow used by operating activities
was $2.7 million primarily as a result of a $5.7 million decrease in other
noncurrent liabilities partially offset by a net $458,000 increase in non-cash
working capital and a net $2.5 million from total revenues, less lease operating
expenses, production taxes, general and administrative expenses and cash
interest expenses. Cash flow provided by investing activities was $8.4 million
in the first nine months of 1999 primarily as a net result of $18.3 million of
capital expenditures related to exploration activities and $27.1 million of
proceeds received from the sale of interests in certain seismic projects and
natural gas and oil properties. Cash flow used in financing activities was $4.9
million in the first nine months of 1999 resulting from a $4.0 million net
reduction in notes payable attributable to the repayment of outstanding
borrowings under the Credit Facility and 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 new revolving credit agreement
(the "Credit Facility"), which provided for an initial borrowing availability of
$75 million. The Credit Facility was amended in March 1999 to reduce the
borrowing availability, extend the date of borrowing base redetermination,
modify certain financial covenants, include certain additional covenants that
place significant restrictions on the Company's ability to incur certain capital
expenditures, and to increase the interest rate on outstanding borrowings.
As a result of the completion of the majority of the Company's strategic
initiatives to improve its capital resources, including the late June 1999
property divestitures and the application of the net sales proceeds to reduce
borrowings outstanding under the Credit Facility, the Company and its senior
lenders entered into an amendment to the Credit Facility in July 1999. This
amendment provides the Company with borrowing availability of $56 million
principally to fund its planned drilling activities and anticipated working
capital requirements through the end of 1999. The Company's lenders have
indicated that the borrowing availability provided under the amended Credit
Facility exceeds that which would otherwise be made available under a more
traditional conforming borrowing base calculation based on the estimated value
of the Company's current net proved reserves and its cash flow. As consideration
for this amendment to the Credit Facility, in July 1999 the Company issued to
its senior lenders one million warrants to purchase the Company's common stock
at an exercise price of $2.25 per share. The warrants have a seven-year term
from the date of issuance and are exercisable at the holders' option at any
time. An estimated value of $1.2 million was attributed to these warrants by the
Company and was recognized as additional deferred loan fees which will be
amortized over the remaining period to maturity of the Credit Facility
borrowings at January 26, 2001.
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 is either the lender's base rate or LIBOR plus 3.00%,
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 and other
tangible assets of the Company. The borrowing availability will be redetermined
by the senior lenders at January 31, 2000, based on the Company's then estimated
net proved reserve value and cash flow.
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At November 10, 1999, the Company had $55 million in borrowings
outstanding under the Credit Facility, which bear interest at an average annual
rate of 8.54%.
The Credit Facility has certain financial covenants including current and
interest coverage ratios, as defined. The Company and its lenders effected the
March 1999 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 its
amendments are indicative of its senior lenders' cooperation in the current oil
and natural gas industry environment. If oil and natural prices deteriorate
beyond the date of redetermination of borrowing availability or the Company does
not generate its expected growth in proved reserves through its drilling
activities planned for the remainder of 1999, the Company believes its senior
lenders may require the Company to reduce its level of borrowing under the
Credit Facility accordingly. Should the Company be unable to comply with certain
of the financial covenants, its senior 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 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. 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 interest in kind
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.
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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.
At September 30, 1999 and November 10, 1999, the Company has $44 million
principal amount of Subordinated Notes outstanding.
Capital Expenditures
As a result of the Company's limited available capital resources, Brigham
has significantly reduced its capital expenditure budget for 1999 from the
Company's previously anticipated levels in an effort to match its current and
expected future capital resources. The Company's current 1999 capital budget is
estimated to be $25 million, or approximately 30% of 1998 expenditures. The
Company's budgeted 1999 capital expenditures consist of approximately $15.5
million to drill an estimated 25 to 30 gross wells, $6 million for seismic and
land costs, consisting primarily of previous year commitments and obligations to
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 to prospects identified among
its 3-D projects primarily in its Anadarko Basin and Gulf Coast provinces, and
such expenditures will be devoted to the drilling of the highest grade prospects
in the Company's inventory of 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 Anadarko Basin property
divestitures completed in late June 1999, the sale of interests in certain 3-D
seismic projects for $11.5 million completed in January 1999 and the potential
sales of additional interests in certain 3-D seismic projects during the second
half of 1999). The Company's capital availability during 1999 will depend to a
large extent on its success raising additional financing through its planned and
potential strategic initiatives discussed above, and therefore 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.
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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 developed a plan to address this issue and has reviewed 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 internal identification and remediation
phases of its plan by identifying all computerized systems and completing an
inventory of its equipment and component parts. The Company reviewed the
manufacturer's information and/or performance testing with respect to its
inventory. Where material problems were identified, the Company has undertaken
remediation, replacement or alternative procedures for non-compliant equipment
or facilities on a business priority basis. In addition, in the ordinary course
of replacing computer equipment and software, the Company attempts to obtain
replacements that are Year 2000 compliant
As of September 30, 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 flow. However, in certain
instances the Company may determine that replacing existing equipment may be
appropriate and may capitalize such replacements. The Company currently
estimates that its total out-of-pocket costs to become Year 2000 compliant will
be insignificant. The Company currently expects that such costs will not have a
material adverse effect on the Company's financial condition, operations or
liquidity.
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 has identified third parties whose business significantly impacts
the Company and has attempted to contact those significant third parties to
determine the extent to which interfaces with such entities are vulnerable to
Year 2000 issues. All significant third party responses received to date have
indicated that such entities are either Year 2000 compliance or expect to be
Year 2000 compliant prior to January 1, 2000. The Company is in the process of
performing follow-up inquiries with respect to those significant third parties
that have not responded to the Company's previous Year 2000 compliance
information requests. The Company expects to have completed the remaining follow
up inquiries by November 30, 1999, and will endeavor to undertake any
appropriate remediation efforts that may be required as a result of those third
party investigations.
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. In the event third
parties are unable to timely resolve their Year 2000 problems, such failure
could partially affect the Company's ability to conduct its operations, sell its
oil and natural gas and receive related payments. Year 2000 failures could also
cause a shutdown of the pipeline systems into which the Company markets its
natural gas and oil production. In addition, there could be disruptions in
getting certain vendors to provide supplies and /or services in support of the
Company's operation. While this is the most likely worst case scenario, based
upon the responses received from industry partners and an analysis of the
services and products that are provided by those from whom the Company has not
yet received a response, the Company is not
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currently aware of a likely business disruption. Since the elements of such a
scenario are outside of the Company's control and an effective contingency plan
would not be economically feasible, the Company has not developed a contingency
plan for dealing with a worst case scenario. 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.
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PART II. OTHER INFORMATION:
Item 2. Changes in Securities
In July 1999, the Company issued to Bank of Montreal and Societe
General, Southwest Agency (the "Lenders"), warrants to purchase a
total of one million shares of Brigham Exploration Company common
stock at an exercise price of $2.25 per share. The warrants have a
seven year term from the date of issuance and are exercisable at the
holders' option at any time. The warrants were issued as consideration
for an amendment executed in July 1999 to the revolving credit
agreement between the Company and the Lenders. These shares were
issued pursuant to the exemption provided by Section 4(2) of the
Securities Act of 1933, as amended.
Pursuant to the Company's agreement dated March 30, 1999 with Veritas
DGC Land, Inc. ("Veritas"), in August 1999 the Company exchanged
89,165 shares of newly issued Brigham Exploration Company common stock
valued at $3.50 per share for approximately $312,000 of payment
obligations due to Veritas in 1999 for certain seismic acquisition and
processing services. 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
10.1 Agreement dated as of August 16, 1999 between Brigham
Exploration Company and Jon L. Glass for the
amendment of an Employee Stock Ownership Agreement
and Option Agreements.
10.2 Agreement dated as of August 16, 1999 between Brigham
Exploration Company and Craig M. Fleming for the
amendment of an Employee Stock Ownership Agreement
and Option Agreement.
10.3 Form Change of Control Agreement dated as of
September 20, 1999 between Brigham Exploration
Company and certain Officers.
10.4 Warrant Agreement for the Purchase of Common Stock
dated as of July 19, 1999 by and between Brigham
Exploration Company and Bank of Montreal.
10.5 Warrant Agreement for the Purchase of Common Stock
dated as of July 19, 1999 by and between Brigham
Exploration Company and Societe Generale, Southwest
Agency.
27 Financial Data Schedule
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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 12th day of November, 1999.
BRIGHAM EXPLORATION COMPANY
By: /s/ BEN M. BRIGHAM
---------------------------------------
Ben M. Brigham
Chief Executive Officer, President and
Chairman of the Board
By: /s/ CURTIS F. HARRELL
---------------------------------------
Curtis F. Harrell
Chief Financial Officer
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INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION
------- -----------
10.1 Agreement dated as of August 16, 1999 between Brigham
Exploration Company and Jon L. Glass for the amendment of an
Employee Stock Ownership Agreement and Option Agreements.
10.2 Agreement dated as of August 16, 1999 between Brigham
Exploration Company and Craig M. Fleming for the amendment
of an Employee Stock Ownership Agreement and Option
Agreements.
10.3 Change of Control Agreement dated as of September 20, 1999
between Brigham Exploration Company and certain Officers.
10.4 Warrant Agreement for the Purchase of Common Stock dated as
of July 19, 1999 by and between Brigham Exploration Company
and Bank of Montreal.
10.5 Warrant Agreement for the Purchase of Common Stock dated as
of July 19, 1999 by and between Brigham Exploration Company
and Societe Generale, Southwest Agency.
27 Financial Data Schedule