================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2002 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 Classification Code Number) Identification organization) Number) 6300 BRIDGEPOINT PARKWAY BUILDING TWO, SUITE 500 AUSTIN, TEXAS 78730 (512) 427-3300 (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 for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X . No . --- --- As of August 2, 2002, 16,061,242 shares of Common Stock, $.01 per share, were outstanding. ================================================================================ BRIGHAM EXPLORATION COMPANY SECOND QUARTER 2002 FORM 10-Q REPORT TABLE OF CONTENTS ----------------- PAGE ---- PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Consolidated Balance Sheets - June 30, 2002 and December 31, 2001 . . . . . . . . . . . . . 1 Consolidated Statements of Operations - Three and six months ended June 30, 2002 and 2001 . 2 Consolidated Statement of Changes in Stockholders' Equity - Six months ended June 30, 2002. 3 Consolidated Statements of Cash Flows - Six months ended June 30, 2002 and 2001 . . . . . . 4 Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . 5 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. . . . . . . . . . . . . . . . . 16 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . . . . . . . . . . . . . . . . 17 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 PART I. FINANCIAL INFORMATION Item 1. Financial Statements BRIGHAM EXPLORATION COMPANY CONSOLIDATED BALANCE SHEETS (in thousands, except per share data) (unaudited) June 30, December 31, 2002 2001 ---------- -------------- ASSETS Current assets: Cash and cash equivalents $ 5,700 $ 5,112 Accounts receivable 11,981 9,325 Other current assets 3,601 2,531 ---------- -------------- Total current assets 21,282 16,968 Oil and natural gas properties, net (full cost method) 158,314 151,891 Other property and equipment, net 1,344 1,331 Deferred loan fees 2,741 3,166 Other noncurrent assets 580 52 ---------- -------------- $ 184,261 $ 173,408 ========== ============== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 12,408 $ 8,267 Royalties payable 1,359 145 Accrued drilling costs 2,458 1,969 Other current liabilities 6,710 4,885 ---------- -------------- Total current liabilities 22,935 15,266 ---------- -------------- Notes payable 75,000 75,000 Senior subordinated notes 21,218 16,721 Other noncurrent liabilities 367 206 Commitments and contingencies Series A Preferred Stock, mandatorily redeemable, $.01 par value, $20 stated and redemption value, 2,250,000 shares authorized, 1,696,034 and 1,630,692 shares issued and outstanding at June 30, 2002 and December 31, 2001, respectively 18,033 16,614 Stockholders' equity: Preferred stock, $.01 par value, 10 million shares authorized, of which 2,250,000 are designated as Series A - - Common stock, $.01 par value, 50 million shares authorized, 17,172,579 and 17,127,650 shares issued and 16,061,042 and 16,016,113 shares outstanding at June 30, 2002 and December 31, 2001, respectively 172 171 Additional paid-in capital 79,703 80,466 Unearned stock compensation (379) (494) Accumulated other comprehensive income (loss) (2,043) 351 Accumulated deficit (26,580) (26,728) Treasury stock, at cost; 1,111,537 shares at June 30, 2002 and December 31, 2001 (4,165) (4,165) ---------- -------------- Total stockholders' equity 46,708 49,601 ---------- -------------- $ 184,261 $ 173,408 ========== ============== <FN> The accompanying notes are an integral part of these consolidated financial statements. 1 BRIGHAM EXPLORATION COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) (unaudited) Three Months Ended Six Months Ended June 30, June 30, ------------------------ ---------------------- 2002 2001 2002 2001 ------------ ---------- ---------- ---------- Revenues: Oil and natural gas sales $ 8,769 $ 10,467 $ 15,203 $ 17,372 Other 17 37 27 175 ------------ ---------- ---------- ---------- 8,786 10,504 15,230 17,547 ------------ ---------- ---------- ---------- Costs and expenses: Lease operating 796 784 1,667 1,490 Production taxes 499 622 852 1,088 General and administrative 1,718 957 2,682 1,774 Depletion of oil and natural gas properties 3,394 3,182 6,531 5,659 Depreciation and amortization 101 83 204 235 ------------ ---------- ---------- ---------- 6,508 5,628 11,936 10,246 ------------ ---------- ---------- ---------- Operating income 2,278 4,876 3,294 7,301 ------------ ---------- ---------- ---------- Other income (expense): Interest income 74 105 93 167 Interest expense, net (1,649) (1,779) (3,070) (3,585) Other income (expense) 79 5,764 (169) 5,985 ------------ ---------- ---------- ---------- (1,496) 4,090 (3,146) 2,567 ------------ ---------- ---------- ---------- Income before income taxes 782 8,966 148 9,868 Income taxes - - - - ------------ ---------- ---------- ---------- Net income 782 8,966 148 9,868 Accretion and dividends on redeemable preferred stock 721 639 1,419 1,117 ------------ ---------- ---------- ---------- Net income (loss) available to common stockholders $ 61 $ 8,327 $ (1,271) $ 8,751 ============ ========== ========== ========== Net income (loss) per share available to common stockholders: Basic $ 0.00 $ 0.52 $ (0.08) $ 0.55 Diluted $ 0.00 $ 0.46 $ (0.08) $ 0.51 <FN> The accompanying notes are an integral part of these consolidated financial statements. 2 BRIGHAM EXPLORATION COMPANY CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (in thousands) (unaudited) Accumulated Common Stock Additional Unearned Other ------------------ Paid-in Stock Comprehensive Accumulated Treasury Shares Amounts Capital Compensation Income (Loss) Deficit Stock -------- -------- ------------ -------------- --------------- ------------- ---------- Balance, December 31, 2001 17,128 $ 171 $ 80,466 $ (494) $ 351 $ (26,728) $ (4,165) Exercise of employee stock options 45 1 106 - - - - Expiration of employee stock options - - (46) - - - - Revision of terms of employee stock options - - 596 - - - - Dividends on Series A mandatorily redeemable preferred stock - - (1,307) - - - - Accretion on Series A mandatorily redeemable preferred stock - - (112) - - - - Amortization of unearned stock compensation - - - 115 - - - Net income - - - - - 148 - Other comprehensive loss: Unrealized loss on cash flow hedges - - - - (2,394) - - Comprehensive loss -------- -------- ------------ -------------- --------------- ------------- ---------- Balance, June 30, 2002 17,173 $ 172 $ 79,703 $ (379) $ (2,043) $ (26,580) $ (4,165) ======== ======== ============ ============== =============== ============= ========== Total Stockholders' Comprehensive Equity Loss --------------- --------------- Balance, December 31, 2001 $ 49,601 Exercise of employee stock options 107 Expiration of employee stock options (46) Revision of terms of employee stock options 596 Dividends on Series A mandatorily redeemable preferred stock (1,307) Accretion on Series A mandatorily redeemable preferred stock (112) Amortization of unearned stock compensation 115 Net income 148 $ 148 Other comprehensive loss: Unrealized loss on cash flow hedges (2,394) (2,394) --------------- Comprehensive loss $ (2,246) --------------- =============== Balance, June 30, 2002 $ 46,708 =============== <FN> The accompanying notes are an integral part of these consolidated financial statements. 3 BRIGHAM EXPLORATION COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited) Six Months Ended June 30, ---------------------- 2002 2001 ---------- ---------- Cash flows from operating activities: Net income $ 148 $ 9,868 Adjustments to reconcile net income to cash provided by operating activities: Depletion of oil and natural gas properties 6,531 5,659 Depreciation and amortization 204 235 Interest paid through the issuance of additional senior subordinated notes 497 278 Amortization of deferred loan fee and debt issuance costs 585 686 Market value adjustment for derivative instruments (384) (7,028) Stock option compensation expense 596 - Changes in working capital and other items: Accounts receivable (2,656) (4,029) Other current assets (1,371) (889) Accounts payable 4,141 (1,554) Royalties payable 1,214 (35) Other current liabilities 548 3,334 Other 3 (6) ---------- ---------- Net cash provided by operating activities 10,056 6,519 ---------- ---------- Cash flows from investing activities: Additions to oil and natural gas properties (13,047) (18,559) Proceeds from sale of assets 617 - Additions to other property and equipment (183) (127) Increase (decrease) in drilling advances paid (580) 723 ---------- ---------- Net cash used by investing activities (13,193) (17,963) ---------- ---------- Cash flows from financing activities: Proceeds from exercise of employee stock options 107 70 Proceeds from issuance of preferred stock and warrants, net - 9,838 Proceeds from issuance of senior subordinated notes 4,000 9,000 Principal payments on capital lease obligations (22) (69) Deferred loan fees paid (360) - ---------- ---------- Net cash provided by financing activities 3,725 18,839 ---------- ---------- Net increase in cash and cash equivalents 588 7,395 Cash and cash equivalents, beginning of period 5,112 837 ---------- ---------- Cash and cash equivalents, end of period $ 5,700 $ 8,232 ========== ========== <FN> The accompanying notes are an integral part of these consolidated financial statements. 4 BRIGHAM EXPLORATION COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1. ORGANIZATION AND NATURE OF OPERATIONS Brigham Exploration Company ("Brigham"), a Delaware corporation formed on February 25, 1997, explores and develops onshore domestic oil and natural gas properties using 3-D seismic imaging and other advanced technologies. Brigham focuses its exploration and development of onshore oil and natural gas properties primarily in the Anadarko Basin, the Texas Gulf Coast and West Texas. 2. BASIS OF PRESENTATION The accompanying financial statements include the accounts of Brigham and its wholly-owned subsidiaries, and its proportionate share of assets, liabilities and income and expenses of the limited partnerships in which Brigham, or any of its subsidiaries, has a participating interest. All significant intercompany accounts and transactions have been eliminated. The accompanying 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 consolidated financial statements should be read in conjunction with Brigham's 2001 Annual Report on Form 10-K pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. 3. COMMITMENTS AND CONTINGENCIES Brigham is, from time to time, party to certain lawsuits and claims arising in the ordinary course of business. While the outcome of lawsuits and claims cannot be predicted with certainty, management does not expect these matters to have a materially adverse effect on the financial condition, results of operations or cash flows of Brigham. On November 20, 2001, Brigham filed a lawsuit in the District Court of Travis County, Texas against Steve Massey Company, Inc. ("Massey") for breach of contract. The Petition claims Massey furnished defective casing to Brigham, which ultimately led to the casing failure of the Palmer "347" No. 5 well (the "Palmer #5") and the loss of the Palmer #5 as a producing well. Brigham believes the amount of damages incurred due to the loss of the Palmer #5 may exceed $5 million. Massey joined as additional defendants to the lawsuit other parties that had responsibility for the manufacture, importation or fabrication of the casing for its use in the Palmer #5. The case is currently in discovery and the trial has been set for May 2003. On February 20, 2002, Massey filed an Original Petition to Foreclose Lien in Brooks County, Texas. Massey's Petition claims Brigham breached its contract for failure to pay for the casing it furnished Brigham for the Palmer #5 (and that Brigham's claim is defective, forming the basis of the lawsuit described in the paragraph above). Massey's Petition claims Brigham owes Massey a total of $445,819. Brigham's Motion to Transfer Venue to Travis County, Texas, was recently granted. Once transfer is completed, Brigham will file a motion to consolidate Massey's claim with Brigham's suit against Massey pending in Travis County. If Massey is successful in its claim, Massey would have the right to foreclose its lien against the well, associated equipment and Brigham's leasehold interest. At this point in time, Brigham cannot predict the outcome of either its Travis County case or Massey's claim. 4. NET INCOME (LOSS) PER SHARE Basic earnings per common share are computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding for the period. The computation of diluted net income (loss) per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised for or converted into common stock or resulted in the issuance of common stock that would then share in the earnings of Brigham. The number of common shares equivalents outstanding is computed using the treasury stock method. 5 BRIGHAM EXPLORATION COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited) The following table reconciles the numerators and denominators of the basic and diluted earnings per common share computations for net income (loss) available to common stockholders for the three and six months ended June 30, 2002 and 2001: Three Months Ended Six Months Ended June 30, June 30, ---------------------- --------------------- 2002 2001 2002 2001 ---------- ---------- ---------- --------- BASIC EARNINGS PER SHARE: Income (loss) available to common stockholders $ 61 $ 8,327 $ (1,271) $ 8,751 ========== ========== ========== ========= Common shares outstanding 16,038 15,983 16,027 15,983 ========== ========== ========== ========= Basic earnings per share $ 0.00 $ 0.52 $ (0.08) $ 0.55 ========== ========== ========== ========= DILUTED EARNINGS PER SHARE: Income (loss) available to common stockholders $ 61 $ 8,327 $ (1,271) $ 8,751 Adjustments for assumed conversions: Amortization of compensation expense on stock options - 4 - 10 Interest on convertible debt - - - 464 Dividends on mandatorily redeemable preferred stock - 399 - 793 ---------- ---------- ---------- --------- - 403 - 1,267 Adjusted income (loss) available to common stockholders - diluted $ 61 $ 8,730 $ (1,271) $ 10,018 ========== ========== ========== ========= Common shares outstanding 16,038 15,983 16,027 15,983 Effect of dilutive securities: Warrants 1,227 2,521 - 3,349 Stock options 288 331 - 402 ---------- ---------- ---------- --------- Potentially dilutive common shares 1,515 2,852 - 3,751 ---------- ---------- ---------- --------- Adjusted common shares outstanding - diluted 17,553 18,835 16,027 19,734 ========== ========== ========== ========= Diluted earnings per share $ 0.00 $ 0.46 $ (0.08) $ 0.51 ========== ========== ========== ========= Options and warrants to purchase 14.8 million shares and 7.7 million shares of common stock were outstanding but not included in the calculation of diluted earnings (loss) per share for the three months ended June 30, 2002 and 2001, respectively, and options and warrants to purchase 19.0 million shares and 5.1 million shares of common stock were outstanding but not included in the calculation of diluted earnings (loss) per share for the six months ended June 30, 2002 and 2001, respectively, because the effects would have been anti-dilutive. 5. DERIVATIVE INSTRUMENTS Brigham utilizes various commodity swap and option contracts to (i) reduce the effects of volatility in price changes on the oil and natural gas commodities it produces and sells, (ii) support its capital budgeting plans, and (iii) lock-in prices to protect the economics related to certain capital projects. At June 30, 2002, the fair value of hedging contracts included in accumulated other comprehensive loss and other liabilities was approximately $2.0 million of which approximately $160,000 was classified as noncurrent. In the three months ended June 30, 2002 and 2001, Brigham recognized losses of $592,000 and $1.5 million, respectively, which were recorded as a reduction of oil and natural gas sales. In the six months ended June 30, 2002 and 2001, Brigham recognized losses of $303,000 and $8.1 million, respectively, which were recorded as a reduction of oil and natural gas sales. 6 BRIGHAM EXPLORATION COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited) Derivative instruments not qualifying as hedging contracts are recorded at fair value on the balance sheet. At each balance sheet date, the value of derivatives not qualifying as hedging contracts is adjusted to reflect current fair value and any gains or losses are recognized as other income or expense. During the three months ended June 30, 2002, Brigham's derivative instruments not qualifying as a hedging contract expired. In the three months ended June 30, 2002 and 2001, Brigham recognized $635,000 and $6.8 million, respectively, in non-cash gains related to changes in the fair values of these derivative contracts and $559,000 and $1.0 million, respectively, in cash losses related to cash settlement payments made by Brigham to the counterparty. In the six months ended June 30, 2002 and 2001, Brigham recognized $384,000 and $7.0 million, respectively, in non-cash gains related to changes in the fair values of these derivative contracts and $559,000 and $1.0 million, respectively, in cash losses related to cash settlement payments made by Brigham to the counterparty. The following tables summarize Brigham's outstanding oil and natural gas derivative instruments as of June 30, 2002: OIL CONTRACTS 2002 2003 -------------------- -------------------- VOLUMES CONTRACT VOLUMES CONTRACT FIXED PRICE PRICING REMAINING HEDGED PRICE HEDGED PRICE SWAPS BASIS CONTRACT TERM (BBLS) ($/BBL) (BBLS) ($/BBL) - ------------ ------- ------------- -------- ---------- -------- ---------- Contract #1 NYMEX 07/02 - 09/02 46,000 $ 25.06 - - Contract #2 NYMEX 10/02 - 12/02 23,000 $ 24.50 - - Contract #3 NYMEX 01/03 - 03/03 - - 22,500 $ 23.92 Contract #4 NYMEX 04/03 - 06/03 - - 22,750 $ 23.50 Contract #5 NYMEX 07/03 - 09/03 - - 23,000 $ 23.15 Contract #6 NYMEX 10/03 - 12/03 - - 23,000 $ 22.90 2002 2003 ----------------------------- ----------------------------- PRICE PRICE VOLUMES ------------------- VOLUMES ------------------- PRICING REMAINING HEDGED FLOOR CEILING HEDGED FLOOR CEILING COLLARS BASIS CONTRACT TERM (BBLS) ($/BBL) ($/BBL) (BBLS) ($/BBL) ($/BBL) - ---------- ------- ------------- -------- -------- --------- -------- -------- --------- Collar #1 NYMEX 07/02 - 12/02 46,000 $ 18.00 $ 22.35 - - - Collar #2 NYMEX 07/02 - 06/03 46,000 $ 18.00 $ 22.56 45,250 $ 18.00 $ 22.56 7 BRIGHAM EXPLORATION COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited) NATURAL GAS CONTRACTS 2002 2003 -------------------- -------------------- VOLUMES CONTRACT VOLUMES CONTRACT FIXED PRICE REMAINING HEDGED PRICE HEDGED PRICE SWAPS PRICING BASIS CONTRACT TERM (MMBTU) ($/MMBTU) (MMBTU) ($/MMBTU) - --------------------- ------------- ------------- -------- ---------- -------- ---------- Contract #1 NYMEX 07/02 - 12/02 460,000 $ 2.900 - - Contract #2 NYMEX 07/02 - 06/03 460,000 $ 3.000 452,500 $ 3.000 Contract #3 NYMEX 07/02 - 09/02 230,000 $ 3.200 - - Contract #4 NYMEX 10/02 - 12/02 92,000 $ 3.455 - - Contract #5 NYMEX 01/03 - 03/03 - - 225,000 $ 3.700 Contract #6 NYMEX 04/03 - 06/03 - - 91,000 $ 3.400 Contract #7 NYMEX 07/03 - 09/03 - - 230,000 $ 3.450 Contract #8 NYMEX 10/03 - 12/03 - - 92,000 $ 3.670 Contract #9 NYMEX 07/02 - 09/02 230,000 $ 3.560 - - Contract #10 NYMEX 10/02 - 12/02 230,000 $ 3.755 - - Contract #11 NYMEX 01/03 - 03/03 - - 225,000 $ 3.895 Contract #12 NYMEX 04/03 - 06/03 - - 227,500 $ 3.515 Contract #13 NYMEX 07/03 - 09/03 - - 230,000 $ 3.555 Contract #14 NYMEX 09/03 - 12/03 - - 230,000 $ 3.755 In July 2002, Brigham entered into five crude oil fixed price swap agreements whereby Brigham exchanged a floating market price for a fixed contract price of $25.39 per Bbl for 325 Blbs per day for the period from October 2002 through December 2002, $24.79 per Bbl on 300 Bbls per day for the period from January 2003 through March 2003, $24.30 per Bbl on 200 Bbls per day for the period from April 2003 through June 2003, $23.89 per Bbl on 250 Bbls per day for the period from July 2003 through September 2003, and $23.59 per Bbl on 200 Bbls per day for the period from October 2003 through December 2003. These derivative instruments qualify for hedge accounting and will be designated as cash flow hedges. 6. EMPLOYEE STOCK OPTIONS In May 2002, Brigham accelerated the vesting of certain employee stock options and extended the time limitation for exercising certain employee stock options following termination of employment. These revisions resulted in the immediate recognition of stock compensation cost as measured at the effective date of the changes. Accordingly, a non-cash charge to general and administrative expense in the amount of $596,000 was recorded during the second quarter of 2002. 7. RECENT ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Standards No. 143, "Asset Retirement Obligations" ("SFAS 143") which establishes accounting requirements for retirement obligations associated with tangible long-lived assets including the timing of the liability 8 BRIGHAM EXPLORATION COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited) recognition, initial measurement of the liability, allocation of asset retirement cost to expense, subsequent measurement of the liability and financial statement disclosures. SFAS 143 requires that an asset retirement cost be capitalized as part of the cost of the related long-lived asset and subsequently allocated to expense using a systematic, rational method. Brigham plans to adopt SFAS 143 no later than January 1, 2003, as required. The transition adjustment resulting from the adoption will be reported as a cumulative effect of a change in accounting principle. At this time, Brigham cannot reasonably estimate the effect of the adoption of SFAS 143 on its financial position, results of operations or cash flows. In April 2002, the FASB issued Statement of Financial Standards No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections" ("SFAS 145") which is effective for fiscal years beginning after May 15, 2002. Prior to the adoption of the provisions of SFAS 145, gains or losses on the early extinguishment of debt were required to be classified as extraordinary gains or losses, net of associated income taxes, below the determination of income or loss from continuing operations. SFAS 145 changes this accounting (except in the case of events or transactions of a highly unusual and infrequent nature) and requires that gains or losses from the early extinguishment of debt be classified as components of income or loss from continuing operations. Brigham will adopt the provisions of SFAS 145 on January 1, 2003. The adoption of the provisions of SFAS 145 is not expected to affect Brigham's future financial position or liquidity. When Brigham adopts the provisions of SFAS 145, gains or losses from the early extinguishment of debt recognized in the consolidated statements of operations for prior years will be reclassified to other revenues or other expense and included in the determination of the income (loss) from continuing operations of those periods. In July 2002, the FASB issued Statement of Financial Standard No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146") which requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of commitment to an exit or disposal plan. Examples of costs covered by SFAS 146 include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operations, or other exit or disposal activity. SFAS 146 replaces Emerging Task Force Issue No. 94-3, "Liability Recognition for certain employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)". The provisions of SFAS 146 are effective for exit and disposal activities that are initiated after December 31, 2002. Brigham will account for exit or disposal activities initiated after December 31, 2002 in accordance with the provisions of SFAS 146. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Comparison of the three-month periods ended June 30, 2002 and 2001 Production. Our net equivalent production volumes for the three months ended June 30, 2002 were 2,460 MMcfe (27.3 Mmcfe per day) compared to 2,652 MMcfe (29.5 Mmcfe per day) for the same period during 2001. The decline in our production for the three-month period is primarily due to the natural decline of existing production. Production of natural gas represented 61% of our total production for the three months ended June 30, 2002 compared to 70% for the same period in 2001. Natural gas production declined 20% from 1,867 MMcf (20.7 MMcf per day) in the second quarter 2001 to 1,499 MMcf (16.7 MMcf per day) in the second quarter of 2002. Oil production for the second quarter 2002 increased 22% to 160 MBbls (1,778 Bbls per day) compared to 131 MBbls (1,453 Bbls per day) for the same time period during 2001. Revenue from the sale of oil and natural gas. Oil and natural gas sales for the second quarter 2002 were $8.8 million. This represents a decline of $1.7 million from prior year second quarter sales, of which $1.1 million is related to a 10% decline in our equivalent realized price and $626,000 is related to lower production. Total revenue from the sale of natural gas for the second quarter 2002 declined $2.1 million from the second quarter last year to $4.9 million. Our average realized sales price for natural gas for the second quarter 2002 was $3.30 per Mcf or 13% lower than our average realized sales price for natural gas in the second quarter last year. Cash settlements on natural gas hedging contracts of $321,000 ($0.21 per Mcf) negatively impacted our revenue from the sale of natural gas and our average realized natural gas sales price for the second quarter of 2002. Cash settlements on natural gas hedging contracts of $1.4 million ($0.77 per Mcf) negatively impacted our revenue from the sale of natural gas and our average sales price during the second quarter of 2001. Our average realized sales price for oil for the second quarter of 2002 was $23.90 per Bbl. This represents an 8% decline from $26.09 per Bbl realized during the second quarter of 2001. Revenues from the sale of oil and our average realized oil sales price were negatively affected by hedging losses of $271,000 ($1.69 per Bbl) in the second quarter of 2002 and hedging losses of $50,000 ($0.38 per Bbl) for the same period in 2001. Lease operating expenses. Lease operating expenses for the second quarter were $796,000, or 2% higher than lease operating expenses for the second quarter of 2001. Lease operating expenses on a per unit of equivalent production basis were $0.32 per Mcfe, up 7% from $0.30 per Mcfe for the second quarter of 2001. The increase in lease operating expenses was primarily due to an increase in the number of producing wells in the second quarter of 2002 as compared with the same period in 2001. The increase in lease operating expenses per unit in the second quarter of 2002 relative to the second quarter of 2001 was primarily due to higher maintenance and workover expense on certain wells. Production taxes. Production taxes for the second quarter 2002 decreased 20% to $499,000 compared to $622,000 in the second quarter of 2001. This decrease is primarily due to lower severance tax rates on certain wells, a 16% decrease in the average pre-hedge equivalent price received for oil and natural gas and lower production. On a per unit of equivalent production basis, production taxes for the second quarter of 2002 decreased 13% to $0.20 per Mcfe compared to $0.23 per Mcfe for the same time period in 2001. General and administrative expenses. General and administrative expenses for the second quarter of 2002 were $1.7 million compared to $957,000 in the second quarter of 2001. Of the increase, $596,000 was the result of non-cash stock option compensation expense. The remainder of the increase was primarily due to an increase in payroll, employee benefits and public company expenses. On a per unit of equivalent production basis, general and administrative expenses increased from $0.36 per Mcfe in the second quarter of 2001 to $0.70 per Mcfe in the second quarter of 2002. Of the increase, $0.24 per Mcfe was the result of the non-cash stock compensation charge. Depletion of oil and natural gas properties. Depletion of oil and natural gas properties for the second quarter 2002 was $3.4 million compared to $3.2 million for the second quarter of last year. Approximately $477,000 of this increase is the result of an increase in our depletion rate and was partially offset by a 10 decrease resulting from lower production. On a per unit of equivalent production basis, depletion expense increased 15% from $1.20 per Mcfe in the second quarter of 2001 to $1.38 per Mcfe in the second quarter of 2002. The increase in the depletion rate per unit of equivalent production is primarily due to an increase in the estimated cost required to fully develop our Home Run Field. Interest expense. Interest expense for the second quarter 2002 was $1.6 million compared to $1.8 million for the second quarter of 2001. This decrease is due to lower interest rates on outstanding debt borrowings during the second quarter of 2002 as compared to the same period for 2001 and was partially offset by an increase in outstanding debt for the second quarter 2002 compared to second quarter 2001. The weighted average interest rate on our outstanding indebtedness during the second quarter 2002 was 7.5% compared to 9.7% for second quarter of 2001. This decrease is primarily due to a decrease in LIBOR for the second quarter of 2002 as compared to the second quarter of 2001. Our weighted average outstanding debt balance for second quarter 2002 was $96.1 million compared to $91.2 million for the same period last year. Interest expense for the second quarter 2002 included (i) $270,000 of interest expense that was paid in kind through the issuance of additional debt in lieu of cash, and (ii) $299,000 of non-cash charges related to the amortization of deferred loan fees. Interest expense is reflected net of capitalized interest of $443,000 and $150,000 in the second quarter 2001 and 2002, respectively. Other income (expense). Other income for the second quarter 2002 was $79,000 compared to other income of $5.8 million during the second quarter last year. We recognize other income or expense primarily related to the change in the fair market value and the related cash flows of certain oil and natural gas derivative contracts that do not qualify for hedge accounting treatment. For the second quarter 2002, other income (expense) includes $635,000 of non-cash income related to the change in the fair market values of these derivative contracts and was partially offset by $559,000 of cash expense related to cash settlement of these derivative contracts. Other income (expense) for the second quarter of 2001 includes $6.8 million of non-cash income related to the changes in the fair market value of these derivative contracts and was partially offset by $1.0 million of cash expense related to the cash settlement of these derivative contracts. As of July 1, 2002, all of our existing derivative instruments qualify as hedging contracts. Comparison of the six- month periods ended June 30, 2002 and 2001 Production. Our net equivalent production volumes for the six months ended June 30, 2002 were 4,733 MMcfe (26.3 Mmcfe per day) compared to 4,716 (26.2 Mcfe per day) for the same period during 2001. Production of natural gas represented 60% of our total equivalent production volumes for the six months ended June 30, 2002, compared to 74% for the same period in 2001. Natural gas production declined 18% from 3,477 MMcf (19.3 MMcf per day) for the first half of 2001 to 2,844 MMcf (15.8 MMcf per day) for the second half of 2002. Oil production for first six months of 2002 increased 52% to 315 MBbls (1,749 Bbls per day) compared to 206 MBbls (1,147 Bbls per day) for the same time period during 2001. Revenue from the sale of oil and natural gas. Oil and natural gas sales for the first two quarters of 2002 were $15.2 million compared to $17.4 million for the same period during 2001. A 13% decline in our equivalent price received for oil and gas accounted for $2.8 million of the decline for the first two quarters of 2002 and was partially offset by an increase of $680,000 related to increased production volumes. Our average realized sales price for natural gas for the first six months of 2002 was $2.92 per Mcf or 15% lower than our average realized sales price for natural gas during the same period of 2001. Total revenue from the sale of natural gas during the first six months of 2002 declined $11.7 million to $8.3 million when compared to the first six months of last year. Cash settlements on natural gas hedging contracts of $18,000 ($0.01 per Mcf) positively impacted our revenue from the sale of natural gas and our average realized natural gas sales price for the first six months of 2002. Cash settlements on natural gas hedging contracts of $8.0 million ($2.30 per Mcf) negatively impacted our revenue from the sale of natural gas and our average sales price during first six months of 2001. Our average realized sales price for oil for the first six months of 2002 was $21.95 per Bbl. This represents a 17% decline from $26.33 per Bbl realized during the first six months of 2001. Revenues from the sale of oil and our average realized oil sales price were negatively affected by hedging losses of $321,000 ($1.02 per Bbl) during the first six months of 2002 and hedging losses of $125,000 ($0.61 per Bbl) for the same period in 2001. Lease operating expenses. Lease operating expenses for the first two quarters of 2002 were $1.7 million or 12% higher than lease operating expenses for the same period of 2001. Lease operating expenses on a per unit of equivalent production basis for the first six months of 2002 were $0.35 per Mcfe, up 9% 11 from $0.32 per Mcfe for the same period of 2001. The increase in lease operating expenses was primarily due to an increase in the number of producing wells during first six months of 2002 as compared with the same period of 2001. The increase in lease operating expenses per unit in the first six months of 2002 relative to the first six months of 2001 was primarily due to higher maintenance and workover expense on certain wells. Production taxes. Production taxes for the first six months of 2002 decreased 22% to $852,000 compared to $1.1 million for the first six months of 2001. This decrease is primarily due to reduced severance tax rates on certain wells and a 39% decrease in the average pre-hedge equivalent price received for oil and natural gas. On a per unit of equivalent production basis, production taxes for the first half of 2002 were $0.18 per Mcfe compared to $0.23 per Mcfe for the same time period in 2001. General and administrative expenses. General and administrative expenses for the first half of 2002 were $2.7 million compared to $1.8 million for the first half of 2001. Of the increase, $596,000 was the result of non-cash stock option compensation expense. The remainder of the increase was primarily due to an increase in payroll, employee benefits and public company expenses. On a per unit of equivalent production basis, general and administrative expenses increased from $0.32 per Mcfe for the first six months of 2001 to $0.57 per Mcfe for the first six months of 2002. Of the increase, $0.13 was the result of the non-cash stock compensation charge. Depletion of oil and natural gas properties. Depletion of oil and natural gas properties for the first six months of 2002 was $6.5 million compared to $5.7 million for the same time period last year. Approximately $849,000 of this increase resulted from an increase in our depletion rate. On a per unit of equivalent production basis, depletion expense increased 15% from $1.20 per Mcfe for the first half of 2001 to $1.38 per Mcfe for the same period of 2002. The increase in the depletion rate per unit of equivalent production is primarily due to an increase in the estimated cost required to fully develop our Home Run Field. Interest expense. Interest expense for the first six months of 2002 was $3.1 million compared to $3.6 million for the same time period of 2001. This decrease is due to lower interest rates on outstanding debt borrowings during the first half of 2002 as compared to the same period for 2001 and was partially offset by an increase in outstanding debt for the first six months of 2002 compared to second quarter 2001. The weighted average interest rate on our outstanding indebtedness during the first six months of 2002 was 7.4% versus 10.3% for the first six months of 2001. This decrease is primarily due to lower LIBOR for the first six months of 2002 as compared to the first six months of 2001. Our weighted average outstanding debt balance for the first half of 2002 was $95.2 million compared to $87.9 million for the same time period last year. Interest expense for the first half of 2002 included (i) $497,000 of interest expense that was paid in kind through the issuance of additional debt in lieu of cash, and (ii) $585,000 of non-cash charges related to the amortization of deferred loan fees. Interest expense is reflected net of capitalized interest of $1.0 million and $450,000 for the first six months of 2001 and 2002, respectively. Other income (expense). Other expense for the first half of 2002 was $169,000 compared to other income of $6.0 million for the first six months of 2001. We recognize other income or expense primarily related to the change in the fair market value and the related cash flows of certain oil and natural gas derivative contracts that do not qualify for hedge accounting treatment. For the first six months of 2002, other income (expense) included $384,000 of non-cash income related to the changes in the fair market values of these derivative contracts and was offset by $559,000 of cash expense related to cash settlements pursuant to these derivative contracts. Other income (expense) for the first six months of 2001 included $7.0 million of non-cash income related to the changes in the fair market values of these derivative contracts and was partially offset by $1.0 million of cash expense related to the cash settlement of these derivative contracts. As of July 1, 2002, all of our existing derivative instruments qualify as hedging contracts. LIQUIDITY AND CAPITAL RESOURCES 2002 Capital Expenditure Program Our current total net capital spending budget for 2002 is $25.0 million. We spent $13.0 million in total net capital for the first six months of 2002. Capital expenditures include costs related to the well control event with the Burkhart #1. We submitted our claim to our insurance company and expect to receive a reimbursement of approximately $2.0 million. For the remainder of 2002, we plan to spend approximately $14.0 million. Spending will be funded by our discretionary cash flow and our current cash balance. Estimated capital 12 expenditures for the remainder of 2002 represent an increase of approximately 16% from our original 2002 budget. This increase is primarily attributable to a forecasted increase in production volumes, currently forecasted oil and natural gas prices and projected growth in cash flows. The final determination with respect to drilling the currently budgeted wells may depend on a number of factors including the following: - the results of exploration efforts and the review and analysis of our 3-D seismic data, - the availability of sufficient capital resources by us and other participants for drilling prospects, - economic and industry conditions at the time of drilling, including prevailing and anticipated prices for natural gas and oil and the availability of drilling equipment, - the availability of leases on reasonable terms for the potential drilling locations, and - the availability of more economically attractive prospects. There can be no assurance that the budgeted wells will, if drilled, encounter reservoirs of commercial quantities of oil or natural gas. Senior Credit Facility Interest expense on our senior credit facility for the second quarter of 2002 was $1.1 million. This includes $130,000 of non-cash charges related to the amortization of deferred loan fees. Accrued interest expense for our senior credit facility at June 30, 2002 was $49,000. Interest expense on our senior credit facility for the first half of 2002 was $2.1 million. This includes $257,000 of non-cash charges related to the amortization of deferred loan fees. The interest rate on our senior credit facility on July 31, 2002 was 4.8%. We were in compliance with our covenants at June 30, 2002. Subordinated Notes Facility We borrowed an additional $4.0 million under our subordinated notes facility in March 2002. Total debt outstanding pursuant to our subordinated notes facility on June 30, 2002 was $21.2 million. Approximately $1.2 million of this outstanding balance is subordinated notes that were issued to satisfy interest obligations on our subordinated notes facility. We have no remaining borrowing availability under our subordinated notes facility. Interest expense on our subordinated notes facility for the second quarter of 2002 was $735,000. This includes $169,000 of non-cash charges related to the amortization of deferred loan fees. During the second quarter 2002, we exercised our option to satisfy 50% of the interest payment obligation on our subordinated notes facility through the issuance of additional subordinated notes in lieu of cash by issuing approximately $270,000 of additional subordinated notes. Accrued interest expense for our subordinated notes facility at June 30, 2002 was $381,000. Interest expense on our subordinated notes facility for the first half of 2002 was $1.4 million. This includes $328,000 of non-cash charges related to the amortization of deferred loan fees. For the first six months of 2002, we issued approximately $497,000 in additional subordinated notes to satisfy 50% of the interest obligations on our senior subordinated notes facility. We were in compliance with our covenants at June 30, 2002. Series A Preferred Stock Dividends and accretion on our Series A Preferred Stock for the second quarter of 2002 were $721,000. This includes $57,000 of non-cash charges related to the accretion of the preferred stock and $664,000 of dividends that were paid-in-kind through the issuance of Series A Preferred Stock. Dividends and accretion on our Series A Preferred Stock for the first two quarters of 2002 were $1.4 million. This includes $112,000 of non-cash charges related to the accretion of the preferred stock and $1.3 million of dividends that were paid-in-kind through the issuance of Series A Preferred Stock. 13 The liquidation value of our outstanding Series A Preferred Stock at June 30, 2002 was $33.9 million. Approximately $3.9 million of this outstanding balance represents additional Series A Preferred Stock issued to satisfy our dividend payments. Cash Flow Analysis Cash Flows from Operating Activities. Cash flows provided by operating activities for the first six months of 2002 were $10.0 million compared to $6.5 million for the first six months of 2001. The increased cash flows from operating activities for 2002 is primarily due to a $1.9 million increase in cash from working capital for the first six months of 2002 versus a cash decrease of $3.2 million from working capital during the first six months of 2001. This was partially offset by a decrease in operating cash flow before changes in working capital for the first two quarters of 2002 when compared to the first two quarters of 2001. Cash Flows from Investing Activities. Cash flows used by investing activities for the first six months of 2002 were $13.2 million compared to $18.0 million for the first six months of 2001. The decrease in cash used by investing activities for 2002 is primarily due to lower capital expenditures for exploration and development activities during the first six months of 2002 ($13.0 million during 2002 versus $18.6 million during 2001) and $617,000 in cash proceeds from the sale of assets during the first six months of 2002. Cash Flows from Financing Activities. Cash flows provided by financing activities for the first six months were $3.7 million compared to $18.8 million during the first six months of 2001. This decrease is primarily due to increased borrowings under our subordinated notes facility and the financing transaction that we completed during the first six months of 2001. During the first six months of 2001, we borrowed an additional $9.0 million under our subordinated notes facility compared to an additional $4.0 million during the first six months of 2002. We also issued $10.0 million in Series A Preferred Stock and warrants during the first six months of 2001. OTHER MATTERS Derivative Instruments Total natural gas sold subject to swap arrangements entered into by us was 682,500 MMBtu in the second quarter of 2002 compared to 450,000 MMBtu in the second quarter of 2001. We also sold 305,000 MMbtu subject to a floor contract during the second quarter of 2001. We accounted for these transactions as hedging activities and, accordingly, adjusted the price received for natural gas production during the period the hedged transactions occurred. Adjustments to the price received for natural gas under these hedging arrangements resulted in a decrease in natural gas revenues of $321,000 in the second quarter of 2002 and a decrease in natural gas revenues of $1.4 million in second quarter of 2001. For the first six months of 2002, total natural gas sold subject to swap arrangements was 1,357,500 MMBtu compared to 1,800,000 MMBtu during the first six months of 2001. We also sold 305,000 MMbtu subject to a floor contract during the first six months of 2001. We accounted for these transactions as hedging activities and, accordingly, adjusted the price received for natural gas production during the period the hedged transactions occurred. Adjustments to the price received for natural gas under these hedging arrangements resulted in an increase in natural gas revenues of $18,000 in the first half of 2002 and a decrease in natural gas revenues of $8.0 million in the first half of 2001. In addition, oil revenues were reduced by $271,000 in the second quarter of 2002 and $50,000 in the second quarter of 2001 as a result of crude oil hedging arrangements outstanding during the period. For the six months ended June 30, 2002, oil revenues were reduced by $321,000 and for the same time period of 2001 oil revenues were reduced by $125,000. Derivative instruments not qualifying as hedging contracts are recorded at fair value on the balance sheet. At each balance sheet date, the value of derivatives not qualifying as hedging contracts is adjusted to reflect current fair value and any gains or losses are recognized as other income or expense. During the second quarter of 2002, Brigham's derivative instruments not qualifying as a hedging contract expired. In the three months ended June 30, 2002 and 2001, Brigham recognized $635,000 and $6.8 million, respectively, in non-cash gains 14 related to changes in the fair values of these derivative contracts and $559,000 and $1.0 million, respectively, in cash losses related to cash settlement payments made by Brigham to the counterparty. In the six months ended June 30, 2002 and 2001, Brigham recognized $384,000 and $7.0 million, respectively, in non-cash gains related to changes in the fair values of these derivative contracts and $559,000 and $1.0 million, respectively, in cash losses related to cash settlement payments made by Brigham to the counterparty. See Note 5 to the Consolidated Financial Statements for information regarding Brigham's outstanding crude oil and natural gas derivative contracts. Effects of Inflation and Changes in Prices Brigham's results of operations and cash flows are affected by changing oil and gas prices. If the price of oil and natural gas increases (decreases), there could be a corresponding increase (decrease) in revenues as well as the operating costs that Brigham is required to bear for operations. Inflation has had a minimal effect on Brigham. Environmental and Other Regulatory Matters Brigham's business is subject to certain federal, state and local laws and regulations relating to the exploration for and the development, production and marketing of oil and natural gas, as well as environmental and safety matters. Many of these laws and regulations have become more stringent in recent years, often imposing greater liability on a larger number of potentially responsible parties. Although Brigham believes it is in substantial compliance with all applicable laws and regulations, the requirements imposed by laws and regulations are frequently changed and subject to interpretation, and Brigham is unable to predict the ultimate cost of compliance with these requirements or their effect on its operations. Any suspensions, terminations or inability to meet applicable bonding requirements could materially adversely affect Brigham's financial condition and operations. Although significant expenditures may be required to comply with governmental laws and regulations applicable to Brigham, compliance has not had a material adverse effect on the earnings or competitive position of Brigham. Future regulations may add to the cost of, or significantly limit, drilling activity. New Accounting Pronouncements In June 2001, the Financial Accounting Standards Board issued Statement of Financial Standards No. 143, "Asset Retirement Obligations" ("SFAS 143") which establishes accounting requirements for retirement obligations associated with tangible long-lived assets including the timing of the liability recognition, initial measurement of the liability, allocation of asset retirement cost to expense, subsequent measurement of the liability and financial statement disclosures. SFAS 143 requires that an asset retirement cost be capitalized as part of the cost of the related long-lived asset and subsequently allocated to expense using a systematic, rational method. Brigham plans to adopt SFAS 143 no later than January 1, 2003, as required. The transition adjustment resulting from the adoption will be reported as a cumulative effect of a change in accounting principle. At this time, Brigham cannot reasonably estimate the effect of the adoption of SFAS 143 on its financial position, results of operations or cash flows. In April 2002, the FASB issued Statement of Financial Standards No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections" ("SFAS 145") which is effective for fiscal years beginning after May 15, 2002. Prior to the adoption of the provisions of SFAS 145, gains or losses on the early extinguishment of debt were required to be classified as extraordinary gains or losses, net of associated income taxes, below the determination of income or loss from continuing operations. SFAS 145 changes this accounting (except in the case of events or transactions of a highly unusual and infrequent nature) and requires that gains or losses from the early extinguishment of debt be classified as components of income or loss from continuing operations. Brigham will adopt the provisions of SFAS 145 on January 1, 2003. The adoption of the provisions of SFAS 145 is not expected to affect Brigham's future financial position or liquidity. When Brigham adopts the provisions of SFAS 145, gains or losses from the early extinguishment of debt recognized in the consolidated statements of operations for prior years will be reclassified to other revenues or other expense and included in the determination of the income (loss) from continuing operations of those periods. In July 2002, the FASB issued Statement of Financial Standard No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146") which requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of commitment to an 15 exit or disposal plan. Examples of costs covered by SFAS 146 include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operations, or other exit or disposal activity. SFAS 146 replaces Emerging Task Force Issue No. 94-3, "Liability Recognition for certain employee Termination Benefits and Other costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)". The provisions of SFAS 146 are effective for exit and disposal activities that are initiated after December 31, 2002. Brigham will account for exit or disposal activities initiated after December 31, 2002 in accordance with the provisions of SFAS 146. Forward Looking Information Brigham or its representatives may make forward looking statements, oral or written, including statements in this report, press releases and filings with the SEC, regarding estimated future net revenues from oil and natural gas reserves and the present value thereof, planned capital expenditures (including the amount and nature thereof), increases in oil and gas production, the number of wells it anticipates drilling during 2002 and Brigham's financial position, business strategy and other plans and objectives for future operations. Although Brigham believes that the expectations reflected in these forward looking statements are reasonable, there can be no assurance that the actual results or developments anticipated by Brigham will be realized or, even if substantially realized, that they will have the expected effects on its business or operations. Among the factors that could cause actual results to differ materially from Brigham's expectations are general economic conditions, inherent uncertainties in interpreting engineering data, operating hazards, delays or cancellations of drilling operations for a variety of reasons, competition, fluctuations in oil and gas prices, availability of sufficient capital resources to Brigham and its project participants, government regulations and other factors set forth among the risk factors noted in this report, in the description of Brigham's business in Item 1 of our Form 10-K report for the year ended December 31, 2001 (see page 1 of Brigham's 2001 Form 10-K) or in our Management's Discussion Analysis of Financial Condition in our Form 10-K report for the year ended December 31, 2001 (see page 29 of Brigham's 2001 Form 10-K). All subsequent oral and written forward looking statements attributable to Brigham or persons acting on its behalf are expressly qualified in their entirety by these factors. Brigham assumes no obligation to update any of these statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK In Part II, Item 7A of Brigham's Form 10-K report for the year ended December 31, 2001 (see page 54 of Brigham's 2001 Form 10-K), Brigham provided a discussion of its market risk. See Note 5 to the Consolidated Financial Statements regarding Brigham's market risk associated with its derivative instruments at June 30, 2002. There were no material changes during the second quarter of 2002 in Brigham's exposures to loss from possible future changes in the prices of oil and natural gas or in interest rates, other than those described in Brigham's 2001 Form 10-K report, and in Note 5 to the Consolidated Financial Statements in this Form 10-Q. 16 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS As discussed in Note 3 of Notes to the Consolidated Financial Statements included in Part I. Financial Information, Brigham is party to various legal actions arising in the ordinary course of business and does not expect these matters to have a material adverse effect on its financial condition, results of operations or cash flow. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) We held our Annual Stockholders meeting on Friday, May 17, 2002 in Austin, Texas, at 1 p.m., local time. (b) Proxies were solicited by the Board of Directors of Brigham pursuant to Regulation 14A under the Securities Exchange Act of 1934. There were no solicitations in opposition to the Board of Directors' nominees as listed in the proxy statement and all of such nominees were duly elected. (c) Out of the total of 16,016,113 shares of our common stock outstanding and entitled to vote, 13,700,629 shares were present in person or by proxy, representing approximately 86%. The only matters voted on by our stockholders, as fully described in the definitive proxy materials for the annual meeting, are set forth below. The results were as follows: 1. To elect eight directors to serve until Our Annual Meeting of Stockholders in 2003. Number of Shares Withholding Authority to Number of Shares Vote for Election as Nominee Voting for Election as Director Director -------------------- ------------------------------- ------------------------ Ben M. "Bud" Brigham 13,425,903 274,726 Anne L. Brigham 13,553,039 147,590 Harold D. Carter 13,553,039 147,590 Curtis F. Harrell 13,425,903 274,726 Stephen P. Reynolds 13,553,039 147,590 Steven A. Webster 13,553,039 147,590 R. Graham Whaling 13,553,039 147,590 2. To approve the appointment of PricewaterhouseCoopers LLP as our independent auditors for the year ending December 31, 2002. For 13,692,564 Against 2,850 Abstain 5,215 17 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: None (b) Reports on Form 8-K: We filed a report on Form 8-K on April 1, 2002, to announce that we had regained surface of the Providence Field development well. The Form 8-K included a copy of the press release that provided these announcements. We filed a report on Form 8-K on April 19, 2002, to announce that our management would be presenting at the IPAA 2002 Oil & Gas Investment Symposium held in New York on Tuesday April 23, 2002. The Form 8-K included a copy of the press release that provided these announcements. We filed a report on Form 8-K on May 6, 2002, to announce our operational and financial results for the first quarter 2002. The Form 8-K included a copy of the press releases that provided these announcements. We filed a report on Form 8-K on June 6, 2002, to announce that Gene Shepherd has been named CFO and other executive promotions. The Form 8-K included a copy of the press release that provided these announcements. We filed a report on Form 8-K on June 12, 2002, to update the market on the Providence Field Development. The Form 8-K included a copy of the press release that provided these announcements. 18 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 on August 14, 2002. BRIGHAM EXPLORATION COMPANY By: /s/ BEN M. BRIGHAM --------------------- Ben M. Brigham Chief Executive Officer, President and Chairman of the Board By: /s/ EUGENE B SHEPHERD, JR. ------------------------------ Eugene B. Shepherd, Jr. Senior Vice President and Chief Financial Officer 19